It’s a New Europe—if You Can Keep It
The continent has managed to take a great leap forward—but there still might be a crash landing.
This summer, Europe is basking in a sense of accomplishment. On July 21, after protracted labor, the European Union announced the birth of a historic recovery package to the tune of 750 billion euros ($880 billion). It’s not only that this is a lot of money. For the first time, a considerable sum will be financed through large-scale borrowing by the EU itself. Once again Europe has managed to turn a crisis into the spur for major institutional change.
With the troubled last decade of the eurozone in mind, it is tempting to view these changes as long-overdue updates of Europe’s incomplete union. That is both true and reassuring in confirming that, once again, Europe “got there” in the end. But by the same token, this complacent narrative tends to diminish the scale of Europe’s problems and the novelty of the crisis we face in 2020. The speed and scale of changes forced on Europe since this spring ought to give one pause for thought. To move Europe this far this fast takes an almighty shock. Even with this latest package, it is far from obvious that Europe is sufficiently equipped to meet the challenges ahead.
To appreciate the sense of relief in Europe this summer, it is worth recalling how unlikely this outcome seemed only a few months ago—and how serious a disaster COVID-19 has been for the continent. In terms of national excess mortality, only Ecuador and Peru exceed the levels of mortality recorded in Spain, Italy, and Belgium. We talk a lot about America’s mishandling of the crisis. But in terms of mortality, only New York and New Jersey are in the same league as Europe’s hot spots. As of July, recalcitrant red states like Texas, Florida, and Georgia aren’t even close.
The lockdowns that stopped the virus in Europe have had a devastating economic impact. Again, the American habit of dramatizing data by means of annualizing rates of change disguises the fact that economic implosion in Europe has been every bit as bad, if not worse. The U.S. economy fell 9.5 percent in the second quarter of 2020. Germany’s contracted by 10 percent. In Spain, the collapse was twice as bad, at 18.5 percent. (If Spain reported its data in the American style, it would be down 65 percent on the year.)
On top of the virus and the economic catastrophe, in May it looked as though everything was going wrong in political terms as well. As the crisis hit hard in late February, the Europeans, with France and Germany in the lead, resorted to national measures, shutting off the export of personal protective equipment and closing down borders. Italy’s appeals for aid were met with stony silence, and Brussels lacked the powers to push through a more cooperative approach. On March 12, Christine Lagarde, the president of the European Central Bank (ECB), announced that Italy’s spreads were not the business of the European bank, sending interest rates on Italian debt to new highs. A proposal from a coalition of heavyweight governments led by France for joint borrowing in the form of “coronabonds” was unceremoniously shot down by Berlin. Then a ruling by the German Constitutional Court put in question the legal basis for the ECB’s bond market purchases. Perhaps unsurprisingly, public opinion, especially in hard-hit Spain and Italy, was swinging against Europe.
It was a disillusioning shock. Since the start of the year, Ursula von der Leyen’s new European Commission had been doing its best to encourage deeper integration with the mood music of a Green New Deal. Now COVID-19 was reopening old wounds, reminding Europeans that since the end of the eurozone crisis in 2012, they had made frustratingly little progress on the key issues of structural reform, notably on the banking union and the capacity for a more proactive fiscal policy. By early April, the sense of crisis was acute. Not for nothing, French President Emmanuel Macron spoke of Europe facing a “moment of truth.”
This being Europe, that “moment” turned into a protracted three-month battle. But the results, in terms of responding to the pandemic in public health, political, and economic terms, are impressive, certainly by contrast with anywhere in the world outside of East Asia.
With regard to the virus, the Europeans have managed to do what the United States has failed to do. They have not just damped down the hot spots, as New York has done. The EU has managed to prevent a massive spillover to member states, for instance in Eastern Europe, that were largely spared the first wave. This made possible a cautious return to a “new normality.”
