The EU’s fiscal governance has created a European mezzogiorno. Shared debt could offer a way out.
Image: @calvinhanson
COVID-19 is a crisis like none have seen in modern Europe. But the initial response of Eurozone governments was conventional: arguments between northern and southern EU member states about public sector debt. The self-styled "frugal four" (Austria, Denmark, Netherlands and Sweden, which are characterized by low public debt and sky-high private sector borrowing) seemed happy to subsidize authoritarians in Poland and Hungary, but insisted that any aid to badly affected countries like Italy or Spain should be limited, conditional, loans.
This response by the frugal four was disappointing. Conditional lending rarely achieves its supposed goal of sustainable fiscal policy anywhere. In the context of Europe’s 2010 debt crisis, it embittered public opinion while completely ignoring the huge internal structural imbalances of the Eurozone.
For these reasons, the EU Commission’s proposal to issue shared debt for spending in response to COVID-19 is very good news. Shared debt could well be both the way out of the current crisis and yawning internal imbalances. The most successful federations around the world pool their debt in order to insure their people against risks too big for any one of their governments to take on.
An article I just published in Health Economics, Policy and Law lays out the stakes. It looks at the EU as if it were a federation. What stands out about the EU compared to other federations? A rigid currency union, an immensely powerful legal system and, by the standards of every other federation, almost no money. These factors, more than the particular language of EU treaties or the EU’s scant welfare and social policy, are what shape and limit the ambition of the EU.
My article maps out a bad scenario that should get more attention: the EU could recreate the downsides of Italian unification on a continental scale. Italian unification in 1870 brought together two quite different, but equally successful, economies, one in the north and another in the south.
The new Italy brought a currency union and a shared market. It quickly emerged that the rules of the market were biased towards the north, serving northern industrial interests well at the expense of an increasingly uncompetitive south. The southern economy declined. Ambitious southerners moved north to work in industry. The government increasingly bought off the elites of the declining south with aid and capital expenditure which produced local corruption more than development. Over time southern Italy, known as the Mezzogiorno, became what it is today -economically stagnant, dependent on transfers that are enough to keep existing elites in power without escaping its problems, and riddled with crime.
The Eurozone has been on track to create its own Mezzogiorno since 2010. Eurozone governance is not addressing the internal structural imbalances between the center and periphery which the Euro creates. The EU transfers enough money to keep increasingly authoritarian governments in power in its periphery -such that by now Hungary and Poland are not democratic regimes. Those governments use the EU money to entrench themselves further via clientelism or outright corruption, while ambitious young people simply leave.
The structural divergence between center and periphery gets bigger every year, and maintaining elites in power is easiest with a little more corruption and a little more authoritarianism every year. Europeans have centuries of national stereotypes to draw upon, so it is trivially easy for voters and elites in the core to blame deficient cultures in the periphery for the economic and political decline caused by this system and these policy choices. As Italy shows, there is no reason such a scenario can't happen, and persist for a very long time.
That is the trajectory I feared when I wrote this article in 2019, before the pandemic. The shock of COVID-19 might jolt the EU off this corrosive trajectory and onto one that works for all EU member states and their citizens. In the context of a global pandemic, somehow making a giant Mezzogiorno looks like less of a policy priority to European leaders.