Sánchez’s Heat Level: A frozen eurobonds proposal divides the EU…again…

  • President Sánchez proposes Eurobonds to ensure resources in coronavirus crisis.
  • Northern countries led by Merkel & Rutte reject Eurobonds proposal.
  • In part, nationalist bias against the South threatens the EU’s political and economic union.
Source: Francisco Seco ~ El Pais

Why is Sánchez’s level freezing?

Answer: While struggling to contain coronavirus deaths at home and safeguard Spaniard’s economic needs, Sánchez watches as his “coronabonds” proposal creates greater division in the EU.

With overwhelmed hospitals fighting COVID-19, the Spanish economy went into almost full hibernation mode over a weekend as Sánchez declared a state of alarm. Although in recent years Spain has experienced one of the highest growth rates in the EU, it has yet to fully recover from the 2008 financial shock. The unemployment rate is high: 13.6% in comparison to the 6.7% EU average. Income inequality has increased and is above the EU average. Additionally, Spain is the ninth country in the EU with the highest poverty rate, as low wages and in-work poverty have become increasingly common. 

This is the scenario Sánchez was met with when he arrived to the government. And now, Sánchez has to mitigate the negative impact of a deep economic crisis that will exacerbate unemployment, inequality and poverty for every generation in Spain. Not only that: the impending economic and social crisis will likely limit the Spanish healthcare system’s abilities to fight the coronavirus as well as many other illnesses that have been put on hold such as cancer. Unless enough resources can be raised for mitigation, health in Spain will suffer not only from coronavirus, but also from an economic recession. Indeed, studies have found that poverty leads to higher mortality risks.

Unfortunately, Sánchez is not alone in this struggle. Italy is, together with Spain, one of the countries hit the hardest by coronavirus so far. With the lockdown, Italians are struggling to buy food. In France, where coronavirus deaths appear to be spiking, President Emmanuel Macron expects the economy to shrink by 8%.

These three countries and their leaders are now the forefront of the European South, which is looking towards the EU and its member states for solidarity: “If the European Union exists for anything, it is for crises like these,” stated Sánchez. Sánchez has brought from the dead an old and never fully accepted tool: eurobonds, or as some call them today, coronabonds. This tool, which was heavily discussed back in the 2008 crisis without success, would share debt among all EU member states. The debt from the most financially weak countries due to coronavirus measures would shrink with eurobonds, thus allowing these countries to cheaply borrow money with lower debt risks. However, to Sánchez’s and other leaders’ detriment, history has repeated itself.

The reaction by some Northern EU member states (headed by Germany and the Netherlands) has been the opposite of solidarity. This response should not come as a surprise. The mistrust and ideological biases that drove the 2008 divisions between the North and the South of Europe have not disappeared, and instead have come back to play. Only this time, the problem being faced is very different, and so are its implications for the future of the EU.

What is changing Sanchez’s temperature?

Answer: The Northern countries led by Angela Merkel, Mark Rutte, and their respective finance ministers, who continue to place nationalist concerns above the EU’s already weak political union.

Merkel and Rutte’s answer to Sánchez’s eurobonds proposal has been blunt. Their reasons? It’s either too early in this crisis to consider such radical tools or eurobonds would not do the job better than less radical measures (such as borrowing from Europe’s bail out fund, the same one used for the 2008 crisis). The real reasons? In part, an ideological, nationalist bias against Southern countries.

Arguing that it’s too early to consider drastic measures such as eurobonds appears to be a simple excuse, and even a recurrent mistake. The Spanish and other economies have been on hold for weeks without any predictions of near openings. Urgent measures are necessary to finance businesses and households that from one day to the other found themselves with no income to survive. Urgent measures are also needed to ensure investors’ confidence in the EU (if it hasn’t been lost yet). Otherwise, capital flight will exacerbate the economic crisis even more. In fact, a significant mistake made in 2008 that increased the crisis’ economic costs for the EU as a whole was a late and reactive response instead of a precautionary response.

Additionally, arguing that other, less radical measures (such as the ones currently implemented by the EU) will work better than eurobonds is also questionable (see section below).

Instead, the rejection of eurobonds can be partly explained by an ideological and nationalist bias that has spread against Southern countries. As it was made clear in the 2008 crisis’ negotiations, the North sees itself as the rescuer of a greedy, irresponsible and waste-driven South. Today, Merkel & Rutte view eurobonds as a tool that discourages Southern countries from responsibly managing their finances.

