BCE European Central Bank

Why Eurozone Recovery Depends on More Than a €750 billion Stimulus

The European Council has just finished the longest meeting that it has had since the Nice, France gathering in 2000 and agreed upon a €750 billion recovery package. The package consists of grants and loans to counter the economic impact that the coronavirus has inflicted on the bloc since March.

European Council (EC) President Charles Michel described it as a “pivotal” moment for Europe and this sum represents the largest joint borrowing the EU has ever undertaken so far. The deal focuses on a €390 billion program to member states hardest hit by the virus such as Italy and Spain. An extra €360 billion in low-interest loans will alsombe available to EU states.

The ‘Frugal Four’ Opposed Grants for Spain and Italy

The agreement followed 90 hours of talks that started on Friday, during which tempers were frayed. The “frugal four” (Sweden, Denmark, Austria and the Netherlands) alongside Finland had opposed extending €500 billion in grants.

At one stage, French President Emmanuel Macron accused the frugal four of placing the European project in danger.

The €390 billion sum was recommended as a compromise, and the frugal countries were won over by the guarantee of rebates on their EU budget contributions.

Dutch Prime Minister Mark Rutte, despite being the biggest opponent of the original package, welcomed the deal.

This agreement will no doubt provide both German Chancellor Angela Merkel and Italian Prime Minister Giuseppe Conte with relief as they were the biggest proponents of the package from the beginning. Merkel argued throughout the last five days that “exceptional situations also require exceptional efforts.” Italian borrowing costs are also set to fall to March levels as the stimulus cheers markets.

The Deal Will Only Provide Short-Term Relief

Nonetheless, this stimulus will only provide the eurozone with short-term relief. Now that the EU has been provided with a recovery fund, the bloc’s greatest challenges lie ahead. The economic impact of the coronavirus has tested the single currency’s survival in a way not witnessed since the 2008 recession. If European leaders are serious about preventing a pandemic or any other external threat from threatening European unity again, they must deal with the bloc’s existential problems that the coronavirus exposed.

This was the first European Council meeting without Britain at the table. In December, a UK-EU trade deal should be completed, but if that process fails, the UK will quit the EU without a deal. This outcome would be far worse for the EU as Germany exports 800,000 cars to Britain every year, which equals 14 percent of all vehicles it makes domestically. German car imports would be levied by a 10 percent tax under World Trade Organization (WTO) rules.

Brexit Remains a Problem

The IMF suggests Ireland would suffer an output loss of four percent in the event of a no-deal Brexit. Therefore, EU diplomats should focus all their energy on preventing a no-deal scenario if they want to stimulate economic growth.

The coronavirus has also increased the prospect of other countries leaving the EU, too. The Daily Express reports on one survey which suggests that 50 percent of Italians support an “Italexit,” or Italy’s exit from the EU, whilst 27 percent of Italians prefer to remain within the bloc. Earlier this year, the President of the European Commission Ursula von der Leyen had to apologize for the way the bloc treated Italy at the start of the pandemic. It is unlikely that Italians will forget this when it comes to the polls, and COVID-19 has increased the prospect of an anti-EU coalition government being formed in Italy in the future.

Will There Be More EU Integration in the Future?

Milton Friedman and Martin Feldstein warned in 1999 that the eurozone cannot succeed without a political union. The coronavirus may make EU leaders realize that there is a greater need for political integration to prevent this situation from happening again, but it is looking doubtful all nations will agree, particularly Poland which is about to enter its own battle with Brussels over the imposition of gay marriage.

The markets may be celebrating the outcome of this European Council meeting, but technically the party is already over. How the EU evolves now will be the ultimate test of its survival.