This op-ed is written by Prof. Dr. Karl-Heinz Paqué, Chairman of the Friedrich Naumann Foundation for Freedom
Something unusual happened in Europe last week. After tough negotiations, eurozone finance ministers agreed on a Corona aid package amounting to 500 billion euros. That is 3.6% of the European Union's total gross domestic product, no doubt a lot of money. The funds will be financed through the EU's short-time work programme, the European Investment Bank and the European Stability Mechanism (ESM). Italy has agreed to this package. The ESM funds alone allow for 39 billion euros in extremely long-term loans for the renewal of Italy’s health care system. The interest rates for debtors are among the lowest in Europe – not least because the ESM is supported by all Eurozone members, some of which have the best credit rating, which reflects on the ESM.
In face of the humanitarian catastrophe in Italy, there are practically no conditions for the loans – except for the requirement to use the funds for the health care system, where the crisis has revealed huge deficits and a lack of long overdue investments. Anyone familiar with public finances knows that such earmarking also brings relief in other ways, because self-financed expenditure for the grant purpose can, in turn, be used elsewhere. There is, moreover, agreement that there will be a second aid package – a more economically oriented one, probably on an even larger scale.
So far, so good. The problem: Italian Prime Minister Giuseppe Conte is now voicing his opposition. He has reacted to the decision, supported by his own Finance Minister, in a way that adds a new quality to European relations. In a way, his government is refusing to accept it. Conte announced that he would not sign any document unless it explicitly mentions the introduction of Eurobonds. He is apparently under pressure from two populist fronts: on the one hand, from his coalition partner, the left-wing populist Cinque Stelle, which categorically rejects any funds from the ESM as a national humiliation; on the other hand, from outside the government, he is under pressure from right-wing populist Matteo Salvini, who sees things the same way and has already explicitly blamed the EU's austerity policy for a previous disaster in Italy: the collapse of the Morandi Bridge in Genoa in 2018, although a private motorway operator was responsible for its maintenance.
It is important to keep an eye on the driving populist forces behind this political decision-making. It is in stark contrast to the tradition of pragmatic and moderate Italian statesmen, like Alcide de Gasperi and Luigi Einaudi, that dominated Italian politics in the post-war era until the rise of Silvio Berlusconi in the 1990s. One of the country's last politicians in this great tradition is the 81-year-old Romano Prodi who made it clear in an interview that the Italian Government is making a serious mistake.
Italy has the financial capacity to act
What next? The EU and its member states have clearly signaled their willingness to provide unprecedented support to all those countries that have been hit particularly hard by this crisis – above all Italy. The only controversial issue is the mechanism of financing. Italy and a number of other countries want to take the opportunity to set a precedent by establishing the principle of joint liability for government debt through the introduction of Eurobonds – by refusing to accept extremely cheap loans worth 39 billion euros. It is difficult not to call this a “highly questionable political style” at best. After all, Italy is creditworthy on the international capital markets: the government has just launched a ten-year investment at 1.6% interest, which was far oversubscribed; and as recently as March 2020, when the Corona crisis was already in full swing, old bonds were redeemed by the government. In short: Italy is financially capable of acting. It may be that the new demand for credit will trigger an upward movement in interest rates, but Italy operates still at a level that is very far from the financial and debt crisis of 2012. Incidentally, the recently adopted aid package and the one that is still to come would send a strong signal to the markets that Italy can rely on Europe. And lastly, the European Central Bank is, as always, available as a “lender of last resort” in the event of crisis: Christine Lagarde would certainly not hesitate to declare a "whatever it takes" – monetary policy, like her predecessor Mario Draghi did in 2012.
In any case, it is highly unlikely that this will happen anyway, because from an economic point of view the situation is a completely different one: it is about the prevention of long-term damage caused by a stagnation in production – and not a drastic loss of confidence in banks and the state. The latter could actually only happen if Italy stubbornly insists on pushing for Eurobonds now – and by doing so to fuel and intensify the conflict and ultimately to fail with its demands.
Italy deserves generous help and solidarity
Indeed, of the 19 eurozone countries, at least eight are against Eurobonds, including four wealthy nations of Western and Northern Europe (Germany, Austria, the Netherlands and Finland) and four poorer countries of Central Europe (Slovakia, Estonia, Latvia and Lithuania). Their per capita income is about 60% of Italy's – and thus about 40% of the Italian north. All these countries – and especially the poorer ones – have low debt ratios by international standards. Why should they accept to participate in the financing of Italy's high national debt via Eurobonds, when they are willing to provide generous solidarity – however, via a grand yet well-defined fund in which they hold manageable shares and which refinances itself at favorable conditions on the world market?
Let us hope that the Italian government will come to its senses. Without question, the country deserves generous help and solidarity. But the way to do this must not wipe aside the contractual foundations of the Eurozone in an emotionalized state of emergency. The goal should be: to create a fund that works now and, after the crisis, to think about reforming the treaty system.
This article was first published on the website of the Friedrich Naumann Foundation for Freedom. Professor Karl-Heinz Paqué is chairman of the Friedrich Naumann Foundation and a German academic specialising in economics. He tweets under @KH_Paque