Webinar: Economic Implications of the COVID-19 Pandemic: A New Political Economy for Europe?

Thomas Raines

Good evening, and welcome to this Chatham House webinar. My name’s Tom Raines. I’m the Head of the Europe Programme at Chatham House. Thank you all very much for joining this discussion this evening, where we’re going to focus on the EU’s political economy after coronavirus. It’s pretty clear the COVID-19 pandemic has created a unique economic challenge, and European governments have had to respond with quite extraordinary measures, and that’s expanded the reach of the European state in a very short space of time. We’ve seen governments take on remarkable new roles in the economy, providing economic relief to the tune of hundreds of billions of pounds or euros.

Only yesterday, the UK Government, a Conservative Government no less, was comparing its ambitions to Franklin Roosevelt’s New Deal programme, so we are in what seems like a new era of political economy. So, as well as these immediate questions about unemployment and reopening the economy, the crisis has created a whole set of new questions about the nature of our market economies, about their vulnerabilities, our dependence on global supply chains and international trade, and on the proper balance between the role of the state and the role of the market.

At the beginning of this month, myself and colleagues in the Europe Programme published a paper exploring some of these issues. It’s called Europe After Coronavirus: The EU and a New Political Economy. You can find it on our website and we’d love you to go there and read it. In particular, we were exploring this question about a change in the role of the state in the EU and what that would mean over the long-term for European integration, and tonight we’ve got a chance, an opportunity, to discuss those themes with a great panel.

So, I’m going to introduce them now, before we get into the discussion. To kick us off is Hans Kundnani, he’s a Senior Fellow on the Europe Programme, one of the co-authors of the paper along with my colleagues, Alice Billon-Galland, Vassilis Ntousas, and Pepijn Bergsen. He’s going to speak first and introduce the argument that we make in the paper and help us frame this discussion. Second, I have Maria Demertzis, is – she’s the Deputy Director of Bruegel, which is the economic policy think tank I’m sure many of you will know in Brussels. She’s worked at the European Commission and the Dutch Central Bank in the past, and research and comments widely on lots of these European economic issues. And, third, we have John Peet, he’s the Special Reports and Brexit Editor of The Economist, who used to be the Europe Editor and the Brussels Bureau Chief, and is a long-term commentator and writer on European politics. So, it’s a great panel. Really looking forward to the discussion. Please throw in your questions as they come up, and I’m going to hand over to Hans to kick us off.

Hans Kundnani

Thanks, Tom. So, as Tom was saying, this is very much a collective publication by the Europe Team, and so some of my colleagues may want to chip in at some point, particularly Pepijn Bergsen, on the economics of this. And it really came out of the, sort of, internal discussions that we started having in the Europe Programme at Chatham House, immediately after the coronavirus hit, and it seems to us that nearly all of the discussion that seemed to be taking place about the implications of the coronavirus for Europe, beyond the, sort of, immediate health crisis, focused on this whole question of risk-sharing in the eurozone. In other words, this, kind of, debate about so-called coronabots. And, you know, because the pandemic hit some EU member states, like Italy, harder than others, like Germany, there is a lot of fear that the crisis could lead to a, kind of, divergence, I mean, an even further divergence than already exists in Europe between the North and the South, and that would, sort of, pull the EU apart, as it were.

And the announcement of the €750 million recovery fund has gone some way, I think, to easing those fears, there are different views about it. I’m rather sceptical that it’s going to have the effect that some pro-Europeans hope, in particular, this idea that it might lead to a fiscal or even political union. But, in a sense, that’s a separate question that we’re not really – that we don’t really focus on that much in the paper. It seemed to us that there was another issue, which just hadn’t been discussed at all, and I think still hasn’t really been discussed very much, which goes beyond this question around divergence and debt mutualisation, and that’s this whole question around this possible political economy shift that might be taking place under the, sort of, impact of the coronavirus. There’s been lots of talk about a, sort of, return of big governments, the state having taken on this new active role in the economy that Tom talked about, and whether it’s through furlough schemes, other forms of state aid for companies, there’s discussion around policies like a universal basic income.

I was very struck in April by an editorial in the FT, of all places, which was calling for radical reforms, reversing the policy direction of the last four decades, calling for a more active role in the economy, redistribution, UBI, wealth taxes, and, as I say, in the Financial Times, which I thought was quite indicative of the kind of mood shift that there’d been. So, in other words, there does seem to at least be a possibility that there is this, kind of, shift towards a demand for a different kind of political economy, and the question that we started to ask ourselves in the Europe Programme was, is the European Union, in its current form, compatible with that kind of shift in political economy? The current form of the EU, which is centred, above all, on the single market in the single currency, emerged during a period of economic liberalisation. I mean, precisely the period – the 40-year period that the Financial Times was referring to and suggesting that we now reverse.

That’s the kind of moment that produced the current form of the EU. In other words, it came out of the so-called neoliberal term in the 1970s. And pro-Europeans think, for example, of the single market above all as being this big breakthrough in integration, but I think it’s worth remembering that it was also, kind of, a Thatcherite project. In particular, EU rules, competition law, state aid rules, and so on, limit how far member states can interfere in the market, and we discuss in the paper the work of Fritz Scharpf, and, in particular, this distinction that he makes between positive and negative integration, which has to do with the role of the state in relation to the market. And this kind of – we call it a, sort of, neoliberalisation of the European project, which began with the single market project in the 80s, then continued and, I think, intensified after the end of the Cold War with the creation of the euro.