However, there is an important difference between the 2008 crisis and the coronavirus crisis: the current crisis is caused by an external shock (a virus) that is unrelated to countries’ financial management. While we can disagree on whether the coronavirus measures chosen have been appropriate or not, the decisions made by Sánchez and other European leaders to go into lockdown were supported by the EU and member states. The North’s nationalist bias is unwarranted. Therefore, the mistrust on behalf of the North portrays a sad reality: the EU is far from achieving a shared identity and political union.

What’s more, Merkel & Rutte are focusing on short-term gains (such as a happy electorate) instead of on the long-term pains of rejecting coronabonds, which puts at risk the EU project. The North’s ideological bias ignores an important fact: all EU member states have benefitted from the EU internal market and policies, not just the South. In fact, a report that examines inequalities within the EU internal market finds that core EU countries such as Germany and the Netherlands have benefited more from the EU free trade policies than periphery countries in the South. For instance, Germans were 1,046€ richer and Spaniards were 590€ richer.

Increases in welfare portrayed with yellow as the smallest increase and dark blue as the largest increase

Moreover, in the long-term, the economic costs of not acting in time and appropriately to the current crisis will be severe not just for the South, but also for the North. After all, both the South and the North depend on extremely linked markets. Therefore, one thing is clear: Merkel & Rutte are listening to nationalist concerns and ignoring EU countries’ demands for help at the risk of weakening the EU economy and political union.

What is driving Sánchez?

 Answer: The current EU measures are insufficient for Spain’s needs.

The economic crisis that Spain (and other countries) is facing is imminent and clear, and Sánchez knows this. As explained above, the consequences for the population can be devastating. The EU has agreed on some measures to alleviate the situation, but they don’t appear to be enough. In an article from The Guardian, Sánchez writes: “this is not going to be sufficient in the medium term”, and hence eurobonds are needed.

Many economists agree with Sánchez’s approach. The main measure that the EU has agreed on is a 540€ billion loan support package: a 300€ billion credit for companies and employment measures, and a 240€ billion credit for each country (up to 2% their GDP) that is specifically targeted at coronavirus measures.

While to us, average citizens, the number 540 billion seems big, the coronavirus crisis will require much more. In fact, economists, Sánchez and counterpart leaders, and even the European Central Bank, have declared that an amount of 1.5 trillion euros is needed. However, a country like the UK, which after Brexit has free monetary policy, can now print this vast amount of money without a high risk of inflation. A country like Spain, which shares a central bank with the rest of EU countries, doesn’t have the same ability to print money. Therefore, Spain has to borrow money at the expense of increasing its debt.

The only positive side in the 540€ billion loan is that the EU has agreed on not attaching conditions (that is, austerity measures) to such loans (for now, let’s see what happens when the worst of this crisis is over). A win for Sánchez. Regardless, Sánchez knows that, for Spain to get out of this crisis without worsening its already negative economic and social conditions, more is needed from the EU and its members.

Eurobonds appear to be his ideal solution. Given the amount of money that Spain will need, eurobonds could ensure that financially weak countries don’t go into bankruptcy, which is a similar and scary scenario as that of 2008. With eurobonds, Spain could borrow money cheaply while Merkel & Rutte would only pay “trivially” higher interest rates. Eurobonds would thus be the fair balance in exchange for being part of an internal market that, while it limits states’ monetary policy, it also brings other benefits to all member sates (both in the North and South).

What does it mean for you?

Answer: The European Union is an unprecedented and peace-driven project that faces the risk of destruction to the detriment of each of us.

As Sánchez has pointed out, the lack of solidarity between the North and South can lead to an increase in euroscepticism. Especially when, arguably, the shock on the economy comes from a factor unrelated to the South’s resource management (that is, a virus). If everything goes down, the EU will be an easy enemy to pick at by those groups that have suffered the most. In fact, a recent poll shows that 51% of Spaniards value the EU less since the coronavirus crisis began. For a country that recently dodged an extreme right-wing party from entering government, scenarios on the EU’s future are not positive.

In addition, China is appearing as the new world leader in this crisis. Italian politicians have already pointed out the EU’s lack of response to medical equipment aid and have chosen to trust China’s rescue efforts instead. A rejection of eurobonds may increase China’s influence in Europe to the detriment of the EU.

So should you worry about the current EU divide on eurobonds? For sure. If you are a Spaniard, worry about your government’s lack of resources to help you. If you are a European, worry about the systemic political and economic risks that could spread even among those countries not hit hard by coronavirus measures. If you are not European, worry about the geopolitical implications that the end of a project aimed at achieving peace in Europe could lead to. We should all worry.

Adriana Rodriguez

Executive Director of Research and Analysis