The future of the Euro (#coronavirus bonds)

For most of my adult life, we’ve been part of the European Union. The Brexit vote came as a shock, and the unravelling of Britain from Europe for the past four years has been a major stalemate in British life and politics. Now, the whole euro project might come tumbling down, so maybe the Brits were just proactive?

I say this as we see the European project causing major rifts between rich and poor countries during a pandemic that no one had planned for. Italy was left isolated and alone as thousands were hospitalised and died. Then Spain joined the issue, closely followed by France and Germany.

The headlines shortly thereafter was that the Northern nations didn’t feel inclined to support the Southern nations.

A year ago Carlo Calenda ran in European parliamentary elections in Italy under the slogan “We are Europeans”, a rallying cry to defend his country’s place in the EU at a time of rising nationalism. Now even Mr Calenda, a 46-year-old former minister and Italian permanent representative to the EU, is experiencing a crisis of faith in an idea he has spent a lifetime fighting for.  “This is an existential threat, I am not sure if we are going to make it,” he says. “You have to consider my party is one of the most pro-European parties in Italy and I now have members writing to me saying: ‘Why do we want to stay in the EU? It is useless.’” 

As Italy faces its most severe crisis since the second world war, with more than 15,000 deaths from coronavirus and its economy on course to suffer the deepest recession in its modern history, there is a rising feeling among even its pro-European elite that the country is being abandoned by its neighbours. 

The Financial Times, April 5 2020

Nearly half of Germans think Italy and Spain's troubles with the coronavirus crisis are mainly due to poor governance in those countries, according to an opinion poll.

The results of the survey underscore why Berlin has opposed calls from Rome, Madrid and other capitals for the EU to issue a joint debt instrument, known as corona bonds, to tackle the economic fallout from the crisis. The issue was at the heart of disagreements that prevented finance ministers from around the bloc reaching a deal on a common strategy after all-night talks earlier this week.

Politico, April 8 2020

There’s more than just a fight over funding here though, as borders are now back. Nearly all EU countries are not allowing anyone to enter or leave their countries; all flights are canned; and cars and trucks driving across borders are checked rigorously. Add on to this that some countries like Norway, Denmark and Germany are starting to move out of lockdown whilst others are still in hard lockdown, there are fundamental disagreements about the crisis and how it is dealt with at a nation state and European market level.

This is not just my view, but it is a view being fuelled by politicians at senior levels in Germany, Italy and other nations.

Italy's prime minister has told the BBC that the European Union risks failing as a project in the coronavirus crisis.

BBC, April 9 2020

And German Christian Democratic Union leader Friedrich Merz (likely successor to Angela Merkel) tweeted:

Italien will von der EU bereitgestellte Hilfen bislang nicht annehmen. Das zeigt doch: Italien hat keinen akuten Finanzierungsbedarf, sondern versucht, im Windschatten von Corona zu unbegrenzten Refinanzierungsmöglichkeiten für seinen Staatshaushalt zu kommen. (tm) @faznet

— Friedrich Merz (@_FriedrichMerz) April 19, 2020

… which roughly translates into:

“Italy has no acute need for financing. It tries to find unlimited financing options for its state budget in the slipstream of coronavirus.”

The core of the issue is the issuance of coronabonds. Italy wants them; Germany does not (although that’s open to question). The core reason why it is controversial is that coronabonds at a European level would be backed by the whole Eurozone and would enable a financial rescue for Spain and Italy without hurting their sovereign debt levels. Bearing in mind that 2012 saw a sovereign debt meltdown in Europe, borrowing is also very difficult at a national level.

However, if European coronabonds are issued with a higher debt rating, then Germany, Netherlands and other richer nations would be liable for them, dragging down their own sovereign debt levels.

This is a true test for Europe and its future. Add into this mix that millions will now be unemployed, in debt, broke or broken, there may even be huge civil unrest and retaliation from the masses post-pandemic. Think the gilet jaunes (yellow jackets) in France 2019 on a European scale and you get my drift.

We all think things will return to a new normal?

Nah … whatever the future is, it won’t be like the past, and “Europe” will never be the same again.