GP Insights

GP Insights # 329, 11 April 2020

Europe: Amid North-South Divide, EU declares €500bn as rescue package to fight the COVID-19
Sourina Bej

What happened? 

The European Union Finance Ministers on 10 April agreed on a €500bn rescue package for the severely affected European economies in the pandemic. The deal was announced after the resolution of an impasse between the southern countries of Italy, Spain, France and the northern countries of the Netherlands, Austria, and Finland within the EU. The deadlock was over the demand for 'Coronabonds' by the southern countries who insisted that the bonds funded by all EU countries will help in recovering any debts in a country. The other group rejected this idea of the collective burden of common debt and finally agreed on a rescue deal.  

The main component of the rescue plan is the European Stability Mechanism through the EU's bailout fund, which will make Euro 240bn available to guarantee spending by indebted countries under pressure. The EU ministers also agreed on other measures including Euro 200bn in guarantees from the European Investment Bank. 

What is the background? 
The breakthrough deal has made it clear that bitter divisions within the EU over the longer-term task of rebuilding the European economy are deep-rooted. The north-south division within the EU has its roots in the austerity measures that the bloc imposes to bail out the debt-ridden countries in the region. The euro crisis of 2009 and the crisis in Greece in 2018 have taught the harsh lesson to the bloc that austerity measure is a solution to restore a debt economy and also salvage a single integrated market. With many southern countries riddled in debt, stringent economic measures imposed on them has led to lingering resentment among the people that wealthier northern neighbours have forced tough measures while they are still facing the brunt of a financial crisis. This divide widened when countries like Greece, Cyprus, Italy, Spain and Portugal increasingly struggled to balance their policies between debt payment and public opinion. The northern states often look at these countries' economies as a result of few faulty, corrupt policies which will now impact the whole market clusters. 

What does it mean? 
The rescue deal does not indicate that the north-south divide within Europe has gaped. On the contrary, it has put in retrospect the ability of the EU to answer tough questions at a tough time. 

First, with an economic downturn and a crisis impact expected to be in trillions, a rescue package of 500 billion Euros for all European countries seems to be a little short in outlook. Instead, the deal indicates a symbolic gesture by the block in collective spirit and stands together in spite of differences than facing the crisis alone.

Second, the scars within the bloc are likely to remain and might deepen as public opinion are increasingly shaped by populist leaders like Matteo Salvini, Italy's former Deputy Prime Minister, who has found his Eurosceptic base emboldened by the crisis. Besides, the southern countries like Italy have taken on Germany's past to remind it that it was never made to pay back its debts after the Second World War 

Third, the finance ministers have a punt on the critical issue on economic recovery as the peak of the pandemic plummets. The EU will face a leadership question on who will lead the economic restructuring. How the EU today will have a significant implication for the future of the bloc. It is handling of the crisis in Greece has been defiant but unpopular. It remains to be seen whether common bonds in the Eurozone address the structural fragility that the euro crisis has exposed.

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