And the eurozone’s fiscal rules, which have been gradually tightened and expanded, since their first iteration in the Maastricht Treaty, have set government – limits on government debt and deficits that, in turn, have led to austerity since the euro crisis began. So, this current form of the EU that, as I say, emerged in this, kind of, post-neoliberal moment could now, it seems to – seemed to us, be a problem for Europe. As EU member states start to restart their economies, it seems to us that there’s all kinds of ways in which they might clash with the EU, in particular over the fiscal policy and industrial policy. We’re thinking particularly of member states like Italy, that have been hardest by the pandemic, and I think are going to struggle to adhere to the fiscal rules anytime soon, although it’s not clear to me that even Germany is going to be able to adhere to the fiscal rules anytime soon.

And then, similarly, member states that are seeking to support companies that had been struggling because of the lockdown may clash with the EU’s competition rules. So, if you look at the current case of Lufthansa, that’s a good example of that, the German Government’s taken a 20% stake, I think, in it, and there’s a – there’s some tension with the European Commission over that. Now, it’s possible, and we talk about this in the paper, in theory at least, that Europeans will, sort of, collectively agree to a radical reform of the EU, and I think that’s even more likely if it turns out that it’s not just the likes of Italy, but also member states like Germany, that are starting to clash with the existing model, as it were, as well.

And so, it is possible to imagine a completely different EU, for example with the new set of fiscal rules that would give governments greater space to run expansion on fiscal policies, different state aid rules that allow member states to support, or even nationalise, certain industries. And, as I say, it’s worth remembering, I think, that this current form of the EU that emerged in the 80s with the single market project was the second iteration of the European project after the first phase that began with the Schuman Plan in 1950 and was, sort of, associated with the post-war Keynesian Settlement that created the welfare state and so on. So, you could imagine a – sort of, a third phase in the European project, which would be based on, again, a different political economy, a recalibrated relationship between the state and the market.

And this, I think, would be a real, sort of, next generation Europe, which is what the EU is branding the recovery fund as, even though it’s not a radical, kind of, departure from existing – the existing political economy of the EU. This would be a real, sort of, third generation EU, as it were. The problem, of course, is that, even without the UK in the EU, it’s really difficult to get agreement between member states about reforming the EU in this kind of way, as we’ve seen again and again, since the euro crisis began a decade ago, and the, sort of, asymmetric impact of the coronavirus may have actually exacerbated these difficulties. And so, the danger, and this is where I’ll end, is – or this is how it seemed to us, is that the EU could be stuck in a – kind of, a suboptimal status quo, without the consensus about how to move forward, and that would mean that, even if citizens across Europe want a more state-centred political economy, Europe just maybe unable to make that shift. And that, by the way, is regardless of whether the recovery fund becomes the precedent for further debt mutualisation, as many pro-Europeans hope it will be.

Thomas Raines

Thanks, Hans. Really interesting. I mean, I would say that as a co-author, but I do think it’s a really interesting argument, and, you know, it’s really – it’s nice to, sort of, ground things in that longer-term historical view of the evolution of the EU and the, sort of, change and development of the EU’s political economy as part of that. And, as I say, hopefully, the link is there, if people want to explore the paper, it’s in the chat, to see.

Maria, perhaps we could turn to you now. You’re based in Brussels. I know there’s been, sort of, huge focus on the role of the EU as the, kind of, engine of recovery. But what do you think of these, sort of, longer term questions about where – about what the – what COVID might do to the political economy of the EU over the longer-term?

Maria Demertzis

Yeah, so, first of all, thank you very much for the invitation. It’s lovely to be here. Thank you also for the opportunity to read the paper. I need to go back and read it more carefully, I think, you’ve got many ideas in this paper, and I think it’s important to, sort of, try and understand a little bit your, if I may say, the vision part of the paper. I’ll start by saying that some of the trends that Hans has just described to us were there, irrespective of COVID. I mean, you know, this isn’t really very much a COVID induced thing, right? I mean, if you think about – and one issue you haven’t mentioned, which I think is crucial in that, sort of, you know, long-term vision about Europe, is this issue of sovereignty. Economic sovereignty and the need for other types of sovereignty to try and sustain the economic sovereignty. So, I think that’s an important part, and Europe, as you say, there isn’t one view on this.

However, there is very much a – sort of, an agreement that there is something going on outside Europe that requires much more of a unified view, when it comes down to, sort of, you know, what it is your want? And I would say – I would even say that Europe, I mean, to the very extent, believes that, you know, the ability to achieve its own domestic objectives, let’s say the welfare state, is very much hindered with what is going on elsewhere. So, if you think about the globalisation, China, the US, all of this, and the – sort of, the shift of balances across the world, it’s actually interfering with the ability of Europe to pursue any dependent objective. So, that, by itself, is pushing Europe to think differently, and, again, this is very – it’s independent of COVID.

You add to that the – sort of, this first part of the discussion refers to issues of globalisation, the shift of powers, Brexit, I mean, with the UK leaving, all of this is part of the same type of issues that are making Europe think. But add to that the issue of economic aspects of the digitalisation and what this means about our understanding of productivity and sources of productivity in the future, why do we have interest rates that are so low, and are expected to remain low for so long? What does that mean about the finance of the economy? All of these things are long-run trends that are necessarily pushing everybody to think about the future, and not just in the context of the EU as an institution, but also, the country context. You know, how does each country see itself, in the context of a very new normal, of a very new economic model and, you know, shift in powers and that? COVID-19 is putting a break on this and is making us refocus a little bit, certainly the short-run, what do we need to do in the short-run?

