A virus separates Euroland

History seems to be repeating itself. As in the euro crisis after the financial crash, there is again conflict between North and South in Euroland. Only this time the emotions seem to turn out bigger. Even moderate voices such as those of the former EU Commission President and former Italian Prime Minister Romano Prodi are no longer holding back.

“If there is a big crisis, to whom do you sell your tulips?”, he reacted angrily in a television interview to Dutch Prime Minister Mark Rutte’s uncompromising no to the launch of"Corona-Eurobonds". Portugal’s Prime Minister Antonio Costa qualified comments by Dutch Finance Minister Wopke Hoekstra as “repugnant”, who called for a review of Spain because he had questioned its budgetary capacity to cope with the pandemic.

Emotions are running high after the EU heads of state and government failed to agree on a major joint “Corona aid programme” at their summit meeting last Thursday. The nine countries France, Italy, Spain, Portugal, Greece, Belgium, Luxembourg, Ireland and Slovenia, which together account for almost half of all euro countries, had demanded the inclusion of “Corona Eurobonds” and thus a special aid programme without harsh economic policy conditions. Through this jointly issued bond, the poorer countries could benefit from more favourable interest rates than if they had to go it alone on the capital market.

Germany, the Netherlands and Austria in particular opposed the nine countries ' request. There should not be a joint absorption of debt. For Dutch Prime Minister Rutte, this would mean the “Rubicon has been crossed”, i.e. the EU would be transformed into a transfer union.

Old quarrel - new fears

It is the new edition of the dispute that divided South and North already ten years ago. At that time, the northern countries prevailed, since they made loan commitments to the euro countries most affected by the crisis dependent on tough economic policy conditions. For example, Greece had to massively reduce its healthcare system. Spain also made massive cuts back then. The troika prescriptions prescribed at the time prolonged the crises in the southern countries instead of stopping them. In Portugal the situation only improved when the government under the present leadership renounced the imposed austerity policy.

However, Italy and its allies do not want to accept economic conditions. Because the current crisis is different from the last one. The corona crisis is not self-inflicted. The old recipes are therefore not adapted to the new crisis.

Germany and the Netherlands, on the other hand, want an aid programme based on the euro rescue fund ESM, which was set up after the financial crisis. It has a reach of 410 billion euros, of which 120 billion could be made available. But conditions are connected with this. How they might look is unclear. But even so, the old ghosts of dictation are being reawakened from the outside.

In addition, EU Commission President Ursula von der Leyen has fueled the dispute. “The word Corona Bond is actually just a buzzword,” she said in an Interview. She also expressed sympathy for the reservations in Germany and other countries. The Italian head of government, Giuseppe Conte, reacted angrily to this. He informed the Commission president that she was not competent at all, as the move was directed at the Euro group. And addressed to the German Chancellor Angela Merkel, Conte doubled down in an ARD Interview: “how can one in Europe, faced with such an epochal challenge, think of resorting to instruments that were launched at other times, when other long-outdated rules also applied.”

Is the euro crisis looming?

Are the debates and hatreds the prelude to the breakup of the Euro? The two economic historians Adam Tooze from Columbia University and Moritz Schularick from the University of Bonn have warned of this danger in the British “Guardian” before the EU summit. It is now bigger than it was after the financial crisis ten years ago.

At that time, it would have been enough for the European Central Bank to inject large amounts of liquid funds and protect the banks. Now fiscal intervention is needed. But the EU has little resources. The commission is considering diverting three to five dozen billion euros from the structural funds. At most, the European Investment Bank can contribute something. Together, this would only amount to about twice as much as the aid programme decided by Switzerland alone.

Only the individual member states were able to mobilise new aid packages on a large scale in the short term. But their possibilities are very different. Germany decided with 750 billion euros, a record high support programme. Italy has so far generated only a small fraction of this, although its gross domestic product still accounts for almost half of Germany’s economic strength. And since Italy is already heavily indebted, it would have to accept a higher interest burden when raising capital. As the country most affected by COVID-19, it can therefore only defend itself to a limited extent against the threat of economic Depression.

The Eurozone is in danger of making the same mistakes as it did after the last crisis, fear Adam Tooze and Moritz Schularick. Back then, they always reacted only when “the house was on fire”. Or as Adam Tooze, in his 800-page tome “Crashed, wie die Finanzkrise die Welt verändert” (“Crashed, how the financial crisis has changed the world”), detailed the failure of European crisis management has shown that Europeans did not understand the economic context and were not able to act together. High unemployment over many years in the southern Euro countries was the result of a deepening of the economic gap between North and South in the Eurozone.

The growing tensions are nevertheless having an effect on the EU Commission. President Ursula von der Leyen proposes a new plan for short-time work allowance in the Corona crisis, which will benefit Italy, Spain and other countries particularly affected by the crisis. However, whether the Plan will deliver on the promise made last week by EU finance ministers of an “immediate, ambitious and coordinated political response” is not yet guaranteed.