The European Union has had to face harsh criticism for its belated response to the COVID-19 pandemic, and for its early open hostility towards member states closing their borders to protect their own populations. In the first weeks of the health crisis in Europe, starting with the quick spread of the epidemic from February 20 in Italy, and then a week later in other Western European countries, EU institutions were seen as being unable to coordinate actions taken at national level and to prevent the largest EU countries – France and Germany – from banning exports of medical products like masks and other personal protective equipment, including to Italy where such equipment was so badly needed. This is why Hungarian foreign minister Péter Szijjártó was able to say in early April that national responses to the coronavirus pandemic had been the most effective. This has clearly been the case in the current crisis, where direct intergovernmental cooperation between the V4 countries (Poland, the Czech Republic, Slovakia and Hungary) stands in contrast to the paralysis that has characterised supranational action at EU level.
Fighting the pandemic was best done at national level, but the EU must act together to mitigate the economic fallout
However, while national actions and the restoration of national borders have appeared to work best to fight the pandemic itself, mitigating the economic fallout of the pandemic and the lockdown measures taken by European governments will require strong action from the European Union as a whole. There have been warnings against the potential consequences for the EU if the hardest hit countries are left to plunge into depression and financial crisis, with Italy at particular risk of becoming insolvent, and possibly being pushed out of the eurozone. This would trigger a much larger crisis than the Greek debt crisis of the 2010s, as Italy accounts for 15% of the eurozone economy, not a mere 2% like Greece. After weeks of squabbling and four remote meetings of the European Council, agreement seems to be emerging over the kind of financial and economic response the EU has to come up with. The Visegrád Four presented a united front during the discussions on April 23, and the group’s stance is that the EU’s response should not be a reorientation of cohesion or agricultural funds, but an ambitious policy with a special Recovery Fund implying the commitment of new funds, possibly with new direct sources of funding for the EU budget. It should be recalled, however, that the multiannual financial framework (MFF) for 2021–27 to which the coronavirus Recovery Fund is to be attached was still at the centre of fraught discussions when the epidemic started to spread across Europe and an increasing number of countries chose to go into lockdown. Hence it could still take some time before the 27 come to an agreement on both the MFF and the Recovery Fund for the next seven years.
The Visegrád Four not the worst hit by recession
While the whole of the EU will undergo a deep recession this year as a result of the lockdown, the Visegrád Four will probably not be the hardest hit countries. According to the IMF forecasts published in April, Poland could see its GDP shrink by 4.6% this year and bounce back by 4.2% next year. For the Czech Republic, the figures are –6.5% in 2020 and +7.5% in 2021. The projections are respectively –6.2% and +5% for Slovakia, while for Hungary the IMF forecasts a recession of –3.1% this year followed by growth of 4.2% next year. By comparison, the figures are respectively –7% and +5.2% for Germany, –7.2% and +4.5% for France, –9.1% and +4.8% for Italy, and –8% and +4.3% for Spain. Although current forecasts can change fast in such a dynamic environment, thanks to their having enforced social distancing and closed their borders earlier, the V4 countries have not had to suspend all “non-essential” activities as was done in France, Italy and Spain, and they are now among the first to alleviate their already lighter lockdown. Logically, this means that the lockdown should have a lesser impact on their economies, although the more stringent lockdown measures enforced in the aforementioned Western European countries and the deeper recession that will follow are bound to have a negative effect on exports from the V4. However, for all four countries Germany is by far the largest export market, and according to the IMF forecast Germany should be less affected than France, Italy, and Spain. Thanks to extensive testing and excellent hospital capacities, in Germany too the epidemic has been kept under control, and the social distancing measures never went as far as to shut down all “non-essential” activities.
The EU’s first short-term response to the economic crisis: undersized and inadequate
The EU’s first emergency response on the economic front was the Coronavirus Response Investment Initiative, which came into force on April 1 under a regulation of the European Parliament and the Council adopted on March 27, based on a proposal from the European Commission. It is designed to mobilise a total of €37 billion by reallocating unused or planned sums from existing funds: the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund (CF), and the European Maritime and Fisheries Fund (EMFF). Of these, €8 billion will come from unspent pre-financing in 2019 under the structural and cohesion funds. The rest will come from early allocations of sums planned for this year. As a result of this first set of measures, accusations were made in the Italian media over the perceived unfairness of European aid. At the end of March Italy was the country most affected by the COVID-19 pandemic and its economic consequences, and also most at risk of a default on its foreign debt, which could push it out of the eurozone as a result of rising borrowing costs caused by investors’ defiance. However, the reallocation of funds from the EU’s cohesion and structural policy is of more significance for countries which benefit most from those funds. As a net contributor to the EU budget, Italy is not among them. After the Commission’s first announcements of a sum of €25 billion (later raised to €37 billion, as mentioned above) to be used to support small and medium-sized enterprises, short-term employment schemes, community-based services and healthcare systems in member states, the right-wing newspaper Il Giornale, for example, expressed its outrage at the fact that Italy would only receive €853 million, while Poland and Hungary, both countries with far fewer cases of COVID-19, would get respectively €1.2 billion and €855 million. In another example, the left-wing newspaper La Repubblica criticised Hungarian PM Viktor Orbán at the beginning of April for saying that Hungary had not received a single cent from the EU for its fight against coronavirus. According to the Italian newspaper, Hungary had in fact received 15 times as much money per capita than Italy. For the same reason Polish PM Mateusz Morawiecki was criticised in Poland for saying in Parliament that his country had not received any money from the EU for its own fight against coronavirus, which was true at least for the reallocated funds that were planned to be spent later this year, but is more disputable as regards the reassigned unused funds, which would probably have been lost by their beneficiaries if it had not been for their reallocation to cater for this new situation.
