Von Der Leyen (LaPresse)

Can von der Leyen Unite the EU Behind Her Coronavirus Stimulus?

The EU has already pledged itself to a €540 billion bailout to rescue the eurozone from the economic effects of the coronavirus, but the President of the European Commission (EC) Ursula von der Leyen, announced on Wednesday that she will pledge an extra €500 billion on top of the sum the bloc is already willing to spend. Altogether, that means Brussels is spending €1 trillion to aid the eurozone’s recovery.

On top of killing 172,000 people across Europe so far, the coronavirus has brought the continent’s economy to a grinding halt, with businesses gradually reopening and tight controls being imposed on borders that were once wide open for trade and travel.

France and Germany Support von der Leyen

The EC President intends to help the countries most affected by the pandemic such as Italy and Spain, and she already has the support of France and Germany. The latter countries announced their own joint initiative last week to raise €500 billion on financial markets to begin fixing the eurozone’s problems.

But von der Leyen’s proposal on Wednesday is likely to encounter some obstacles. COVID-19 has also revealed the EU’s inability to agree upon appropriate fiscal measures to lift the bloc’s economy out of a recession. There is an argument over whether the EU’s funds should be loans or grants. The “frugal four,” which consists of Austria, Denmark, Sweden and the Netherlands, are against joint debt in the form of coronabonds and favor loans. Italy and Spain have suggested that loans would not be sufficient to help them recover from the economic effects of the virus.

Coronavirus Has Exposed the EU’s Deep Divisions

The reason why the frugal four oppose grants is because they would require net contributors who pay into the EU’s budget to fill the financial black hole caused by the UK’s exit from the bloc. Before Brexit, Britain was Brussels’ biggest contributor. On the other hand, funding the continent’s recovery through loans would result in nations like Italy being saddled with more debt.

Mujtaba Rahman, Managing Director for Europe at the consultancy Eurasia Group, told CNN that without German opposition, the frugal four will struggle to convince enough member states to block the EU’s recovery fund. This will make it slightly easier for von der Leyen’s plan to be approved.

Nevertheless, that does not mean Germany will be footing the entire bill. The German Government has not agreed to provide the capital guarantees to procure relief funds before 2021.

An Agreement Won’t Come Easy

But time is tight and because the EU consists of many layers. This makes it harder for the bloc to come to a decision sooner. The European Council, which brings the EU’s leaders together twice a year to make important decisions, is meeting in June or July and they will need to negotiate a final deal then. The European Parliament would then need to provide an affirming vote in early September.

The political consequences of failing to reach an agreement would be substantial. The markets would panic and the EU’s credibility would be in tatters.

Timing is Everything

Even if all the EU’s member states manage to agree what a final stimulus package would look like, the eurozone’s survival depends upon the scale of recovery in the southern European states, particularly Italy. 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. If the Italian economy continues to stagnate, these numbers are only likely to increase.

With Germany’s support, von der Leyen will more than likely win the European Council’s approval for her stimulus in June or July, but she should anticipate that her plans will more than likely be watered down. Like with all the crucial decisions the EU makes, timing is everything, and if the member states fail to agree on anything, Europe’s recession will be deeper than expected.