Gerhard STAHL

College of Europe, Pekin University HSBC Business School, Former Secretary General, Committee of the Regions

While European governments are aware of the need for solidarity and a common answer to the corona pandemic, the concrete form of this solidarity is still debated. The recent decision of the EU Economy and Finance ministers on a support package of around 500 Billion Euro are an important step but we are still far away from a final answer to the economic crisis. The call Corona bonds gets louder – and there’s even support from parts of the German business world.

The coronavirus pandemic is not only an international health emergency but also a global economic shock. The containment and the lock-down measures that are needed to save lives has brought the economies to a standstill. The consequences go far beyond the 2008 international economic and financial crisis.

In 2008, the financial sector was at the centre of the economic difficulties, leaving parts of the real economy untouched and affecting mainly developed economies. Now all parts of the globe must confront the corona pandemic. In the developed economies almost all sectors of the economy and society are brought to a halt by the shutdown.

“the UN sees the risk of 195 million jobs destroyed world-wide”

The consequences are dramatic – not only in countries like Italy and Spain which are most affected in Europe by the spread of the virus, the health crisis and an upcoming social crisis. In the first quarter of this year the German economy, the biggest in Europe, contracted by almost 10% and the French economy lost 6% of GDP.

The World Trade Organization fears that global trade could shrink by more than 30% and the UN sees the risk of 195 million jobs destroyed world-wide. Kristalina Georgieva, Head of the International Monetary Fund compared the situation with the world economic crisis of 1929, the Great Depression. Historians remember that this crisis and the wrong policies applied did not only create mass unemployment and social unrest. It undermined the first German democracy and laid the ground for the success of fascism.

Today, the pandemic crisis with its economic consequences has the potential to destroy the cohesion of our societies, to undermine national political systems and the stability of the European Union.

Therefore, governments needed to react quickly with massive regional and national support programs, even if the actions were not well coordinated. The European Central Bank decided a new pandemic emergency purchase program of 750 billion Euro. The EU suspended competition policy rules, state aid rules and the public deficit limits of the Stability and Growth Pact.

These quick decisions helped, but it is clear that uncoordinated national reactions are not sufficient. A common and coordinated European approach is needed. Otherwise national measures might lead to a beggar-thy-neighbour policy, undermine the European internal market and divide the EU even further.

The German government for example is allowed to support companies with 600 billion Euros of credits, financial transfers and equity capital. This is the right answer against liquidity problems, the risks of bankruptcy and unemployment. In the EU, Italy has the second biggest industrial sector after Germany. In some cases, small and medium sized companies of northern Italy’s industrial heartland, a centre of the Corona pandemic, might be in direct competition with German companies. If the EU does not take steps to stabilise the fiscal policy margin of manoeuvre of Italian public authorities, especially burdened with the costs of the health crisis, the superior fire power of the German budget used at the benefit of German business might distort competition between some Italian and German companies.

“The decisions of the finance ministers are a first important step, but we are still far away from a final answer to the economic crisis.”

European governments recognise the need for a common answer to the corona pandemic and for solidarity. But it is still controversial what this means in concrete terms. This was evident in the discussions between Economy and Finance ministers. On 9^thApril, they finally agreed on a support package of around 500 Billion Euro. It is composed of a new guaranty fund of the European Investment Bank, a European unemployment reinsurance scheme (Sure) and credits of the European Stability Mechanism (ESM) for health care related expenditure. The use of the ESM providing loans to countries under certain conditions needed lengthy debates. The unemployment reinsurance scheme was only agreed as a temporary emergency instrument, leaving the decision open whether it should become permanent. In addition, it was agreed to work on a European Recovery Fund demanding the heads of governments to give further guidance. The decisions of the finance ministers are a first important step, but we are still far away from a final answer to the economic crisis.

The policies developed after the 2008 financial crisis are not appropriate for the new historical challenges anymore. The European Stability Mechanism was successful to provide the needed liquidity to some countries during the sovereign debt crisis.

“The hope to come out of the crisis quickly by increased European exports might be an illusion.”

Now the whole of the EU is confronted with an extreme external shock and not only some Member States. This shock takes place in a fundamentally changed international environment. An era of very intense globalisation comes to its end. The breakdown of supply chains from China and the dependency for basic medical products from suppliers outside Europe showed the risks inherent in a  global economy. The hope to come out of the crisis quickly by increased European exports might be an illusion. American protectionism and the rise of China can lead to an international economy that is regionally more integrated into an Asian and American market and less oriented towards an open world market. If Europe wants to overcome the economic crisis and if it wants to succeed with its Green Deal, it must strengthen further the European internal market and it must increase public and private investment.

The financing of a European reconstruction program needs new instruments able to attract international capital to invest in the EU. The worldwide bond market in 2017 was more than 100 trillion US Dollar. This clearly shows the importance to make the Euro attractive as an international currency and to offer European investment opportunities. Different instruments are possible to achieve this goal and to issue European bonds for the financing of specific programs. Even in Germany, there strong voices from the business world in favour of Corona bonds. Reinhold Würth, owner of the worldwide successful Würth Group, that trades in fasteners, screws and screw accessories, and Herbert Diess, CEO of Volkswagen are amongst them. These voices should encourage European governments to be more courageous and to support the development of new European financial instruments.

Copyright: European Union – Mario Centeno President of the Eurogroup