Of course, some of the policy actions that we will do, that we will – policy decisions that we will make, in order to try and deal with such a size of the shock will be path dependent. So, they might lead Europe in a slightly different direction than otherwise, and the question is, can we use this opportunity to actually, you know, make the direction be a good one and sustainable in the future? I mean, I’ll give you an example, the issue of the greening of the economy, which is very much still a priority for everybody in the EU. You know, is COVID-19 taking away the emphasis from the greening of the economy or is it reinforcing it? I personally am not clear on this. I think there is a lot of support for greening of the economy and, you know, the challenges the climate is posing on us, but, at the same time, you know, we’re going to see a recession of the order of magnitude of at least 10% of GDP this year, and, you know, is that not necessarily meaning that the funds available for greening the economy are reduced? You know, one has to ask this question. And I would argue that all the more why we need to stay put when it comes down to the greening of the economy, but I need to acknowledge that the – you know, the priorities, at least in the very short-run, might be slightly different.

I would like to add perhaps three risks in the way that I see policy intervention in Europe is causing. And, you know, again, I will say that, you know, the future of capitalism, which is a broad umbrella thing, for what we are necessarily having to consider, is something that we have – you know, is continuing, and it will continue to be a part of the discussion. But COVID-19 is adding an extra dimension, and, actually, an extra degree of complexity, that is making the whole thing more difficult to fathom.

I think there are three things that I see as potential risks. Two of them are going to play directly into your question about the divergence. It might make divergence more prominent in the EU, and one of it is much more of a – sort of, an overarching theme. So, the three risks, in my view, the first one is debt. How do we deal with debt? The second one is the single market, in various forms that Hans described, and I’ll talk a little bit about that. And then the third one is the role of the ECB as one – as perhaps the only European institution, and really, truly European institution with a truly European mandate. I suppose the Commission is one of them, but, I mean, the ECB has really gotten a mandate for – to target European numbers. So, how does this pandemic – where does the pandemic leave the ECB? And I think that’s an important thing, because the ECB has been pivotal in allowing countries to deal with the COVID pandemic, so it’s important to think of what this is going to do in the future.

Now, the debt. The ECB announced a very big QE programme, quantitative easing programme, that had one effect, and that was allowing the countries to go to the markets to borrow. Now, we are all in the same storm, but we’re not in the same ship, you know, some of us are in better ships than others, and, you know, the boats that we are riding are very different, the capacity to deal with that storm is not the same. We’ve been hit by the pandemic at very different – very differently. The reaction was very different because it came at different times, and the economic strength of it – of the economy was very different to be able to pick up the bill.

The ECB has alleviated some of those differences by simply allowing everybody to go to the markets, including Greece by the way. Greece did not have access to QE because the debt is still not of investment grade, but even Greece is allowed to participate in QE this time round, which basically means that everybody can go in the markets and borrow cheap and borrow cheap they have. I mean, this is a very important thing. We mustn’t underestimate how important this is for countries to go and finance immediately, health authorities, health workers, and basically, be able to deal with the pandemic in real time. So, this was very important.

However, the day after, and by ‘day after’, I mean, you know, the day after we declare victory against the pandemic, you know, I suppose this is after the – we’ve discovered a vaccine, I suppose, which is some time from now, you know, we’re going to have big stocks of debt, both at the sovereign level, so the country level, as well as on the corporate side, and possibly households, as well. You know, if we start seeing bad debts developing, this might transfer into a financial issue, and then, you know, the spiral begins again, very much in – as we observed in 2009. Question mark, but it is a risk, it’s not a zero probability event, it’s – I dare to say that it’s actually a positive, rather, it’s a risk we need to think about, and banks and supervisors need to really think about the second stage of the crisis.

So, the stocks of debt and the ability of countries to put policies in place to generate growth will be strongly – very strongly compromised by the stocks of debt that we necessarily have to take on today, in order to deal with the pandemic, you know? And here we’re not the same, Germany and the Netherlands are not the same as Italy, Spain, Greece. They’re very – we’re in very different starting positions, so that will make a difference. So, that’s one risk that is going to – you know, we will have to deal with it, yeah. And here, you know, the ability to deal with it, both now and in the future, might actually lead to more divergences, and, you know, the question is, can we find other ways to try and prevent those divergences from happen? And that will be some of the things that the Prime Ministers will discuss on the 17th of July, you know?

The second one is the single market, and I think Hans there has really made very good points on this issue. Again, there is a continuing trend about, let’s say, industrial policy, in the context of a global platform, but the – you know, the removal of the state aid, which is very well-intentioned, trying to, sort of, allow every country to help its own firms, comes with side effects, and that is that, again, we’re not in the same boat, so some of those countries who managed, who had the ability to save their own companies, did, in masses. I mean, half of the demands at the European Commission come from Germany. You know, what would that do internally to the single market, yeah?

Apart from the fact that it’s disturbing a natural process of creative distraction, which is also an important process in economics, it is also going to, sort of – you know, the day after, we will find a single market that perceivably will look actually quite different to what it looks today. And that, again, points to the direction of what you point in the paper, which is the divergences. You might actually find that the economies diverge, as a result of having actually an industrial base that is different to what it was three months ago, four months ago, and that is a real risk. And, again, can we find other ways of compensating for it in order to try and – there is – in order to make sure that there is some sort of a level playing field, and at least there’s not – is not, you know, defining today who the winners and losers will be of the future industrial policy. You know, this is a very important problem, and, you know, in real time, we, of course, have to deal with helping companies, almost indiscriminately, but, actually, the day after – the picture, the day after, is going to be rather different.

