The continent’s market rigidities and lack of effective federal structures are liabilities in times of economic distress.
The continent’s market rigidities and its lack of effective federal structures and a shared political outlook are liabilities in times of economic distress.
E ven before Donald Trump’s presidency, the United States was rarely cited as a paragon of good governance. From chronic partisan polarization, gridlock, and the weakening of the legislative branch to the horrific death toll from the current coronavirus pandemic, there’s no shortage of reasons for pessimism about America.
Yet a dysfunctional federal government that can nonetheless take action in real time is preferable to no government at all. Just consider the EU’s acrimonious four-night summit in Brussels, which finally yielded agreement Tuesday morning on a modest recovery package and a budget for 2021–2028.
For all the bitter partisanship, our Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act almost unanimously in March. Since then, the U.S. economy has been propped up by that $2.2 trillion package, which included $300 billion in one-time cash payments to most Americans and $669 billion for the Paycheck Protection Program. This short-term relief has been complemented by the Fed’s injection of several trillion dollars’ worth of liquidity into the economy.
European economies, meanwhile, have until now been mostly left to cope with the economic effects of COVID-19 on their own. Many have the fiscal firepower needed to provide support to struggling businesses and to keep employees tied to their jobs, but others are not so lucky. Italy’s debt-to-GDP ratio was above 130 percent even before the crisis hit. Under the deal reached on Monday night, the EU will provide further assistance of €750 billion to such distressed countries, beginning in January of next year and financed by the issuance of common EU debt.
Given the long-standing reticence of countries such as Germany to move toward a genuine fiscal union, the agreement has been hailed by many as a historic breakthrough. But out of the headline figure, €390 billion will take the form of grants with some strings attached and €360 billion will take the form of loans. EU countries in financial distress can already access cheap loan financing through facilities such as the ESM — and adding more debt to already-massive mountains of it tends to eventually trigger financial panics.
Perhaps the package will be just good enough for Europe to muddle through, as it often does. Still, the continent’s prospects for recovery are extremely fragile, especially considering that a ruling of the German Federal Constitutional Court in May raised doubts about the future of the ECB’s quantitative-easing programs, which were critical to the resolution of the post-2008 debt crisis in the Eurozone.
If the CARES Act is not extended by the end of July and lockdowns become unavoidable again in the fall, another, similar package will almost certainly be passed in the United States. But it is anybody’s guess whether it will be possible to expand the EU’s recovery package further, contingent as such an expansion is on the support of those reluctant member states in good fiscal health. And even if those governments are overruled and an expansion goes forward, it could touch off a resurgence of Euroskepticism among their citizens.
In other words, either way, the same basic problem — the divergence of interests among EU member states — will persist. The United States may be polarized, but Americans do not lack a basic sense that we are in “this” together. In Europe, whatever “this” is, odds are that publics and governments in the Mediterranean, in the continent’s “frugal” northern states, and in the Visegrad region will hold wildly different views on it. Given that, by design, it relies so heavily on consensus among governments, the EU can’t do much better than panicked last-minute decisions in times of crisis.
Somewhat paradoxically, EU countries’ power to take matters into their own hands instead of following Brussels’s lead is also one little-noticed factor that has allowed Europe to be more successful than the U.S. in fighting the coronavirus. Most EU countries all but shut their borders in the early days of the pandemic, effectively suspending the regime of passport-less travel existing within the Schengen Area. While these border closures were in most cases undertaken unilaterally, and there was little to authorize them in EU law, they do seem to have played a role in slowing the spread of the disease. Yet, for U.S. states to implement similar restrictions on the travel of Americans between them is unthinkable, notwithstanding the efforts of some governors to induce people arriving from states with growing numbers of cases to self-isolate.
In this particular case, Europeans were served well by the fact that the EU is not a real federation, because Brussels couldn’t, practically speaking, constrain the power of member states to close down on their own. But the continent’s market rigidities and its absence of effective federal structures and a shared political outlook are real liabilities in times of economic distress. So even with the botched response of the Trump administration and many state governments to the virus, we should not be surprised if COVID-19 ends up having a more devastating long-term impact on Europe than on the United States.