Furthermore, though their economies have taken a huge hit, European countries have used short-time working schemes to keep unemployment levels far below the extraordinary levels seen in the United States, at least for now. And rather than escalating the political tensions, again by contrast with the United States, they have been turned in a positive direction.
With the connivance of the German government and even the Bundesbank, the challenge to the ECB by Germany’s Constitutional Court was smothered. In May, France and Germany sidestepped the coronabonds impasse and threw their weight behind the proposal that would become the July 21 deal: to raise money directly via the EU’s own budget; fund that budget with debts issued by the EU itself rather than member states; and distribute a large share of the funds to the most distressed countries in the form of grants, rather than loans, so that their already heavy debt burdens do not grow.
It was never going to be an easy deal to sell to the coalition of fiscal conservatives led by the Dutch. The negotiations were extraordinarily protracted and fraught. They were not always dignified. There was media gamesmanship. Macron and German Chancellor Angela Merkel are said to have lost their tempers on more than one occasion. But no one quit the marathon meeting. A deal was done. This, the EU spin tells us, is what adult politics looks like.
In the process, the more conservative voices of Northern Europe extracted serious concessions. Unfortunately, those came at the expense of some of the more progressive and innovative budget elements, including spending on joint efforts in the areas of health care and green investment. Thankfully, the package is up for debate in the European Parliament, which is, step by step, asserting leverage over Europe’s politics. Earlier in the crisis, the Parliament favored a far more expansive plan, and hopefully it will make adjustments to the July compromise.
This is how the standard Europe storyline goes. Europe writes commitments to solidarity and cooperation that it cannot cash. It comes up hard against reality. It responds by “falling forward” and deepening its institutional commitments. This so-called “functionalism” is the homegrown ideology of the EU. It has served Brussels well. And in short order, 2020 will no doubt be inscribed in the long list of crises through which Europe has developed.
As an ideology to live by, the EU’s functionalism is both comforting and oddly disempowering. After all, needing a fix is one thing; developing and agreeing on a solution in a timely fashion is quite another. To assume that the former necessarily leads to the latter is to take a remarkable sanguine view of history that tends to underestimates the degree of risk and the need for agency.
This summer, there was certainly nothing inevitable about the way the deal was done. It did not seem likely. Credit goes to the European Commission for raising the stakes, upping the original suggestion by Merkel and Macron to an ask of 750 billion euros, on top of the regular 1.1 trillion euro ($1.3 trillion) multiyear budget. (It was the Commission’s officials who dug up the legal precedent that would allow the EU to justify massive borrowing.) Among national governments, one has to admire the Spanish and Italians, who began the long march toward a constructive European response back in March and suffered through the demeaning objections of Northern Europeans without walking away. The best that can be said for the Dutch and the Austrians is that they gave way in the end. Perhaps the shameless defense of the narrowest conception of national interest by Dutch Prime Minister Mark Rutte and Austrian Chancellor Sebastian Kurz will serve some useful purpose in dampening criticism from their domestic populists.
But in the last instance, it is clear that what held the negotiations together was the weight of the Franco-German alliance. And the clear-headed and dauntless advocates of that partnership are the French. Since he assumed the French presidency in 2017, in the wake of the disastrous refugee crisis that had rocked Europe in 2015-2016, Macron has been appealing to Berlin for cooperation. For three long years, Merkel denied Macron the strategic alliance that he craved. That hurt. And in the fall of 2019, there were signs of increasing impatience in Paris, with Macron making unilateral moves toward Moscow. What changed in 2020 was that Merkel came around.
What motivated the shift?
It is true, of course, that Merkel has announced her retirement. She does not face reelection. But that was true already last year, when she showed no inclination to lead the way on Europe.