And then the last risk I’d like to point out is the role of the ECB. Again, the ECB will end up with, let’s say about five trillion – more than five trillion, of assets in its coffers. I mean, this is big, this is about a third of GDP, right? I mean, this is big numbers. At some point, you know, the debt of countries issued to try and finance the pandemic today is what I would call short to medium-term, it’s not very short-term, it’s, kind of, medium-term. But, you know, at some point, those debts will start maturing. What will the ECB do then? Is it going to roll them over? It will be – my sense is that the ECB is going to feel compelled to roll them over because you wouldn’t want to stall the markets by, sort of, you know, flooding them with national debt and affecting the financial stability of each individual members.

However, if we know that now, you know, there is an issue about the independence of the ECB, and, you know, some of the critics that countries and commentators have given about the ECB and their role as a fiscal player, you know, become again very valid. Now, this is not to say that I don’t believe the ECB had to do what it did, but, you know, at this point, we need to find other means to try and support the European economy and, you know, create – you know, correct for some of the distortions. The future of the EU will be different de facto, I mean, all of these things are path dependent. We have removed the fiscal rules. Is this not also a good opportunity to try and reform the fiscal rules? Because the fiscal rules that were put in place, you know, many agree are not really the best rules that we can have. You know, why not seize the opportunity and try and reform them? Similarly, for industrial policy.

I mean, you know, you have to think very carefully about this idea of what happens in a global scene. Can we really protect without protectionism? And if you believe that you need to go down that route, what form will it take and still stay faithful to some of the major principles that the EU is doing? These are not easy questions, and, you know, you’re faced with a US that is actually, you know, at best absent, at worst distracted, and then, on the other side, you have China, who doesn’t have all their cards laid on the table. So, you know, they are different things that will define the future of Europe, and not necessarily because of the pandemic, but maybe accelerated because of the pandemic, all may change a little bit the direction. So, I’ve taken more of my time. Let me stop here and perhaps you can come back with questions, then.

Thomas Raines

Maria, that’s great. There’s a huge amount of…

Maria Demertzis

Sorry about that.

Thomas Raines

…of iss – no, no, it’s great, and, you know, I think, you know, highlighting the pre-existing, sort of, trends towards challenging some of these, sort of, economic orthodoxies that were there, the risks you identified around debt, the single market, the ECB, and this, sort of, crucial question about the degree to which the current crisis enhances European divergence and what, kind of, countervailing measures there might be to prevent that becoming politically destabilising. So, on the subject of political destabilisation, can I turn to you, John, as a veteran of previous EU crises? What do you think the politics of this looks like? Particularly, you know, we’ve talked about issues like, you know, the huge increase in European debts, this could have some quite challenging politics over the long-term. What do you – how do you think it will play out?

John Peet

Well, thank you, Tom, and thank you for inviting me. Thank you for your very interesting paper. I want to say, very – fairly briefly, because the other two, Maria and Hans, have said a lot of interesting things, some of which I was going to say, so I don’t want to duplicate them. Very briefly, something about the EU’s future, something about the euro, something about a multispeed Europe, and then I’ll finish with some comments on Britain and Brexit. The EU, as an institution, I think the things – the two things that always strike me about it over the years, it has a very, very strong survival instinct, so people who say it’s going to get into trouble or even dissolve tend to be wrong. The countries in the EU, excluding the UK which has now left, are very attached to the project.

I very much liked your model of negative integration, and I think that that’s another fundamental thing about the EU; it was slightly different in the 50s and 60s, but I think it evolved into essentially, a promotor of free markets, and it turned, during the single market process particularly, into the notion of dismantling barriers to free trade, rather than pursuing an active industrial policy. I think your view that COVID is challenging this is correct, but I also think Maria is correct to say that this – that the challenge to this has been around for actually quite a long time, and it’s often taken the form of the EU institutions against certain member states, most obviously France, but not only France.

When I was in Brussels, in fact repeatedly over the last 20 years, I’ve heard from the British how terrible the European Union is because it’s always regulating everything and it’s against free markets. You hear from the French precisely the opposite, that the terrible thing about the EU is it’s obsessed with promoting competition and it doesn’t allow the, sort of, traditional plan and state – a big role for the state that appeals to the French. And I’ve always stuck much more to the French view of the way the Brussels institutions worked, partly under the influence of Britain, particularly under the influence of Margaret Thatcher. I think it did work to promote free competition and to limit the role of the state, and a lot of people – a lot of countries in the EU have actually been quite unhappy with that. I mean, the example – the most recent example that was striking was the block on the Siemens-Alstom merger. And I think we are going to see much more debate over this, particularly in the area of state aids, but also more generally, fiscal rules, other rules that seem to promote free markets and to minimise the role of the state. I think that is a very interesting area for people to brood on after COVID.

The one thing that I would, sort of, qualify it with is that, if you’re starting to talk about redesigning the whole of the EU, I think there is a great nervousness in Brussels and in capitals about anything that would ever involve treaty change. And I think the sense that Hans came to at the end, that we may be in a position where some citizens want a different approach, but the member states are unable to make any change, I think that could well come about. The lesson, over the last 20 years is, don’t try and have a big treaty change because you’ll never get it through, and I think Brexit has probably made people even more nervous about that because there are, not surprisingly, some countries in which some parties occasionally say, “Look, if Britain does well, we might want to think about following their example.” So, that’s what I just wanted to say briefly on the EU.

