A Battle for the Future: How the COVID-19 recovery package is causing disruption within the EU

written by Oliver Zarp-Karsholt

“Europe will be forged in crises” (Monnet 1976) — those were the words of Jean Monnet, although the forging has not gone well in recent years. The handling of the 2008 financial crisis caused a great deal of division between North and South Europe, the refugee crisis showed the EU’s inability to act fast, and the UK is in the chaotic process of leaving the Union. Now, the EU faces the COVID-19 pandemic, and the response to the financial crisis occurring from it will be another defining moment for the Union.

An enormous recovery fund of €750bn has been proposed as part of the solution. Funds will be borrowed by the EU as a collective, of which two-thirds are to be handed out as grants to the countries most in need. This proposed package has been welcomed with open arms by Southern Europe, where the crisis has not only claimed the most lives, but has also killed the essential business gained from tourism, off of which many base their entire livelihood. Yet, while it creates hope in the South, the fund has been less well-received further north.

Austria, Denmark, the Netherlands and Sweden were quick to sound the alarms on the proposal. The ‘Frugal Four,’ as this coalition has been dubbed, initially stood together last autumn, when they demanded that the EU’s budget for the next seven years be restricted to 1 per cent of the EU’s combined GNI. These countries are all net contributors in the grand scheme of the EU, and their proposal for a smaller budget is, in part, motivated by not wanting to shoulder even more of the EU’s spending. Lately, their advocacy for a “responsible approach,” as the Austrian prime minister called it, has been extended to the COVID-19 recovery fund (Kurz 2020). The coalition demands that the recovery fund be distributed as a loan, to be paid back by its beneficiaries.

The Southern European countries with the most need for this recovery fund are those who also struggled the most through the financial crisis a decade ago, and who still struggle with high GDP-to-debt ratios. These high debt ratios have increased the countries’ vulnerability to future economic shock — a key component of why Southern Europe struggles to deal with the current economic crisis through only utilising national measures. Burdening these economies with more debt or asking them to restructure their debt through austere measures could be a recipe for disaster. If Southern Eurozone members get into trouble, the markets may lose confidence in these countries — reminiscent of the Eurozone crisis when Greece faced difficulties. But this time, the potential financial market instability could be at a much grander scale, with Italy and Spain as much larger Eurozone economies being in the middle of the picture. The ‘Frugal Four’ should have to change their position for the above measures to be avoided; if it doesn’t change, the outlook for the EU does not look good. It seems odd that this small coalition of four countries that are all heavily reliant on a functioning European economy would stand in the way of the most effective recovery of the worst affected countries; their position looks to be almost self-defeating. But this debate concerns more than just economic solidarity or reasonability.

On the face of it, this dispute centres around the distribution of the bill from the help package. But the conflict is more profound than this; it is an essential battle for the future of the EU’s identity, which could shape the future of the entire Union? The amount of capital that the EU has pledged to loan for its rescue plan, €750bn, is far greater than any previous collective loan taken by the Union, but the truly historic steps are in the proposed new own resources for raising the money to repay the loan. Among the options, the Commission is proposing the collection of taxes on plastics, CO2, and big tech companies. So far, tax collection has been a national concern for all member states, and this step towards the more significant role of the EU will undoubtedly ignite major ideological discussions.

With the unprecedented proposed responses to the current financial crisis, this is the right time to ask ourselves which EU we envision for the future: the traditional union focusing on the internal market, trade policy, and international public goods such as the climate? Or a union that increasingly takes over roles previously undertaken by the individual nation-states, one in which we are European just as much as we are French, Bulgarian, or Danish? I would argue for the latter, but we must foster a debate so that under any outcome, we stand firm as an undivided union, rather than one with internal separations.

Monnet, Jean (1976) Mémoires. Paris: Fayard.

Kurz, Sebastian (2020) The ‘frugal four’ advocate a responsible EU budget, https://www.ft.com/content/7faae690-4e65-11ea-95a0-43d18ec715f5

Originally published at https://www.europeanhorizons.org on September 5, 2020.

TTP, formerly known as the IDEAS blog, is the official blog of European Horizons, created to give students a voice on transatlantic policy. Views are not EuH’s.

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