The result of this meeting may well be a defining moment for the future of the E.U. itself. Indeed, Emmanuel Macron, France’s president, has called it Europe’s “moment of truth.”
Governments use their fiscal powers to tackle economic crises. The E.U. can’t.
A typical government response to the economic fallout of the coronavirus pandemic involves fiscal policy measures — governments employ their power to tax, spend and borrow to stimulate the economy. The E.U. is different. It has many of the trappings of a nation-state, including a currency (the euro), a central bank — the European Central Bank, or ECB — and various regulatory and legal powers. However, E.U. leaders and their publics have never given the E.U. the ability to directly tax citizens, or to jointly issue European debt, or “Eurobonds.”
Some have proposed new powers for the E.U.
Several European leaders have suggested that the E.U. should be able to issue joint Eurobonds, or “coronabonds,” to tackle the crisis. Under this proposal, European leaders would set up a new E.U. institution that would directly borrow money in financial markets, with all E.U. members contributing a minimum amount of initial capital. Every E.U. government would then commit itself to guarantee the value of that institution’s debt, which would secure the bonds’ AAA rating.
Unlike ESM loans, which are usually subject to conditions, this type of Eurobond would be a permanent mechanism of E.U. strength and solidarity across its members. The ECB is already effectively mutualizing E.U. countries’ sovereign debt through its Pandemic Emergency Purchasing Program (PEPP), in which it has committed to buy up to 750 billion euros ($812 billion) of E.U. members’ sovereign bonds until the end of the year. But by doing so, the ECB is really stretching its institutional mandate.
So why have E.U. members so far refused to give political support to an official Eurobond?
Northern nations don’t trust the south
Part of the answer is that some political elites in wealthier northern E.U. members see Eurobonds as politically unacceptable. After the 2008 global financial crisis, financial markets attacked the national debts of some E.U. members, particularly Greece, Ireland, Portugal, Spain and Italy. Then, as now, some countries called for major institutional reforms to include Eurobonds. But Germany, the E.U.’s most powerful creditor nation, vetoed these proposals with the support of the Netherlands, Austria and Finland.
Our research showed that even though lender nations such as Germany might benefit from such reforms, the debate was constructed by prominent neoliberal economists, market-oriented think-tanks, right-leaning media, and conservative party leaders in ways that made Eurobonds political poison in the north. This approach framed the politics of Eurobonds as a contest between profligate southern “sinner” nations that wasted their money and thrifty northern “saints.” Under this narrative, the appropriate solution to debt problems was to slash public spending and adhere to strict fiscal rules, rather than build a robust fiscal system and financial union.
The leaders of Europe’s “frugal four” — Germany, the Netherlands, Austria and Finland — have continued to double down on the “saints and sinners” narrative during the 2020 pandemic-related crisis. Back in 2017, the Dutch finance minister and president of the Eurogroup famously suggested that Greeks and Italians had squandered all their money on women and booze.
A few weeks ago, the current Dutch finance minister, Wopke Hoekstra, infuriated Southern European leaders when he argued that Eurobonds risked undermining Mediterranean countries’ “incentives for sensible policy” and suggested that Brussels should investigate why certain E.U. members were fiscally incapable of fighting the economic downturn caused by the coronavirus.
France is trying to change this narrative
Sociologists have a term for widely held beliefs that people accept as taken-for-granted realities: social facts. The frame of northern saints and southern sinners has taken hold within Europe over the past decade as a sort of social fact, despite its questionable reality. And it has helped build a political barrier to the creation of Eurobonds and to forward movement in the process of European integration.
On the eve of this week’s European Council Summit, Macron has been attempting to reshape the political frame around Eurobonds and claims he is slowly bringing along his Dutch and German counterparts. On Thursday, we will find out whether Macron and his fellow southern sinners can convince German Chancellor Angela Merkel and other leaders to back away from this north-south divide in the interest of broader European stability and growth.
Macron argues that France made a historic mistake in 1919 by insisting that Germany had to pay reparations for World War I, as Germans know all too well. We will soon see whether he can persuade Northern European leaders not to make the Southern European states pay all of the huge political, economic and social costs they have incurred during the covid-19 crisis, but to instead create a Eurobond to jointly address Europe’s woes.
Kathleen R. McNamara is professor of government and foreign service at Georgetown University and the author of “The Politics of Everyday Europe: Constructing Authority in the European Union” (Oxford University Press, 2015).
Matthias Matthijs is associate professor of international political economy at Johns Hopkins University’s School of Advanced International Studies.