On the euro, I do think it’s worth putting the euro at the centre of worries about the future. The – as I just said, the EU is actually very strong, and I think people are very attached to it. I think that is less true of the euro because it is so obvious that there are structural faults still in the euro. Maria quite rightly identified the ECB and said some interesting things about the ECB as the working institution. But fiscal – the fact is that the euro is still an incomplete project, I mean, we are not moving in the direction of mutual deposit insurance, and we’re certainly not moving, I think, towards Eurobonds, although they will feature in the debate. And, perhaps worse than that, I think the euro does seem to have exaggerated divergence in the European Union more than convergence, and that’s particularly been seen in the South-North division, and we’re seeing it again in the debate over the recovery fund with the frugal four against the – its size.

And I think as actually Hans said, I don’t think the recovery fund is – it’s a lot of money, but I don’t think it’s a, sort of, game changer in the way that perhaps some of what you’re – you’ve written about in the paper might be. So, I worry about the euro. I worry about the position of Italy. I worry about the position of Greece. I think that the euro crisis, if you like, is not over yet, and I think, post-COVID, with the debts that countries have accumulated and will continue to accumulate, we may well see a return of the euro crisis in some form or another. And I think that’s a general – going to be a general worry over the whole of the European project. In a sense, the euro hasn’t worked for everybody. It clearly hasn’t worked for Italy, and I would argue it probably hasn’t worked for Italy – for Greece and Portugal, either, and, until that is put right, particularly until Italy gets back on a growth path, the euro is going to be an awkward complication for the whole project.

Then, very – fairly briefly, my other two points. The paper quite rightly draws attention to the fact that only 19 of the EU’s countries are in the euro, it also talks about other bits of the European Union that not everybody is in. I think the way the club is structured and the way that Brussels’ institutions work, they like the idea of a one size fights all, everybody belongs to everything. They never really liked the optouts that Britain has had, and they never liked the ones that Denmark has had, and I think that is increasingly an unrealistic position to take.

The future of Europe will be one in which not all countries participate in everything. Some will not join in defence, some will not join the euro, some will not join all aspects of justice co-operation and so on, and we might get a more deeply integrated centre and a slightly less integrated outer tier in Europe. I don’t find that a problem. I think that’s something that Europe would be well advised to accept, and it has the extra advantage that it may be the best way of dealing with the bits of Europe that are not in the European Union, the Western Balkans, maybe the Caucasus, Ukraine. You know, Europe consists – the European Union consists of 27 countries, but Europe, arguably, consists of more like 45, and it’s always been a bit of a problem for the European Union. What does it do with the countries that don’t fit into the EU structure? And I think a multitier, multispeed Europe is a better idea for how to operate that, and it would also have the advantage of coping with some of the countries in Europe that are finding it more difficult to integrate more rapidly.

And then my last comment on the politics was going to just bring up the subject of Britain, because I do think the issue of what happens to Britain is going to be important for the future of Europe. I mean, on the simplest version, you know, if Brexit turns out to be quite successful economically, I think particularly if it involves a lot more state subsidy and state interference, which is where Boris Johnson seems to be going, I think some countries may say, “Look, we may want to learn from that,” and that would involve relaxing some of the state aid rules, for example. On the more benign side, if Brexit doesn’t work, and I think it probably won’t, I do think that Britain may have done a – more to promote European integration in the European Union than most of the existing members. The mere sight of what’s happened in the last four years has certainly discouraged people from saying, “Maybe it’s time to leave this club.”

But my final thought on it is I do think Britain is a big enough country, with a big enough role, particularly in security and foreign policy, but also, to some extent, in economics, and, indeed, in financial services, that Europe needs to find a way of fitting Britain into the picture. I don’t think – you know, Britain is clearly heading out of the single market, it’s heading out of the Customs Union. I think Europe can operate without Britain, but I think it would be a mistake to, sort of, ignore it, and it would be a mistake for Britain to ignore the European Union. We need each other and we need to find some way of working together.

Thomas Raines

Lots of interesting issues there that you’ve raised. I’m going to just ask people to keep sending in their questions. We’ve got one question in but lots of participants, so please add your questions into the Q&A that I can put to the panel. There’s lots that we – excuse me, there’s lots that we raised there that I’d like to focus on a little bit. One is around the politics of debt, because it seems to me that there’s a couple of different sides to this. One is, you know, the relationship between, you know, sovereign debt in the context of the single currency, but another is about how countries deal with their own debts and deficit, and we saw, you know, after the euro crisis, the politics of deficit reduction being extremely poisonous in different parts of Europe. So, do you think that countries in the EU will take a lesson from the politics of, sort of, the 2012 to 2015 experience and the Greek experience and other things, and pursue debt reduction in a different way, and, you know, pursue the balance between, you know, taxation and – or, you know, a reallocation of the tax burden versus cuts in services and government expenditure, and is that perhaps one way that you deal with the tensions of COVID driving greater divergence within the EU and the eurozone? Anyone be – Hans, do you want to…

Hans Kundnani

Yeah, I mean, I’ve been thinking

Thomas Raines

…come in on that?

Hans Kundnani

…about this, although I’m sure Maria has something to say, and maybe Pepijn does, as well. But, yeah, you see, this is really interesting because it goes to exactly what we were trying to put our finger on, which is the way that there are certain – I mean, often people think of EU policy as being completely unconstrained, and that, you know, member states just choose to make whatever policy they like, but there are ways in which certain policies, and particularly around the euro, are now embedded in, you know, the constitutions of EU member states. And so, this is precisely the, sort of, potential problem that we were trying to put our finger on, which is surely, unless you radically reform the fiscal rules, and you know, I’d love to hear if Maria agrees with this, the eurozone will be forced to go down the same path of austerity, except even more so than it did after 2010.

