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With nearly 80,000 confirmed cases to date, Germany is home to the fifth-largest coronavirus outbreak in the world. In response, Europe’s largest economy has blown past its constitutional budget rules to issue billions in debt and keep its own businesses afloat. But it’s not clear if politicians in the fiscally conservative state will overcome their historic aversion to helping out less fortunate European Union countries amid the pandemic. And the outcome of the COVID-19 policy debate, taking place now across the continent, could profoundly affect the future of the E.U. itself.
In a cruel twist of fate, the coronavirus has once more pitted the countries of Northern Europe against the South. And just as was the case after the 2008 financial crisis, Southern European countries are in a much weaker position. At a human level, Spain and Italy have been hit hardest by the pandemic. But it’s also true that countries whose economies are dependent on tourism will see much bigger economic losses in the long run. Germany can always sell cars in six to 12 months when this thing is over; the revenue from a summer of canceled trips to Rome is lost forever. Moreover, countries like Portugal and Greece that accumulated high debt levels amid their struggles a decade ago are much less able to raise money for the kind of stimulus Germany is already mounting in response to the coronavirus crisis.
“This coronavirus affects everyone, but it affects some people more than it affects others — it’s a symmetric shock with very asymmetric effects,” explained Lucas Guttenberg, the deputy director of the Jacques Delors Centre, a think tank in Berlin. “Clearly, it is no one’s fault,” he added, “but if some countries come out of this much stronger than others, that is going to politically undermine the European project as a whole.”
One way to avoid that is to share the pain more evenly. Since the financial crisis, many European voices have been calling for the issuance of “Eurobonds,” debt that is issued centrally rather than being added to just one country’s books. That would spread costs around and nudge the E.U. a bit closer to a U.S.-style union. Eurobonds have been the subject of intense debate for years, and the idea remains stalled amid the controversy, but a proposal for special “Coronabonds” has garnered wider support amid the current carnage. Last week, nine countries called for the issuance of joint European debt to fight the pandemic. Crucially, France backs the creation of these instruments, which basically amount to emergency Eurobonds, alongside Spain, Italy, Portugal, Ireland, Greece, Slovenia, Luxembourg, and Belgium. The big holdout is Germany, backed by the Netherlands, Austria, and Finland.
Germany has a special role to play in this crisis, but it also has a distinct economic tradition. The most important country in the European economy — and very likely the one that has benefited the most from the creation of the E.U. itself — loves to save. Balanced budgets are law. In 2009, Germany modified its constitution to limit structural deficits to the very low 0.35% of GDP. But when the coronavirus arrived, the German government essentially ripped up its economic rulebook. The country’s finance minister unleashed a “bazooka” of unlimited cash to prop up German businesses. A decade ago, German tabloids often blamed countries like Greece, Spain, and Portugal for their own problems, saying they needed to learn their lesson, but it’s hard to see how anyone could say that now in the midst of an unprecedented pandemic. In recent years, Merkel’s center-right Christian Democratic Union (CDU) has been against European bonds, believing they would hurt Germany and create moral hazard. Over the next few weeks, we will see if they might make an exception in light of COVID-19.
“The [German] business community is strongly against the idea, so the debate could end the same way it did before — without issuing the bonds,” said Anke Hassel, professor of public policy at the Hertie School in Berlin. “And the conservative politicians here don’t see any reason why they should have to support them — that is, unless they think the eurozone could fall apart or Italy could leave the EU.” The loss of a core eurozone country would inspire much more fear than Brexit ever did.
So far, Germany has spent its time discussing national solutions to domestic problems. Just last month, Merkel’s CDU party was in crisis — or at least a crisis by German standards — facing down an insurgent right wing and scrambling to deal with the surprise resignation of Merkel’s successor. Merkel, who will not run again, has seen her popularity soar among a public that trusts in her leadership skills. This means that COVID-19 pulled German politics back toward the liberal center, at least for now, says Hassel.
But other countries don’t have the luxury of being able to solve their problems internally. Southern European countries are terrified of what is coming, and already looking to the North for some help. Both Spain and Portugal are now run by left-wing governments supported by elements with deep critiques of the European Union. Pro-European Italians are facing down both the murderous virus and the rise of the populist right, while many in Greece never forgave Brussels for what happened a decade ago; years and years of imposed austerity imposed in Athens led to economic and psychological depression. And a few miles away, Hungary (in the E.U. but not the eurozone) just used COVID-19 to suspend democracy. The European Central Bank has already suspended its normal rules in order to offer extra help to national governments. But a lot of countries think they will need more.
The most-affected E.U. members are presenting a united front. “All Southern European countries seem to be in sync concerning the response” and the need for joint bonds, says Pedro Magalhães, a political scientist at the University of Lisbon. Like other experts, he thinks the shared enemy of the pandemic won’t make the E.U. stronger but absolutely could make it weaker. “It’s too soon to tell, but the signs are not great,” he said. “Despite many examples of cross-border solidarity, national interests have seemed to prevail.”