Coronavirus May Be the EU’s Hardest Test Yet

Amid the coronavirus outbreak, commercial activities are closed as part of a nationwide lockdown in Rome on March 14, 2020.

It is now clear that—beyond its devastating global health implications—the coronavirus is going to cause an immense economic downturn that will likely surpass the 2008 economic crisis. The combined effect of a public health and economic crisis will result in a fundamental shift in politics and geopolitics around the world. This could be deeply destabilizing for the European Union unless decisive action is taken now.

The EU’s response to the 2008 financial crisis was disastrous and almost resulted in the collapse of the EU. It led to the Greek sovereign debt crisis—as well as similar near-crises in Portugal, Italy, Ireland, and Spain—that almost collapsed the euro. It gave rise to extremist politics through the continent, which the 2015 refugee crisis later exacerbated. And it was the spark that ignited the Brexit movement and other copycat efforts across Europe. Put simply, the 2008 crisis, along with the EU’s poor response, was an existential threat to the EU—and the union barely survived. Without a course correction, the COVID-19 outbreak and the EU’s current floundering response could pose an equally dangerous risk to the union.

As American Enterprise Institute Resident Scholar Dalibor Rohac argues, “The European Union may have survived Brexit, the refugee crisis and the financial meltdown of 2008—but don’t assume COVID-19 can’t destroy it.” As Rohac points out, populist reactionary parties and leaders are likely going to capitalize on any economic downturn in the next election. The EU may have thought that it had survived the populist challenge, as these parties have started to fade in many, though not all, recent elections. But it should think again.

There is a lot to criticize in the current EU response

The EU already has a lot on its plate and is stressed from struggling to deal with the fallout from Brexit, combat climate change, settle internal divisions, and counter influence efforts from China and Russia. The coronavirus crisis is highlighting and exacerbating the serious gaps in the current EU structure. Understandably, EU member states are turning inward, focusing on themselves and their citizens instead of working through the EU to contain the outbreak. It couldn’t be clearer that Brussels lacks the tools and political will to effectively aid member states that are in dire need of help or act as a driving force in coordinating the global response. This is a test that the EU, as presently designed, is doomed to fail.

The coronavirus is hammering Italy, overwhelming its hospitals, causing thousands of deaths, and suspending economic activity. But this isn’t just bad for Italy. Italy is Europe’s fourth-largest economy and, crucially, a member of the eurozone. As the crisis has hit, bond spreads between Italy and Germany have grown, meaning that the interest rates for Italian banks to borrow are far higher than they are for German banks. The problem is that the two countries use the same currency—meaning that, in a crisis, Italy could see its borrowing rates soar as lenders search for safe harbors.

This pandemic is similar to the 2008 recession in scope and severity. A repeat of the drawn-out Greek debt crisis would be disastrous for all of the EU. Italy’s GDP is nearly 10 times bigger than Greece’s. Its economic collapse would threaten the survivability of the euro, as the cost for a bailout would be astronomical. The ramifications of such a collapse would be devastating for the entire EU and the global economy.

The EU’s conservative economic approach

Despite American conceptions that the EU is a left-wing enterprise, the EU was founded on economic integration and the building of a common market as well as premised on open access, free trade, and freedom of movement. Europe entered into a monetary union in the 1990s, creating a common currency—the euro—largely to lower trade barriers and end rampant currency speculation between European countries. However, when EU nations entered the eurozone, they lost their national currencies and therefore control over monetary policy. Eurozone members were required, according to the Stability and Growth Pact, to limit budget deficits—much like American states are required to keep a balanced budget.

While Europe created a common monetary policy, it never created a common fiscal policy. When there is a recession in the United States, the federal government tends to intervene, injecting a stimulus in the form of spending and tax cuts to keep the national economy moving. The EU doesn’t do this, and, during the 2008 economic crisis, this lack of a common fiscal policy was exposed.

In 2008, the EU was put to the test and barely averted catastrophe. At the direction of Germany, one of its most powerful member states, the EU forced Greece to undertake draconian cuts in order to receive the funds necessary to prevent Greek banks from collapsing. Ultimately, much of that funding went straight into the coffers of international lenders, many of them German lenders such as Deutsche Bank.