And so, you know, there’s, sort of, a relatively, sort of, good version of that scenario, which is that because even countries like Germany may now no longer be able to get back within the fiscal rules, they might be more open to rethinking them than before. But the really disastrous scenario is where some member states, perhaps Germany, perhaps the Netherlands, block any reform of the fiscal rules, and then, as I say, you’re forced to go down the austerity route. I just don’t really see any way around that, and, again, I’m puzzled that nobody really seems to be discussing this, what happens to the fiscal rules at the end of the coronavirus crisis.

Thomas Raines

Really interesting, Hans. Maria, you mentioned in your comments, actually, the specific question of maybe it is time, and, although people were talking about this before COVID, COVID can serve as a – sort of, an action-forcing event to review the fiscal framework in which the eurozone operates. Do you think there’s a prospect of that, and what does that tell us perhaps about the long-term strategies to deal with the debt hangover?

Maria Demertzis

Yeah, I mean, I certainly think there is, and, you know, the – Europe was very, very slow. I mean, with – I think there is – I want to say agreement, but there is – kind of, you know, there is an understanding that the austerity is not really the way to go because you’re going to have a numerator, but also a denominator effect, and, you know, I – we’ve seen it. We’ve done it and we’ve seen it, so I think, you know, you need to be really hardcore not to see this. And I think there is a lot of discussion about reforming the rules, even the Fiscal Council at the EU is actually – the EU Fiscal Council is actually advocating for, you know, a revival of this, of these rules to something that is slightly more manageable, in particular at – you know, if you have to, sort of, deal with the stock of debt behind you of – which we are going to have, as a result of the COVID. So, I think there is understanding.

Now, I’m not willing to bet on this, because, you know, the past four years have been horrifically terrible for forecasting, so I’m not going to do it again, but I think there is a lot of discussion about this. I think it’s – Brussels is buzzing with the need for fiscal reform, for reforming the rules, and I know that capitals are, as well. Now, on the issue of debt, and it’s not – you know, Europe isn’t just the one thing, and – you know, and that goes also back to the issue that John raised about the multispeed Europe, you know, and certainly Bruegel has made efforts to talk about various constellations of variation in clubs or, you know, conciliatory circles we called it at the Brexit thing, we called it different names. Just to point out the fact that there isn’t really one thing, and, you know, moving at one speed means we’re not moving, and that, I think – there is an understanding there.

However, there are fears, and I’ll come back to the debt in a minute, but there are fears that, if you go down the route of moving a different speed, you don’t get to choose at what speed you’re going. Somebody else will choose it for you. I think this is the fear that is keeping everybody from some, “Yes, actually, you know, it’s not a good idea to move at that speed.” And, you know, the advantage – as John said, the advantage of having more speed is that it’s going to deal also with enlargement, it’s going to deal also with UK, it’s going to deal also with countries that otherwise become problematic. So, you know, there is a lot of good reasons to be thinking about moving at multiple speeds, but there is a fear, and the time is not right, in my view, for this. So, you know, for a little while longer, we have to, sort of, put that on one side. I hope we don’t do it at the expense of having a good relationship with the UK because I think it’s crucial that the relationship with the UK, for many reasons and not just economic ones, is a good one, and, you know, we can discuss what that means, but it has to be a functional relationship.

So, you know, back to the debt, and, you know, the issue of the debt is not of interest to Germany, it’s not of interest to the Netherlands, it would be of interest to Italy, it would be of interest to Spain, but it’s not going to be much of interest to Greece because most of the debt that Greece has is not marketable, so, you know, just adding a little bit of marketable debt, but Greece actually can handle this now. So, you know, the issue really is Italy, that is the elephant in the room, simply because the debt can get into very dangerous territory, and here comes the issue. Do you want to deal with the problem of Italy now or do you want to deal with it later? Because you’re going to have to deal with it, and that – I mean, this is it. Italy has to do the structural reforms to ensure that it has growth, because it’s not the fiscal problem in the sense of being a fiscal profligate country, Italy’s not that. Italy has a growth problem, you know, you’ve got to find ways of growing. But, you know, if you now force Italy to borrow, you will send Italy to the same, in a year from now. So, you know, I feel, unfortunately, this is the balance of options that we have, and I think some of the decisions that we have to take, in two weeks from now, need to take this in very serious consideration.

Thomas Raines

Thanks very much. At this point, I’d just like to bring in my co-author, Pepijn Bergsen, from the Europe Programme, who’s also here, who just wanted to come in and chip in on this question around debt. Pepijn.

Pepijn Bergsen

Yeah, I just wanted to basically reiterate what Maria was just saying there and, sort of, the risks that are created by the current situation on, sort of, the political side, and basically, combining both what Hans was talking about earlier, in terms of shifting expectations among electorates, following the current crisis, where particularly also, in countries like Italy, will probably see an expectation of much more state intervention in the economy, while at the same time, they’re constrained by not just their debt levels but, of course, also the fiscal rules probably, given that Italy will be hit harder in that regard, even than Germany. Yes, Germany and the Netherlands are also being hit, but, you know, if you – of course, you have to take economic forecasts with a pinch of salt at the moment, but for Italy, we’re looking at a contraction of ten or 12%, for Germany and the Netherlands, we’re talking about six or 8%. So, they’ll experience this crisis, I think, very differently, and that will also play into how much they – or electorates in those countries will want to see change post-crisis.

