The difficult federal response of the European union to the covid-19 crisis

After those past weeks and the dramatic impact of the Covid-19 spread around the world, one can say that the current situation appears to have become the worst healthcare crisis since the Influenza pandemic of the past century. Indeed, from its global reach with more than half of humanity in quarantine to its economic impact with entire economic sectors shutting down (tourism, airline sector…) in addition to most local businesses reporting more than 50% revenue losses in the past month alone, the situation is not without remembering the one witnessed in the early XXth century.
However, despite this alarming situation as always in time of crisis the initial instinct of most European countries was to retrench and act unilaterally with little to no consultation of other country members. Consequently, this lack of action on a federal scale led, as during the sovereign debt crisis, to a worsening of the situation showcased perfectly by the initial refusal, prior to the European commission intervention, of France and Germany to share their reserve of protective masks with Italy allowing as such, a more severe spread among the Italian population and then to the zone as a whole.

In this sense, the recent actions taken by the ECB with the creation of a €750 billion Pandemic emergency purchase program in addition to its previous big bank stimulus package were crucial to launch a political dynamic across the EU while protecting the eurozone economy by allowing the EU members the most badly hit by the pandemic to wait out the storm without being put down by a financial crisis. Nonetheless, as could be seen through the two last meeting of the euro group reuniting all the European finance ministers, the divergence between the northern bloc and the southern bloc that emerged during the last financial crisis and led to the enforcing of numerous restrictive budget policies by the northern bloc on countries like Italy or Spain still holds in face of the risk of the Covid-19 pandemic, despite the partial responsibility of those same measures in the current situation.

Indeed, as reported two officials familiar with the discussion during the first euro group, the main reason for the failure of the first meeting was a dispute between the Netherlands and Italy over the conditions attached to the potential use of credit lines from the euro area’s bailout fund with the Dutch minister failing to understand that linking its access to future austerity measures was inconceivable to accept for the Italian government given the rise of the anti-EU far right party of Matteo Salvini and the current country death toll partly caused by a failing healthcare system brought down during the last decade by the imposed European austerity measures.
Thankfully, after the second meeting on Thursday, the euro group came to agreement and announced in addition of the ECB actions a €500 billion package to help countries struggling, to pay for public services, keep business afloat and help people who have lost their jobs as a result of the crisis. In details, this package will be distributed among the European Stability Mechanism (€240 billion), the European Investment Bank ( €200 billion) and the European Commission (€100 billion) through the creation of an exceptional fund dedicated to help countries in financing the paid leaves measures put in place following the quarantine. So, despite an hazardous the EU seems now to have finally come into marching order to tackle this crisis through a united front on the economical and  political side.

Nonetheless, even if the official statement from this second meeting leaves room for further actions if needed, there is still one major point of disagreement between the two blocks on the potential creation of European bonds allowing European countries to finance their economy using the grade of the whole zone. Yet, if we look forward, given the current boom of the public deficit in the southern block in response of the current crisis it becomes more and more difficult to fathom a return to the prior situation with a strict 3% rule of public deficit once the crisis will be over due to the political impossibility for the Italian government to impose on the third biggest European economy a new set of austerity measures in the years to come.

Consequently, ideological lines about monetary financing as well as budget rules will have to evolve in Europe once the Pandemic emergency purchase program of the ECB will come to an end in order to avoid the risk of putting Italy in financial distress through the sharp rise of its interest rate and not put at risk the whole euro zone. Especially, since this idea of Eurobond backed by a promise of buy back by the ECB will not induce any transfer of value from the northern block to the southern countries like Italy or Spain but just an extension of the ECB balance sheet which will keep indefinitely those assets on its balance  just as the FED or the BOJ are currently doing in the US and in Japan.