Will Eurozone’s €500bn Coronavirus bailout compromise be enough?

The impact of the cornavirus on the nations of Europe, Britain included, is obvious and well-documented. But has the virus now spread to the European Union itself? Many would say that it has and that the process may become unstoppable.

Fears are growing right across the continent that if nothing is done to transform the rhetoric of solidarity into tangible financial assistance for the most stricken economies, particularly that of Italy, then the EU, starting with the single currency, could start to fragment, with consequences that can only be guessed at.

Late last night, finance ministers finally came up with an aid package, valued at half a trillion euros (£430bn), targeted at member states hardest hit by the virus, led by Italy but including Spain and France. The deal falls short of what had been demanded by Paris and Rome and, controversially, makes no provision for EU-wide “coronabonds” – newly-issued Eurobonds in which the major investors would be Germany, the Netherlands, Austria, Denmark and Sweden.

The Dutch prime minister, Mark Rutte, an economic conservative in office since 2010, has taken an especially hard line over the idea of coronabonds, but he is backed by Germany’s Angela Merkel, who said on Thursday that Berlin was already helping its neighbours by taking in seriously-ill patients from Italy and France but was not ready to enter into a massive, open-ended financial commitment.

Making the best of things, the French finance minister Bruno le Maire tweeted after the announcement of the latest package: “Europe has decided and is ready to meet the gravity of the crisis”.

President Emmanuel Macron is known to support a tranche of crisis-related eurobonds, as does his compatriot Christine Lagarde, President of the European Central Bank. The ECB this week reckoned that as much as 1.5 trillion euros would be required to deal with crisis across the EU’s 27 member states. Lagarde, however, is reported to have made little progress on the issue over the intransigence of central bank governors from Germany, the Netherlands and Austria.

Fortress Europe, rooted in the single currency but defined physically by the borders of the Schengen Zone, is at serious risk of breaking down under the impact of the health crisis. On Thursday, Italy’s prime minister Giuseppe Conte – a former law professor with no ties to extremism of left or right – told the BBC’s Today Programme that the EU risks failing as a project if it could’t agree an adequate and coordinated response to the needs of the countries worst hit by the virus.

Conte did not pull his punches. If it was to survive, he said, Europe would have to rise to the challenge of its biggest test since the Second World War.

The idea of coronabonds is an old one dressed up in the PPEs of the present emergency. The bonds would release billions of euros that could then be redirected by Brussels and the ECB as finance to Italy and others of the southern, Club Med zone. The problem is that while the Northern states are better able to withstand the demands of a virtual economic shutdown, they can only do so if the results of their previous prudential approach are not frittered away on what they see as the more lax and skittish economies of the South.

Just this week, a motorway bridge linking Genoa and Florence collapsed due to years of neglect, bringing back memories of a similar, but much worse, disaster in the Genoa region in 2019. Only the fact that there were no vehicles on the road at the time due to the economic restrictions now in place precluded a tragedy.

In The Hague, Mark Rutte will have taken note of the accident, confirming him in his belief that something has gone structurally wrong in Italy, not only with its roads, but throughout its entire system of governance. He has refused to throw good money after bad. If the Dutch are to get their chequebooks out, it will only be if they can be convinced that the cash will be put to good purpose.

In Germany, until today, it was mainly the rhetoric that was stepped up. In an open letter to Europe, published earlier this week in several leading newspapers, foreign minister Heiko Mass and minister of finance Olaf Scholz (both Social Democrats) spoke of how their hearts went out to the people of Bergamo, Madrid and Strasbourg – cities especially hard hit by the virus – stressing that protecting the citizens of the EU was their top prority. Europe had a common task and Germany, they assured us, was willing to play its part.

Yes, but how? Well, Brussels had already loosened the Stability Pact criteria, allowing member states to spend more without breaking the rules on debt ratios. At the same time, the ECB was busy quieting the money markets by purchasing new government and company bonds, so that billions in the Commission’s reserves were now flowing in the members states suffering the greatest difficulties.

But that is merely a tweaking of what is already in place. What else? Mass and Scholz proposed that action be taken to ensure that there is sufficient liquidity – i.e. enough money – in the coffers of all member states “so that jobs do not depend on the whims of speculators”. New funds would apparently be made available, without any “unnecessary” conditions attached, by way of the European Stability Mechanism (ESM) set up to enable Eurozone countries to borrow money at favourable rates.

“We don’t need a troika, inspectors and a reform programme for each country to be drawn up by the Commission. What we need is quick and targeted relief. The ESM can provide precisely that if we adjust it sensibly.”

The ministers, as it happens, were only half right. The new package will draw on the stability pact for some €240bn of the promised relief, but the rest, totalling €200 billion, will be made available by way of guarantees from the ECB plus cash redirected by the European Commission from existing projects. A lash-up perhaps, but perhaps better than nothing.

The red lines drawn in Berlin and The Hague may not have been erased, but are now much fainter. In signing off on half a trillion euros, finance ministers were acknowledging, however late in the day that desperate times sometimes require desperate measures.

The cash will have to reach crisis centres within weeks, not months. Otherwise, the risk remains that Club Med members will lose patience with what they see as Northern tight-fistedness and possibly look elsewhere than Brussels – including China – for their salvation. With several of the former East Bloc countries already in a state of incipient rebellion, the resulting crisis could quickly take on alarming proportions.