Since the disastrously inconclusive Bundestag election of 2017, Merkel’s so-called grand coalition had been on a fragile footing, with both partners losing public support. It takes an effort to remember now, but in February, as COVID-19 was silently spreading in Europe, the main news in Germany was the crisis in the Christian Democratic Union (CDU) unleashed by the coalition negotiations in Thuringia, in which Merkel’s party ended up partnering with the far-right Alternative for Germany. That ended the prospects of Merkel’s designated successor, Annegret Kramp-Karrenbauer. Later that same month, as the outbreak in Italy had already burst into the open, Berlin’s focus was on the Eastern Mediterranean and the urgent need to patch up the refugee deal with Turkey. The biggest threat to Europe was thought to be an escalation of the crisis in Syria and a return of the migrant crisis. On March 6, the CDU slumped to a record low of 26 percent in the polls. Not since the formation of the Federal Republic had the party system seemed more in flux.
It was not by accident that as the crisis deepened, the French government started its latest approach to Berlin not via the chancellery but by working its connections to the Social Democrats in the German Finance Ministry. In a desperate effort to revive the flagging political fortunes of the Social Democrats and his own chances of party leadership in 2019, Finance Minister Olaf Scholz had become the leading German proponent of European reform, pushing ideas both for unemployment insurance and banking. Both had been met by stony disapproval from the CDU and a nein from the chancellery.
As recently as April, Merkel was not just stonewalling on coronabonds but explicitly rejecting any idea of grants rather than loans from the EU to its members. Then something shifted. What Merkel saw in the polls was not only a remarkable surge in support for her and her party but also a shift in the center ground of German public opinion in favor of greater European solidarity. As the full impact of the lockdowns made itself felt, it became clear that Europe was facing a truly devastating economic shock that would divide the continent—a risk made worse, once again, by Germany’s relative success. Meanwhile, the threats to Germany’s export-orientated economy from a European recession were all too real.
COVID-19 is the right kind of crisis for Merkel. As is well known, Merkel is not a conviction politician when it comes to Europe, in the sense that her great Christian Democratic predecessors—Konrad Adenauer and Helmut Kohl—were. But that is in part because Merkel is more forward- than backward-looking. Her reference points are not World War II and the Cold War but the longer and broader history of globalization. It is to meet this challenge that the Europeans need each other. It was entirely typical that in the climactic press conference of May 18, in which Macron and Merkel committed themselves to their joint approach, Merkel made the point that COVID-19 was the kind of crisis that demonstrated the obsolescence of the nation-state. “Europe must act together,” she said. “The nation-state alone has no future.”
At the time, this was greeted with puzzlement. Had not Germany’s own comparative success in dealing with COVID-19 demonstrated the importance of competent national government? Did the comparison with the United States not drive that point home?
But Merkel’s standard is not basic competence. She is thinking about the bigger, more strategic question of the German economy and how such public health crises can be managed in the future, through joint surveillance, countermeasures, and vaccine development. She is holding fast to the basic common sense of the era of globalization not as an act of faith or idealistic commitment but as a realism. COVID-19 is one of a range of challenges that demand a complex, multilateral response. On that stage, European cooperation is clearly more urgent than ever. And that is what the differential impact of the crisis in Europe put in question.
It was when the problem was framed in those terms, precisely not as a rerun of the eurozone crisis but as a new challenge requiring new solutions, that Merkel grasped the nettle.
Defining the problem in these terms freed the conversation. But it also defined the limits of the new deal. The COVID-19 fix does not resolve the legacy issues of the era of the eurozone crisis. It does not even mention them.
The discussions in July centered entirely on new money to be raised by the EU. The old debts that burden the public accounts of Italy, Spain, and France were not part of the conversation. Nor were the giant new debts that they are loading onto their national balance sheets this year and next to meet the COVID-19 crisis. For now, the fiscal rules of the eurozone are in abeyance. But what was agreed in the laborious discussions of the European Council was a new control mechanism, a process through which the European nations review and criticize each other’s use of the common funds. As skeptics have observed, this pushes conflict off into the future. In academic discourse about the EU, the old mantras of functionalism are now shadowed by what is called postfunctionalism—or might better be termed dysfunctionalism. The fear is that the grand bargain of July may turn out to have created an arena for bitter nationalist posturing in which the Dutch criticize the Italians and Spaniards and the Southern Europeans respond by naming and shaming Dutch tax havens.
