To avert a broader economic disaster, dispel the threat of a financial crisis, and provide much-needed political solidarity, Europeans should immediately launch a “COVID-19 Marshall Plan.”
LONDON – Euro zone finance ministers finally agreed on April 9 to a package of measures to respond to the COVID-19 crisis. But in the face of an unprecedented medical and economic emergency, they need to be much bolder.
The lockdowns imposed in most European countries are economically devastating. Because many businesses are shuttered and almost everyone is confined to their homes, consumer spending has collapsed and economic activity has plummeted. Bankruptcy looms for many companies, unemployment is skyrocketing, and household incomes are cratering.
According to one official estimate, France’s economy is now operating at around two-thirds capacity. Assuming that similar contractions apply throughout the European Union, a three-month lockdown would cause the annual output to fall by around eight percent—a far bigger shock than in the 2008-09 crisis. Tourism-reliant Spain may be hit even harder.
Moreover, the losses may turn out to be much larger, because economies are unlikely to bounce back as quickly as they have fallen. Crippling uncertainty will remain. Indebted and fearful consumers may not resume their previous levels of spending even if they have jobs. Banks may prove unwilling or unable to lend, and many ailing businesses will never recover. Nor can anyone rule out further lockdowns in the months ahead.
European governments have therefore rightly stepped in to support cash-strapped businesses and income-deprived workers. But most of the eurozone has not responded as forcefully as Japan, the United Kingdom, and the United States have. In France and Spain, the fiscal boost is only around two percent of national income, and it is even lower in Italy. These are grossly inadequate responses to what could become a massive depression.
Why aren’t eurozone governments doing enough? The problem is not eurozone fiscal rules or EU state-aid rules, which have been suspended or relaxed. Nor is market access an issue, considering that governments’ borrowing costs are near-zero or negative. The problem, rather, is the abiding fear that soaring debts will lead to crushing EU-imposed austerity once the pandemic passes, and that governments’ higher refinancing needs could spark another financial crisis.
For now, the European Central Bank has pacified markets by committing to purchase at least €750 billion ($820 billion) of government and corporate bonds this year through its flexible new Pandemic Emergency Purchase Program (PEPP), in addition to its previously announced €360 billion worth of quantitative easing.
But the eurozone remains an unstable edifice, and its penchant for austerity is merely in abeyance. It survived the 2010-12 panic because markets believed then-president of the ECB Mario Draghi’s commitment that the ECB would do “whatever it takes” to hold the monetary union together, and governments then eased off on austerity. But Draghi’s successor, Christine Lagarde, has since undermined his commitment by declaring that “we are not here to close spreads” (referring to the additional interest paid by riskier borrowers, such as Italy, compared to safer ones, such as Germany). There is a real risk of financial crisis once the PEPP ends.
Perhaps the biggest problem, though, is political. The pandemic ought to have brought Europeans together in the face of a common threat that does not respect national borders. Instead, individual countries have largely fended for themselves. When Italy issued an urgent plea for medical help in late February, not one of the EU’s 26 other member states responded until China did. France and Germany actually banned the export of medical equipment, making a mockery of the EU’s single market.
Likewise, Italy’s neighbors in the supposedly passport-free Schengen Area rushed to close their borders. Worse, the COVID-19 crisis has revived the divisions and prejudices of the 2010-12 crisis. At a time when many Italians and Spaniards are dying, some northern Europeans—notably the Netherlands’ tone-deaf finance minister, Wopke Hoekstra—have implied that southern Europeans owe their plight to their own fecklessness.
It is little wonder that the crisis is bolstering anti-EU sentiment and populist-nationalist parties, notably in Italy. Even Sergio Mattarella, the country’s pro-EU president, has despaired at the lack of solidarity.
Meanwhile, the Brothers of Italy, who are even more extreme than the far-right League party, have been surging in the polls. A new hardline nationalist government could decide to issue tradable IOUs to ease both its fiscal constraints and Italy’s exit from the euro. That is the last thing the eurozone needs.
To avert a broader economic disaster, dispel the threat of a financial crisis, and provide much needed political solidarity, Europeans should immediately launch a “COVID-19 Marshall Plan.” To match the scale of the crisis, the eurozone should commit to mobilizing at least €1 trillion (eight percent of GDP), which should be offered as grants—not loans that would add to national debt burdens—to suitable recipients across the monetary union. This could pay for medical needs such as testing, support hard-hit Europeans, and help seed the eventual economic recovery.
The plan should be funded by issuing common debt that the ECB would buy and hold for the foreseeable future. Unlike the temporary “coronabonds” that Germany, the Netherlands, and others have rejected, this new Marshall Plan would not cost European taxpayers, northern or southern, anything. And it should come with a sunset clause, to reassure those who fear that a permanent fiscal union will be created through the back door.
The measures agreed so far by eurozone finance ministers fall far short of that. Loan guarantees for smaller businesses are helpful. But EU loans to help fund medical expenses and employment protection schemes actually would compound Italy’s problem, which is not market access but fiscal headroom. The decision to base a future Recovery Fund on “innovative financial instruments” is a meaningless fudge, and governments remain deadlocked over the issuance of collective debt. Europeans can only hope that their leaders conclude, sooner rather than later, that an ECB-funded Marshall Plan is the way forward.
Philippe Legrain, a former economic adviser to the president of the European Commission, is a visiting senior fellow at the London School of Economics’ European Institute and the author of “European Spring: Why Our Economies and Politics Are in a Mess – and How to Put Them Right” Copyright: Project Syndicate, 2020.