And so, we now have the recovery fund, but maybe, hopefully, possibly, but that is, you know, 1, 1.5% of GDP in a positive scenario, over three years for Italy, that’s not going to be nearly enough to actually make a dent in that recovery. So, that’s just building, I think, towards the political pressure, and that will build up in those countries, particularly with regard to the EU. One of the reasons why the Germans seem to have made a shift, in terms of a recovery fund, is that they see a fundamental threat to the EU if Italy comes out of this with the kind of economic damage that we’re really talking about at the moment, but this is not enough. So, this – I think this will combine with the things that we’re talking about in the paper, to create quite a big risk post-crisis, even if we get our next generation EU. Yeah, so I think that was just something that I think it is important to take into account. It’s not just about the situation in the next year, it’s about what happens after that, and, sort of, two, three years into the recovery.

Thomas Raines

Thanks, Pepijn.

Pepijn Bergsen

And the issue is ongoing.

Thomas Raines

Important points there. I want to bring in a couple of questions that we’ve had from participants, and the first one is – it’s, kind of, along some of the themes that we’ve talked about, but I think it’s, sort of, asking about, you know, the risk of divergence, but particularly what might be able to be done, in terms of tax policy and labour policy, maybe to support convergence or to support a, sort of, slightly different economic model on that? We talk about some of this in the paper, but I’d be interested, John and Maria, in your perspectives on what you think might be deliverable in Brussels, in terms of addressing – you know, there are big issues of tax policy and tax harmonisation and coherence within the EU, and also questions around, you know, issues of common unemployment insurance and other ideas that have been put out there. So, what do you think might be deliverable, in the current political climate, to support convergence around tax and labour?

John Peet

Well, if I may join in, and I’m warning you, my battery is running down, so I may disappear, sorry.

Thomas Raines

This creates good time discipline for you, John, to get you through this.

John Peet

Quite, you’re very right. I do think, and even in your question, the issue is always going to be about Italy once again, and the problem is that the Italians do feel that the EU and the eurozone is on a course of divergence. The figures that Pepijn just gave us were very revealing of that, not convergence, and they also feel that the northern countries, the frugal four, have benefited hugely from the single market, and, in some cases, acting as tax havens, so they always attack the Netherlands over tax, for example. And I do think that this is an issue the EU has to tackle, and Germany in particular, and, at some point down the road, not obviously now, for political reasons, but at some point down the road, I think they are going to have to talk a bit more about a mutual – some kind of mutual debt instrument, which is, in my view, the only way to deal with Italy. Italy’s problems are not caused by annual fiscal policy, they’re just caused by the hangover, the combination of a hangover of a lot of debt, with close to zero growth, and, until you can solve that problem, I think Italy will be a huge issue for the future of the European Union.

Thomas Raines

Thank you, good and speedy remarks. Maria, did you want to add anything on this question around tax or labour policy?

Maria Demertzis

And giving us the proposal right now, it does have a sense of common debt, even if it’s a one-off. I mean, you know, strictly speaking has been a one-off thing, but, you know, nothing more permanent than temporary measures, right? So – and I think, actually, the critics of instruments of common debt very much worry about this, it’s exactly what they worry about, they don’t want it. But if any of that were to happen and Europe were to develop a – sort of, a common – some common resources, common – their own sources to finance that debt, which, you know, I would put that in the realm of the feasible. Improbable but feasible, I still don’t think that any discussion on tax harmonisation is going to be anytime soon, or I think the tax discussion is such a – it’s at the core of each country’s, you know, perception of sovereignty, that, you know, they’re not going to touch this. At least, that’s my sense of it. I think we will have all resources before we have anything else on, sort of, tax harmonisation.

Thomas Raines

Interesting. Thanks very much, and there’s a question here from Richard Whitman which is, sort of, asking us to connect this question around the, kind of, EU market model with this question of, sort of, political agency. So, I think it’s a really interesting question around – and you began, sort of, Maria, talking about, you know, this question of sovereignty, and there’s a, sort of, debate about European sovereignty and European economic sovereignty and what that might mean in a world of, sort of, competition between the US and China. And then there’s also these, sort of, deeply rooted questions around national sovereignty and what is the preserve of national democracies to determine them, shaped by democratic politics. All of which is to say, and I think this links very much to the question about Italy, that how do you actually deliver significant political change within that current constitutional framework? You know, are the EU institutions capable of adapting to significant shifts? And I’m particularly thinking about the, sort of, treaty change trap, which we talk about in the paper, and John highlighted, and particularly the way that Brexit has probably sharpened that, that is the EU actually capable of the, sort of, reforms that most of you seem to be implying the case of Italy suggests it needs?

John Peet

Well, just quickly on that point, again, I – my answer to that is I don’t think the EU is going to be capable of significant treaty change for the foreseeable future. That doesn’t necessarily mean they can’t adapt. I mean, things like the state aid rules, I think they can simply relax them a bit, and I think they could do the same on the Stability and Growth Pact to some extent, you just relax the way you apply the rules, and you do it slightly informally. But I think if you’re actually talking about, you know, tearing up quite a lot of the structure of competition and the role of the Court of Justice, I don’t think the EU is capable of doing that, I’m afraid, you know, and you get to the point that Hans said, citizens may want a different structure of the EU, but you can’t deliver it.

Thomas Raines

Hans, did you want to come in on this question around, sort of, the – a clash between, sort of, different conceptions of sovereignty and the…

Hans Kundnani

Yeah, I think it’s really…

Thomas Raines

…politics of it?

Hans Kundnani

It’s really interesting how this connects with the, sort of, market state question that we were talking about because, I mean, let me put it like this. It seems to me that a big part of why Europe struggles to be the kind of actor in the world that it aspires to be is precisely because of the political economy model that it’s had for the last 30/40 years, and the way that that’s embedded in EU structures. So, you know, for example, you know, Maria, you mentioned this whole question around European champions, right? I mean, it’s EU competition law that has, to a large extent, prevented the emergence of a – you know, of a – for example, a telecoms company that could compete with Huawei. I mean, I know we’re getting there now with Nokia and Eriksson, but, you know, part of the reason we don’t have that already, and have been vulnerable to Huawei, is precisely because of EU competition law.