Germany and other eurozone members sought to make an example of Greece in order to show other eurozone countries that profligacy would be punished. The results were predictable: Greece experienced an economic downturn on par with the Great Depression in the United States and has only recently begun to recover. What could have been a manageable crisis spiraled and spread to the rest of Europe. Spain, which had an economic surplus before the crisis, was plunged into a deep recession—as was most of southern Europe. Instead of seeking to stimulate the European economy, the EU didn’t step in, causing the spreads in bond rates between EU members to deepen and further prolonging the recession.

Ultimately, the European Central Bank (ECB) stepped in and replicated the response taken by the U.S. Federal Reserve. This stemmed the crisis, and Europe began to return to growth. However, Europe hasn’t learned from the crisis of 2008.

While German Chancellor Angela Merkel is rightly praised in the United States for her moral leadership and the dignity she showed during the 2015 migration crisis, her conservative economic approach has been detrimental to Europe’s growth. Merkel’s outlook is rooted in highly conservative German economic thinking, and Germany’s clout within the EU has meant that austerity has reigned in the EU since the 2008 crash. Moreover, German reticence has put the breaks on efforts to bolster the EU’s fiscal and economic firefighting tools. Merkel has rejected French President Emmanuel Macron’s efforts to reform the EU. Therefore, the EU is approaching this crisis with a similar set of limited tools that it had in 2008.

The EU needs dramatic action

The EU must learn from its anemic response to the 2008 financial crisis. It must now be bold and not simply resort to the lowest-common-denominator technocratic responses that characterize so much of EU policymaking. It must now respond with overwhelming economic force—especially fiscally.

First, EU members must unleash long-dormant fiscal policies. This is not the time for Europe to obsess over balanced budgets. Many European nations were already able to borrow at negative rates before the crisis, meaning Europe can make money by borrowing. Members should take advantage of cratering interest rates and use fiscal policy to keep economies afloat, prevent defaults, and, where possible, make important long-term investments.

Second, the ECB needs to replicate the approach of its previous president, Mario Draghi. Unfortunately, the new ECB president, Christine Lagarde, said her job was not to worry about growing bond spreads between Italian and German banks. But that is indeed her job—and her reticence has caused markets to tumble even further. The ECB has the tools necessary to print money in order to save Italy if need be, and Lagarde must indicate to the markets that she is prepared to do so.

Third, now is the time to empower the European Commission and give it the fiscal tools necessary to appropriately respond. The EU needs to be able to provide targeted aid, acquire supplies, and coordinate relief efforts. Currently, it is not doing this, and states such as China are filling the void. This master stroke of public diplomacy in sending aid to Italy is fully noticed by the Italian public. The EU needs to fill the humanitarian space. It needs European citizens to believe that being part of a union helps them—not hinders them—in this crisis.

Fourth, the EU should be at the forefront of coordinating a global response. The coronavirus is a global pandemic, and the EU should be playing a leading role, even beyond its borders. The global response to the 2008 financial crisis was largely driven and coordinated through the G-20, with then-British Prime Minister Gordon Brown and U.S. President Barack Obama as the driving forces. The United States and the EU could follow this example, working together as part of a broader economic and humanitarian response that protects shared liberal values and looks to counter divisive efforts from China. Unfortunately, the U.S. government’s response to the pandemic has been slow, and the United States is unlikely to play the leading role that the world has traditionally looked to it to play. However, as the new epicenter of the virus’s spread, Europe could play a very meaningful role in helping other countries and regions learn the lessons of what has worked and what hasn’t, coordinating the distribution of supplies and treatments, and ensuring the proper balance between protection and liberty. Europe should collectively be a world leader. COVID-19 is a global crisis to which the EU is well situated to help coordinate a response. Global pandemic response does not carry the baggage of traditional hard security issues or touch on state sovereignty in sensitive ways that frequently weigh down such global action from Brussels.

The coronavirus is a test for the EU and all of its members. If it fails, reactionary forces will seek to take political advantage and use this crisis to demonize the EU and perhaps call for its disintegration. After the 2008 financial crisis, Brexit, and the rise of the far-right, many have predicted the EU’s demise. The EU is not bulletproof, and these crises have all taken a toll. Unfortunately, the EU has not reformed in the way it needed to following these crises. Now, Europe’s union will face its most difficult test. The EU needs to step up if it wants to survive. And we should all desperately want the EU to survive.

Max Bergmann is a senior fellow at the Center for American Progress. Siena Cicarelli is a research assistant at the Center. James Lamond is a senior policy adviser at the Center.

To find the latest CAP resources on the coronavirus, visit our coronavirus resource page.