European
Central Bank chief Christine Lagarde risks misreading the moment and not doing
enough to help national governments deal with the coronavirus | Thomas
Lohnes/Getty Images
OPINION
Coronavirus
could break the EU
The
epidemic’s economic shock could easily exceed that of the 2008 financial
crisis.
By DALIBOR
ROHAC 3/16/20, 4:01 AM CET
Dalibor
Rohac is a resident scholar at the American Enterprise Institute in Washington,
D.C. and tweets at @DaliborRohac.
The European Union may have survived Brexit, the
refugee crisis and the financial meltdown of 2008 — but don’t assume COVID-19
can’t destroy it.
For better
and for worse, crises create opportunities for extraordinary politics. European
leaders, including the eurozone’s top central banker, Christine Lagarde, would
be foolish to think that the ongoing pandemic is different just because it is a
public health crisis — and not a political or financial one.
Besides the
cost in terms of lives and public health, the pandemic has created an economic
shock on a scale that could easily exceed the 2008 financial crisis. While the
Great Recession resulted from a financial shock that reverberated through the
U.S. and European economies, the entire world now faces a massive downturn
across all sectors of the economy.
“Social
distancing” invariably means less economic activity for everybody. In the
coming weeks, if not months, people will work less, invest less and spend less.
Inevitably, balance sheets will deteriorate and otherwise profitable businesses
will go under — unless there is a clear commitment from public authorities to
stabilize the economy.
The
countries hit the worst by the pandemic — Italy, Spain and France — are the
ones that have the least amount of fiscal breathing space.
In the
United States, the Federal Reserve is moving ahead with a program of
quantitative easing, although President Donald Trump is chastising it for being
too slow. In the U.K., the Bank of England slashed rates and the government has
announced a large fiscal loosening worth £30 billion.
The EU’s
response, in comparison, has been pitifully weak. According to Lagarde’s
statement last week, there are “no material signs of strains in the money
markets or liquidity shortages” and any policy response to the developments
should be primarily fiscal — and therefore national.
That is irresponsible. The countries hit the worst by
the pandemic — Italy, Spain and France — are the ones that have the least
amount of fiscal breathing space, irrespective of the European Commission’s
relaxation of fiscal and state aid rules on Friday.
Going into
the current crisis, Italy’s debt-to-GDP ratio was 134 percent. Spain’s and
France’s were close to 100 percent. With spreads on their bonds skyrocketing, a
sizeable fiscal stimulus is out of the question. Greece may have seen
relatively few cases of coronavirus, yet the spread on its own 10-year bonds
have gone up by over 50 basis points in the past week. It is not enough to
simply “count on Germany,” as German Finance Minister Olaf Scholz put it —
markets need to see real, macroeconomically significant firepower now in order
to regain confidence.
EU
countries like Spain will have a hard time absorbing the economic hit that the
coronavirus will leave in its wake | Cesar Manso/AFP via Getty Images
And
whatever one thinks of Lagarde’s claim that the ECB should not be “the line of
first response” to the widening bond spreads on the eurozone’s periphery, a
muscular pre-emptive injection of liquidity into the markets by the ECB is now
the only thing that can stop the gradual build-up of panic in the financial
sector and cushion the impact the pandemic is having on nominal spending.
Worse yet,
Lagarde is dramatically misreading the politics of the moment. After the
omnishambles of the Brexit negotiations, it has become conventional wisdom that
Europeans have been somehow cured of any desire to leave the EU. While that may
have been true a few weeks ago, it can no longer be taken for granted in
today’s extraordinary times.
The real
human cost of the pandemic (over 1,000 people have died in Italy alone)
combined with popular anxieties and a sense — justified or not — that European
institutions are not helping can easily add to a potent centrifugal force. That
will be especially true if Italians reach the conclusion that a devaluation of
their currency is their only possible source of economic relief.
Remember
that Italy was until recently governed by a populist coalition built around the
rejection of austerity supposedly imposed by the EU. In opinion polls in
France, French President Emmanuel Macron is tied with the far-right leader
Marine Le Pen for reelection in 2022. Even in Spain, the far right made significant
gains in the parliamentary election in November 2019. Governments in Warsaw,
Budapest and Prague already harbor little affection for the EU. If they
conclude that there are political gains to be made from taking things into
their own hands — in whatever sense — they will.
If there is
one lesson from the Great Depression, it is that when international leadership
fails, it is replaced by the destructive, non-cooperative behavior of national
governments. When the U.S. failed to provide liquidity to the global financial
system and imposed the Smoot-Hawley tariff instead of keeping its markets open,
competitive devaluations and tariff hikes ensued.
The EU’s
leaders and the European Central Bank’s president in particular face a similar
choice today. Either they move boldly to help the periphery, or the periphery
is going to help itself in whatever way it can — even if it means the
unraveling of the eurozone and the EU.
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