Coronavirus may cause Germany to trigger the next Eurocrisis

The economic as well as human costs of the Covid-19 virus across Europe have led many to believe that we live in a completely new era. Yesterday’s burning issues are forgotten. After years of divisive debates about the EU, and not just in Brexit-Britain, there is a certain comfort in the “We’re all in this together” mindset.

But, a new Brussels story may be emerging, one where the coronavirus global crash triggers a Eurocrisis even more serious than the last.

This week’s ruling by the German Constitutional Court questioning the legality of the European Central Bank’s massive bond-buying after the crash of 2008 put a spoke in the wheels of plans to print vast new funds to subsidise the cost of Covid-19 lockdowns across the EU.

Mrs Merkel’s government has three months to justify letting Germany’s Bundesbank participate in the old scheme. But Covid-19 is not going to give the EU, its members and Central Bank three months to decide how to pick up the pieces of economies and government budgets wrecked by lockdowns.

There was a sting in the tail of the German court’s statement that it was only ruling on the last splurge in ECB bond-buying. The German judges stuck to the complaint registered before the virus, but they hinted that since the EU treaty ruled out the ECB subsidising “member state’s budgets” it would be unconstitutional for Germany to join a scheme to share the costs of the lockdowns.   

After the crash of 2008, central banks acted to stimulate their economies by buying up bad debt from their own commercial banks as well as by slashing interest rates, but today the ECB, like our Bank of England, is directly purchasing government debt on a vast scale. In 2009, central banks were lenders of last resort, now they are funding governments to be paymasters of last resort.

The EU Commission dismissed the German Constitutional Court saying EU law took precedence over national laws and constitutions. But it is precisely the fact that the EU is playing fast and loose with its own treaty obligations which alarms so many Germans.

“Take back control” could translate easily into German. The priority of its constitution is embedded in Germany’s civic education. Germans are only too well aware of how Hitler argued that necessity in the great depression of the 1930s meant enabling his government to do what it liked and to hell with the constitution.

People may well say that surely the economic black hole provoked by Covid-19 lockdowns requires extraordinary action. After all hasn’t a Eurosceptic government here thrown financial caution to the winds too to fund millions of people and thousands of companies rendered effectively bankrupt?

This is where Covid’s economic impact is very different for a sovereign country with its own central bank like ours, compared with the very different economies joined together by the single currency. In Italy, with its population shocked by the lack of EU solidarity in the early weeks of the contagion, the opposition was already questioning membership of the Euro. With austerity rather than stimulus likely to be imposed as a condition for any German bailout, the downturn caused by the virus could be prolonged in the Mediterranean members of the EU.   

A one-size fits all economic and monetary response to the economic impact of crisis is likely to misfire. It will probably satisfy no-one outside the EU Commission and ECB. Pooling debt will worry German and Dutch savers but not do enough to re-float Italy or Greece.  

The EU was planning to celebrate next Monday, 9 May – “Europe Day” – as the seventieth anniversary of its founding charter, the Schuman Plan of 1950. Covid-19 is raining on that party as it  casts its ominous shadow over European project’s life-expectancy.

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