And there is every reason to think conflict will, indeed, arise in the future. Europe has undeniably enjoyed a few good months. But it is far from being out of the woods. Controlling the virus remains a huge challenge. It is far from obvious that it will be possible to get through the rest of the summer and into the fall flu season without further draconian measures.
Meanwhile, the economic damage is huge. Paying for workers to be put on short-time is no doubt the best response to the kind of shock that Europe has suffered. But it is far from obvious that it can be sustained. Particularly in Spain, the epicenter of the eurozone unemployment crisis, the rate of joblessness is rising ominously. Because of the limited scope of the July deal that could be agreed with the fiscal conservatives and the inevitable delay in disbursing the funds, the immediate fiscal response will continue to weigh on the budgets of all European nation-states.
This means that the future of Europe continues to hinge on three questions. First, can Europe achieve not just a recovery from the COVID-19 shock but a return to the kind of growth that it experienced before 2008? In particular, can something be done to raise Italy’s growth rate, or at least to offer its young people a future, perhaps in the form of assistance for education and employment outside Italy, especially now that the U.K. labor market is less hospitable? This will require support for education and training and additional investment in housing to accommodate further growth in the hot spots of the pan-European economy. Before the COVID-19 crisis hit, escalating rents in Germany’s boomtowns were one of the country’s hottest political issues.
Second, will the conservative forces that have been held at bay in 2020 return dogmatically to imposing a hard and fast fiscal corset across Europe? Keen-eyed observers of the Greek situation, like ex-Finance Minister Yanis Varoufakis, have pointed out that even in the middle of the COVID-19 crisis, the Eurogroup was envisioning Greece returning to a primary budget surplus by 2021. If this were to be implemented in Greece, let alone across the eurozone more generally, it would require a disastrous scale of austerity. For Brussels to offset a fiscal crunch on that scale would require spending far beyond the sums agreed in July. The question is whether, as Merkel leaves the stage, there will be a resurgence of the right-wing in the CDU that would add Germany’s weight to the lightweight coalition of fiscal conservatives currently headed by the Netherlands and Austria.
Finally, there is the ECB. Given the debt levels that will be accumulated by Italy in the course of the next 12 months, Europe’s central bank remains pivotal. Since March, the reason that Europe’s bond markets have been calm is the ECB. Without its bond purchases, the unsteady progress of the talks would have unleashed chaos, as it did during the eurozone crisis after 2010. Lagarde, unlike her predecessor Jean-Claude Trichet, took that off the table. That was a political decision. In light of the surging deficits, the ECB will have a crucial role in warehousing public debt and keeping interest rates low. Here, too, politics matters. Even at the height of the crisis in March, there was opposition on the ECB Governing Council to Lagarde’s supportive policy. If that criticism were to become strong enough to put the ECB’s commitment in question, both markets and the European public would have reason to fear an escalation of financial tension.
Growth, fiscal policy, the ECB—this trio of issues was at the heart of European politics when the year began. The difference is that, in the meantime, the Anthropocene has revealed its fangs; more than 130,000 people in Europe have died, many of them unnecessarily; and the continent’s fiscal and economic situation is far worse.
It was this stark reality that drove Europe’s recovery package across the finish line. That should not be said lightly. Acting constructively in the face of both deeply uncomfortable facts and profound internal divisions is a very considerable achievement, one of which the United States has so far proved conspicuously incapable. There is, however, no room for European complacency. As far as COVID-19 is concerned, this may be the end of the beginning. But there is very rough water ahead. To regard the July compromise as anything more than a preliminary answer to the crisis would be a betrayal of the realism that makes the deal so remarkable.