Secondly, you know, when this whole discussion around, you know, economic sovereignty in terms of, you know, the secondary impact of US sanctions, for example, you know, and the role of the euro, this aspiration to make the euro a, you know, second global reserve currency after the dollar, and so that we could then use – we could stand up to the US and so on. I mean, again, the reason this hasn’t happened and can’t happen, as far as I can see, is precisely because of the political economy model, particularly the one being driven by Germany. So, I mean, it seems to me there’s all kinds of ways in which the – this political economy model has undermined and weakened Europe globally, you know, in terms of its external relationship.

And I’m afraid I’m with John, that I don’t see how – and even the debate that’s now happening about China and so on, I just don’t see it leading to the kind of fundamental rethink of all of these questions. Not just because of the question of divergence and disagreement between member states, but also because, in a way, one of the things that is really fundamental to the DNA of the EU is that what it does is it creates these rules. And, you know, the idea of sacrificing those rules, in order for the EU to be a more powerful actor in the world, I just think that goes so against the grain of pro-European thinking that I’m rather sceptical that it’ll – that it can happen. In the end, I think the EU – and I think the Brexit – by the way, to link this to Brexit, I think this is what – the way that Brexit has panned out, it illustrates this, is that, in the end, for the EU, defending and sticking to the rules is more important than geopolitics.

Thomas Raines

Hmmm. Maria, you look like you were about to come in, in response to that point.

Maria Demertzis

Yeah, I wanted to know on something, because, I mean, this idea that Europe wants to be a global power, I think I dispute that, in the sense that it’s not really the ambition – I mean, you know, that’s my view, right? It’s not really the ambition to be – to lead in a – sort of, in a global context, as a superpower. I just don’t see that. I think Europe has got a lot more of a soft power when it comes down to that leadership position. So – but the trouble is, however, that by not exerting power, you’re actually losing independence, and I think this is what now the European Union is actually having to do a lot of searching – soul-searching for. You know, if you don’t have digital independence, actually, you are quite threatened, and, you know, Europe is a fundamentally multilateral institution and continent.

We believe – I mean, Europe believes on – sort of, on – in a multilateral context in which everybody can come in around the table and discuss, not so much in, sort of, leading that discussion. However, and this is the big thing, with China emerging, that global rulebook is beginning to shift, and, you know, the – Europe has to think about how do you get to hold the pen, in terms of how we’re going to do discussions from – in the future. This is now much more than motivation for wanting to engage at the global level, rather than the – sort of, the wish to lead in some sort of a powerful way. I think this is the – well, you see it also in the new investment white paper, how do you deal with, you know, hostile takeovers? I mean, this isn’t so much the issue of protecting against losing the first position, the first place, it’s about being able to independently form your own view, pursue [inaudible – 54:47] model and pursue economic model, that we believe is the right one.

So, I think that is a slightly different motivation, in terms of their reaction that you see in the EU. And, yes, I will say, and, actually, one of the interesting things that appear – that really the UK had to deal with in its discussions with the EU in the context of Brexit is, an understanding that EU is very much rule driven. It’s not about, sort of, you know, frameworks for discussion, it’s about rules, and that is just a different way of operating, and I think the UK has found that quite difficult to deal with. But the UK is all about rules because, if you don’t have rules, given that we are all so different, there isn’t much to hold onto, and I think that that’s – that, I think, is an important part of the DNA, as you said, Hans…

Hans Kundnani

I think…

Maria Demertzis

…of…

Hans Kundnani

I think that’s right, but the point I’m trying to make is, I think the rules actually make Europe weaker. The – obviously, the…

Maria Demertzis

That…

Hans Kundnani

…pro-European thinking is that the rules are really important, that’s all we have, and if we…

Maria Demertzis

Yeah.

Hans Kundnani

…compromise the rules, then we have nothing left.

Maria Demertzis

Yeah.

Hans Kundnani

But, actually, I think the rules are making Europe weaker, is my point.

Maria Demertzis

Yeah, I agree with that, and yeah, there’s always a trade-off.

Thomas Raines

So, this is all really interesting. We’re almost just reaching the end of the discussion, but it’s a really nice and, sort of, almost ominous point to finish, which is about this, sort of, very long-term and interesting question for the EU about the conditions of its own internal market and how that fits with this changing global situation and the degree to which the EU can continue to have the, sort of, economic model that it’s had for the last 30 years in the current environment, whether that disadvantages it and actually undermines its attempt to deliver economic sovereignty. And I believe John we’ve lost to a battery incident in West London, so, unfortunately, I can’t thank him in person, but I want to thank everyone else on the panel for their contributions, it’s been a really interesting discussion. Thank you to only a couple of people who asked questions of this audience of more than 50 Chatham House members, so that’s a rarity, but I’ll put it down to the fact that the panel did such a good job interrogating these issues on their own.

The link to the paper is there, we’d love people to read it. We’d love your thoughts and comments on it and it to be part of a discussion and a debate. Maria, in particular, thank you very much for taking the time to join us.

Maria Demertzis

And thank you.

Thomas Raines

Bruegel have been doing some brilliant work, which we drew upon in our paper, so it’s a great resource for understanding the current economic moment. So, thank you for joining us. There’ll be lots more events on this channel in the coming weeks, so stay tuned and have a great evening.

Maria Demertzis

Thank you so much.

Thomas Raines

Bye, bye.