The great European project may not survive COVID-19

The nations of the European Union (EU) are facing both individually and collectively what is the gravest crisis since the Second World War in fighting Covid-19, while contemporaneously facing an unprecedented and severe economic abyss.

And the great European project may not survive.

The fallout from the coronavirus pandemic has exposed fault lines that survived the rupture of losing the United Kingdom through the three-year Brexit process.

Almost nine out of ten Italians believe the EU isn’t helping Italy, seven in ten feel the EU hasn’t contributed in any way to solving the crisis, and eight in ten say they believe the EU won’t change

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But first and foremost, the EU was an economic union, the creation of the world’s largest market by allowing for the free movement of goods, services and people.

It emerged from the coal and steel treaty between France and Germany, expanded into a common market, then the European Economic Community — before evolving into the EU as know today.

But that economic strength had been weakening in the months before the pandemic. Now it is bedridden by coronavirus.

A downward economic curve

Germany has always been the economic behemoth behind the success of Europe. Before the pandemic, Germany’s gross domestic product was sluggish and in the third quarter of 2019 was just at 0.1 per cent.

By Q4, it had flatlined at 0 per cent. The story wasn’t much better in France, with a Q3 GDP of 1.4 per sent slipping to a Q4 performance of 0.9 per cent. Simply put, the general economic curve was downward in Europe.

Along came Covid-19. For the past three years, the leadership of Europe had been largely focused on Brexit — maintaining a united front in negotiations with the UK over the terms of its departure from the club while also ensuring that a growing anti-EU movement didn’t gain enough momentum to rupture the union from within.

But Brexit and the fallout was largely a political issue with economic overtones. Now, this era of pandemic carries a Pandora’s box that combines economics and politics in a febrile and volatile mix that threatens the EU.

And Italy is the weak link.

A leaky ship

Long before Brexit was dominant, the key issue that undermined Europe was a eurocrisis — the high levels of debt carried by Greece and Italy.

Greece, through three bailouts had managed up to the emergence of the pandemic to steady its financial ship and head back into the deep waters of the international money markets.

But Italy? It was a leaky ship carrying a heavy cargo of debt. Unseaworthy if not for the strict budgetary regimen required by Brussels. And Italy is where coronavirus exploded outside China.

It has seen the strictest lockdown since early February, its northern industrial hub, the epicentre of the virus clusters — four million businesses shut, no tourism income and bearing the deep psychological scars of some 22,000 Covid-19 deaths, many of them buried in mass graves.

Economically comatose

While both Germany and France can expect the pandemic to shrink their GDP between 7 and 9 per cent, in Italy, the precipitous drop will likely be in the mid-teens.

If it’s 12 per cent, that will be a relief. Even before Covid-19, Italy was economically comatose as living standards flatlined. What’s more, this catatonic state has exposed that disparities between a north breathing and a south choking on privation.

In 2019, Italy’s economic output was 5 per cent lower than the high recorded before the 2009 financial crisis.

Why? Well, if you owe €1.33 for every €1 in circulation, you’re in no position to be able to offer a stimulus to spur growth. Fact is, you’re doing little more than servicing that debt to keep your head above water.

Cheap money

Now this pandemic has made that pre-existing debt far worse and far more crippling. Greece had debt levels of €1.82 for every €1 and look how long that took to sort out.

If there are positives, they are the money before the pandemic was very cheap — interest rates were at historic lows — and now many nations will need to pay for their Covid-19 measures and some sort of accommodation will be needed for all.

But Italy too had an unemployment rate before the virus that ran at 10 per cent — one of the highest in Europe — and one-in-three of its young people under the age of 24 had no work.

Who knows what will life be like after this pandemic. Maybe, because so many Italians rely on small family-run businesses, they might prove more versatile at surviving this pandemic.

Or maybe they will fold because Italy has shut down and there are no tourists. Only time will tell — but unemployment will rise for sure. Everywhere.

Idea of shared debt

So when the EU did meet and talk of coronabonds as a way out of this current economic hibernation, it was Italian Prime Minister Giuseppe Conte who warned in no uncertain terms that the very future of the EU was in danger if it didn’t act to protect the economies of all — and Italy in particular.

Germany and the Netherlands shot down the idea of shared debt now. It is they and other northern nations who have paid the lion’s share of EU bills in the past and likely in the future.

And the notion of shared debt now possibly means sharing debt in the future.

Instead, the EU does as the EU does and came up with a compromise: The European Stability Mechanism (ESM). It is essentially the EU’s bailout fund, and Italy or other nations can seek assistance there without strings attached.

Totally inadequate tool

Conte is far from happy, saying the ESM was a “totally inadequate tool” and Italy had no intention of applying for help from the fund.

He is not alone. In a poll, nearly half of all Italians rejected the idea of help from the ESM — they see it as “a tool to impose Greek-style austerity”.

Almost nine out of ten Italians believe the EU isn’t helping Italy, seven in ten feel the EU hasn’t contributed in any way to solving the crisis, and eight in ten say they believe the EU won’t change.

Hardly the numbers to inspire confidence in the future of the EU.