19 March 2020

LSE: Coronavirus crisis: There is no way back to business as usual in the EU

Patrick Kaczmarczyk writes that if the EU was to go back to business as usual after the current crisis, right wing and anti-EU parties across the continent might come into power– and the coronavirus may turn out to be the catalyst for breaking apart Europe’s monetary union.

[...]Regardless of when the crisis passes, however, it is already clear that its consequences for the European economy will go significantly beyond the short-term. First of all, the spread of Covid-19 has exposed the danger and fallacy of cutting spending for public health services and outsourcing the production of vital medical supplies overseas. Leaving the issue of public health to profit-driven private companies for reasons of ‘efficiencies’ and a ‘lack of public resources’ lies at the very heart of the problem that we are dealing with. The fact that austerity costs lives is not new, but the Covid-19 crisis has brought it into the spotlight and public conscience.

Secondly, the expansive fiscal responses to the crisis have laid bare that the ‘limited fiscal space’ under which austerity measures were justified was nothing more than an ideological and, in the case of Europe, self-imposed political constraint. All of a sudden, countries who were deemed to have “too much debt to borrow and spend” have set up fiscal emergency packages and liquidity facilities that go into the trillions. In Hong Kong and the US, we are seeing the implementation of Helicopter Money to offset the fall of income for many households and businesses.[...]

In the current context, it is certain the Covid-19 crisis will increase deficits across the Eurozone. Also, one has to take into account that this crisis hits Europe’s Economic and Monetary Union (EMU) at a time in which monetary policy is already at its limits, and many southern European countries, as well as France, have not had a chance to substantially recover from the last crisis – primarily due to the fiscal constraints imposed by the EMU-regime. Herein lies the danger for the long-term viability of the EMU. If, once the Covid-19 crisis is over, Germany and its ordoliberal allies continue to insist on the Maastricht criteria and the fiscal constraints set out in the SGP, the coronavirus may turn out to be the catalyst for breaking up the monetary union.

The austerity measures introduced over the past decade have already suffocated European economies and fuelled widespread discontent. Except for a short period in Italy, in which Matteo Salvini’s Lega formed a government with the Five Star Movement, the success of right-wing anti-EU parties has hitherto been limited to increasing their political weight, while falling short of obtaining executive power. Yet, in contrast to the double-crisis of 2007-9 and 2010-12, and the subsequent failure of the EMU to respond, these political forces are now in a much stronger starting position. If the EMU is destined to survive, there can be no way back to business as usual.

A continuation of austerity and the obsession with government deficits will deepen discontent among the disenchanted, and the winners will likely be right-wing anti-EU politicians, notably in Italy and France. While the last crisis helped right-wing populists move to the forefront of European and national politics, another crisis and another failure to respond might put them in the driving seat in several key Eurozone economies. A rethinking in Berlin and Brussels of its approach to economic policymaking will therefore be paramount to preventing a disintegration of the monetary union.

Full column on LSE's EUROPP blog

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