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1. Europe: Rejected or Recharged?
A lot has been written about Europe and the fate of the European Union in recent times.
After the January exit of the UK from the Union there were already voices questioning the
survivability of the EU as the great unifying experiment. The advent of the coronavirus and
the enforced quarantining of entire countries (starting with the Lombardy region of Italy
which quickly escalated to the rest of the country and thence on to the rest of the EU)
meant that economic production would be affected. The strains on already struggling
member nations threatened to tear the Union apart. The principal danger seemed to fall
along the ‘two-track Europe’ narrative of old, setting the northern against the southern
states.
The European experiment came together more or less on March 25th 1957 with six
members with the signing of the Treaty of Rome. The European Economic Community had
history going beyond that but- for all intents and purposes, this signalled a commitment
towards a union. The European Union as is now known was formed in November 1993 with
the Maastricht Treaty. It was the introduction of the single currency- the Euro at the start of
1999, that, while attempting to consolidate the nations into one large free-trade zone, really
threatened the project. Bringing together countries of disparate economic growth, differing
interest rates, different ideas about social welfare and so on, was always going to be a
challenging task. It needed the backing of the German and French powerhouse economies
(and the Italian one too) to ensure the cohesion of policies required to keep it together.
High interest rate countries like Greece and Italy got the benefit of the German economy’s
access to low rates and needed the Germans to police their deficit spending.

2. This potted historical background is important because it gives us colour as to what is going
wrong (and why people think the EU experiment will fail) and also what it needs to keep it
viable. We can see the seeds of today’s strains in the history of the development of the
Union.
Arguably, the subject of the European Union is far too broad a topic to consider in this
article and also too polemical given that differing countries have differing viewpoints. Also, a
lot becomes apparent only in hindsight and easier to criticise after the fact. It is easier- and
more instructive, just to note the current strains and look at their origins dispassionately.
The common market experiment- the breaking down of trade borders within the European
member states, the ability for Europeans to live and work in each other’s countries were all
directed at minimising the limitations of the nation-state in creating prosperity through the
free exchange of goods, services and expertise. And it was successful in transforming Europe
more than just economically. Given that the two single most devastating wars that mankind
has ever waged originated because of inter-European rivalry and conflict one can even say
that the European Union has succeeded far beyond purpose.
What is of concern at the moment, is not the common market for goods and services and
people, but the financial union that came about with the introduction of the Euro and the
discarding of national currencies- Marks, Francs, Lire, Guilders, Pesos and so on. That was
effectively a one-size-fits-all lock-stepping of all the economies; a commitment to straight-
jacket all monetary and fiscal policies so that each country would not break the single
currency by its individual recklessness or short-sightedness. The advantage was to be- of
course, the elimination of all exchange risk, transparent pricing and invoicing and growth in
intra-European trade. There was also the huge benefit to the high interest countries of Italy,
Greece and Spain- for example, of suddenly getting access to the low interest borrowing
rates that Germany benefitted from. This led to some excess in borrowing (aided by creative
accountancy and classification as the world found out in the great economic crisis of 2008)
and calls for the imminent break-up and demise of the EU experiment became loud and
unceasing, gaining strength with the exit of the UK from the arrangement. The UK were
never fully committed to the EU at any rate- participating in neither the Schengen visa
scheme nor the single currency, so their withdrawal has not strained the single currency as
much as- say, an Italian exit would do.
The crux of the matter is the mistrust that lies between the ‘Frugal Four’- Austria, Denmark,
the Netherlands and Sweden versus the Mediterranean nations- perceived to be more
profligate. The battle has been over the extra resources needed to be brought to bear on
the coronavirus pandemic that has ravaged Europe- but Spain and Italy in particular. The
stricken nations asked for a concerted EU financial commitment- the raising of debt through
issuance of Coronabonds to deal with the sudden massive increase in costs to the
exchequer. This meant a mutualisation of debt obligations across the EU rather than an
individual nation shouldering the cost- which is what the Frugal Four object to.
Why is an internal debate so important? What’s riding on the outcome? A lot more than the
individual deficit numbers apparently. Given the perilous state of global alliances with the
sledgehammer policies of the Trump administration, the European alliance has not been

3. impervious to outside infiltration and turmoil. The US withdrawal from the Transatlantic
alliance compromises territorial integrity in the face of an aggressive Russian state. Both
Russia and China have been making overtures to individual European nations with offers of
help during the pandemic. The UK has withdrawn from Europe in the belief that they are
better off without the benefits of being part of the EU. The entire European borderless
experiment could unravel with all these pressures given the level of internal dissension
during a pandemic-induced economic freeze.
It has taken German leadership to rescue the EU. Germany is- surprisingly (or unsurprisingly,
if you think this was a Hitlerian goal at any rate) very strongly for a unified Europe. Their
1949 Basic Law anyway provides for the abdication of sovereign rights for the sake of a
peaceful and permanent order in Europe. Chancellor Angela Merkel is already looking to the
next stage in the European project and believes that “the nation-state on its own has no
future.” So, while Europe dallied with the idea of “Coronabonds” and George Soros
proposed “Consols” – perpetual bonds, Germany- despite internal protests and opposition
even from their own constitutional court which ruled it illegal, agreed to a 500 billion Euro
recovery fund in the form of grants with an additional 250 billion in the form of loans. The
European Central Bank has agreed to E.1.35 trillion of bond purchases- monetisation in
other words, with Germany also agreeing to a package internally of tax cuts, aid to small
businesses and direct cash transfers amounting to E.130 billion. France has also announced
a E.45 billion programme. These are necessary spends given the magnitude of the problem.
The Frugal four are only looking at the financial aspect of it- odd given that Italy is the third
largest net contributor to the EU after Germany and France. But they wanted the process to
be done through the European Stability Mechanism which would have meant the ECB, the
EU and the IMF would involve itself in the repayment plan- a fate that befell Greece after
2008; a form of ‘administrative receivership’ as the worry is in Italy. With Italian public debt
surging and the possibility of a washed-out tourist season stalling the probability of
returning to growth this summer this is a real worry. The pandemic is- however, the Italians
argue, a pan-European crisis.
Even with push-back within Germany and the hurdle of ratification by the EU Parliament
and the EU member nations, the decision has been collectively taken- led by Germany and
France, to raise funds through the issuance of long-term bonds. Germany has already
abandoned a balanced budget in March and will take on an additional E.150 billion in fresh
debt- something the Germans are averse to in general. The ECB programme announced
allows commercial banks to borrow money (the monetisation part) at -1% if they agree to
on-lend it rather than buy bonds. This is effectively paying banks to lend money.
The announcements may seem like a necessary financial compromise but in many ways
were crucial to the existence of the EU itself. Its failure would have led to the Italians
questioning the value of the EU to them and possibly an exit. The break-up of the EU is still a
back-burner topic and may never entirely disappear. But the decision to accept the need for
a united sharing of costs may have pushed it back from the brink of an existential crisis for
now. If Europe successfully negotiates this crisis then could the next step in the evolution of
Europe into one large country with multiple national languages, like India, happen? Only
time will tell, but at least they’ve got over this hurdle.