Earlier, Italians reacted very negatively to the first response from the European Central Bank, when the ECB’s president Christine Lagarde refused to say during her press conference on March 12 that the ECB would do whatever it took to stop the crisis, and then said that it was not for the ECB to “close the spread” in sovereign debt markets. That declaration pushed interest rates on Italian bonds even higher, reaching a 273 base point difference against German debt titles by the end of the day. On that black Thursday, all European financial markets plunged, with Milan’s FTSE MIB index losing an unprecedented 16.92% in one day. The ECB had to issue new statements to reassure investors, who were also wary of its undersized response compared to that of the Bank of England and the Federal Reserve. Indeed, on March 12 the ECB announced it would inject €120 billion into the economies of the eurozone, while the Bank of England was committing £300 billion to boost credit, and the Federal Reserve was announcing it would inject $1.5 trillion into the US economy. Among the Visegrád Four, only Slovakia is in the eurozone; the other three – Poland, the Czech Republic and Hungary – are relying on their own central banks and are not directly dependent on the policies adopted by the ECB. Those countries do rely, however, on the level of consumption and investment in the eurozone for much of their exports. Less than a week after the much criticised press conference of March 12, the ECB ramped up its planned stimulus package, saying it would spend €750 billion in bond purchases to counteract the effect of the coronavirus pandemic and of the lockdown measures on the economies of the eurozone. Christine Lagarde then wrote on Twitter: “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”
Italy could leave the EU
All this has stoked Euroscepticism in a country where that sentiment has been on the rise since the adoption of the euro, which has had a negative impact on the Italian economy, and has accelerated with the migrant crisis of 2014 onwards. With the current pandemic and the EU’s lack of support during the first weeks of the crisis, followed by sour discussions at European level over the extent and the form of European financial assistance to Italy, Euroscepticism has grown to a point where several opinion polls published in April indicate that around half of Italians would want their country to leave the EU and would vote for Italexit if a referendum was held. Such an outcome would be a deadly blow for the EU, or at least for the position in the EU of the Visegrád Four and Central Europe, which already have much to lose with Brexit.
€540 billion confirmed for the EU’s mid-term response
On April 23, the EU-27 leaders approved the second part of their common response to the economic crisis caused by the pandemic and the subsequent lockdown measures taken in most countries (with the notable exception of Sweden). This first response had been negotiated on April 9, with a total of €540 billion to counter the short-term and mid-term effects of the pandemic. This includes €240 billion available for eurozone countries as special loans through the European Stability Mechanism (ESM). As long as those loans are used directly for investments in health systems in the struggle against the COVID-19 pandemic, they will not be subject to the usual ESM rules by which countries asking for financing must enforce financial restructuring programmes imposed from Brussels, as was the case for Greece after the 2008 financial crisis and its subsequent foreign debt crisis in the early 2010s. Another tranche of €200 billion is to be made available as loans to companies from all EU countries through the European Investment Bank (EIB). A third package of €100 billion is planned to be used through the SURE fund, which is administered by the European Commission. SURE is a European instrument for temporary Support to mitigate Unemployment Risks in an Emergency, and it will allow the Commission to provide financial assistance in the form of loans to EU member states which are most affected by unemployment as a consequence of the current crisis. Of the total of €540 billion, only €300 billion will thus be accessible to all EU countries, including those which like Poland, the Czech Republic and Hungary have kept their national currencies and are not part of the eurozone.
For long-term recovery, a special Recovery Fund added to the next multiannual financial framework is still to be agreed on
As mentioned earlier, during their videoconference held on April 23, EU leaders agreed to create a special Recovery Fund as their common long-term response to the economic crisis. It was also agreed that the Recovery Fund would be added to the multiannual financial framework for 2021–27, which is yet to be agreed on, and that the European Commission would submit a proposal to the next European Council to be held on May 6 as to the amount that should be committed to the Recovery Fund, its sources of financing and the form taken by assistance from the Recovery Fund – namely whether it will be in the form of non-refundable subsidies or preferential long-term loans. Hence, the dispute between the “southern” eurozone countries – in particular France, Italy, and Spain – and the “northern” countries – in particular Germany, the Netherlands, Austria, and Finland – over the possible issuing of common European debt titles (the so-called “eurobonds” or “coronabonds” being demanded by the south and refused by the north) has turned into a dispute over whether the Recovery Fund should give away subsidies, as is being asked for by the southern countries, or just lend money that will eventually have to be paid back, as preferred by the north.
There has been talk of a sum of €1.5 trillion for this Recovery Fund, which is the amount advocated by the prime ministers of Italy and Spain, and Commission President Ursula von der Leyen has said: “we are not talking about billion, we are talking about trillion.” However this is still to be agreed upon, just as it remains to be agreed whether the Recovery Fund will be fed by issuing EU debt – i.e. some kind of eurobonds after all – and/or with additional contributions from member states, with Angela Merkel declaring that Germany – the largest net contributor to the EU’s budget – was ready to make “significantly higher” EU budget contributions. There is also talk of creating special taxes at European level, with V4 leaders expressing support for all such sources of financing. The Polish PM even declared that Poland would be ready to take part in the guarantee mechanisms that would support the eurobonds advocated by the southern countries, stating that “Italy, France, and also Spain and the Visegrád Group have asked for […] a common policy showing solidarity.” Before the April 23 summit, the leaders of the Visegrád Four met so that they could present a united front. Although not much was said in the media about their common positions, in the current spat they clearly stand closer to the countries of the south of the continent.