'Moment of truth' for EU as 'sinners' in the south bid to change narrative around Eurobonds

The result of this meeting may well be a defining moment for the future of the EU itself. Indeed, Emmanuel Macron, France's president, has called it Europe's "moment of truth".

Continuing disagreement has not only limited Europe's response but provoked unprecedented levels of anti-EU sentiment and reinvigorated Eurosceptic political parties.

So why is the EU having such a hard time reaching consensus?

A typical government response to the economic fallout of the pandemic involves fiscal policy measures - governments employ their power to tax, spend and borrow to stimulate the economy. The EU is different. It has many of the trappings of a nation state, including a currency, a central bank and various regulatory and legal powers. But EU leaders do not have the ability to directly tax citizens or to jointly issue European debt, or 'Eurobonds'.

In the US, even a highly polarised Congress quickly passed a $2trn (€1.84trn) stimulus package, backed by the knowledge investors would buy up US Treasury bonds. The EU simply couldn't do this as it operates on a surprisingly tiny budget funded by its members.

Germany and the Netherlands have suggested EU member countries in trouble should use the European Stability Mechanism (ESM), but ESM bailout loans come with conditions, which make them politically toxic in countries such as Spain and Italy.

Several European leaders have suggested the EU should be able to issue joint Eurobonds, or "coronabonds", to tackle the crisis. Under this proposal, European leaders would set up a new EU institution which would directly borrow money in financial markets, with all EU members contributing a minimum amount of initial capital. Every EU government would then commit itself to guarantee the value of that institution's debt, which would secure the bonds' AAA rating.

Unlike ESM loans, which are usually subject to conditions, this type of Eurobond would be a permanent mechanism of EU strength and solidarity across its members. The European Central Bank is already effectively mutualising EU countries' sovereign debt through its Pandemic Emergency Purchasing Programme (PEPP), in which it has committed to buy up to €750bn of EU members' sovereign bonds until the end of the year. But, by doing so, the ECB is stretching its institutional mandate.

So why have EU members so far refused to give political support to an official Eurobond? Part of the answer is that some political elites in wealthier northern EU members see Eurobonds as politically unacceptable.

After the 2008 global financial crisis, financial markets attacked the national debts of some EU members, particularly Greece, Ireland, Portugal, Spain and Italy. Then, as now, some countries called for major institutional reforms to include Eurobonds. But Germany, the EU's most powerful creditor nation, vetoed these proposals with the support of the Netherlands, Austria and Finland.

Our research showed that, even though lender nations such as Germany might benefit from such reforms, the debate was constructed by neo-liberal economists, market-oriented think-tanks, right-leaning media and conservative party leaders in ways that made Eurobonds political poison in the north.

This approach framed the politics of Eurobonds as a contest between profligate southern "sinner" nations, which wasted their money, and thrifty northern "saints".

Under this narrative, the appropriate solution to debt problems was to slash public spending and adhere to strict fiscal rules, rather than build a robust fiscal system and financial union.

The leaders of Europe's "frugal four" - Germany, the Netherlands, Austria and Finland - have continued to double down on the "saints and sinners" narrative during the 2020 pandemic crisis.

Back in 2017, the Dutch finance minister famously suggested Greeks and Italians had squandered all their money on women and booze.

A few weeks ago, the current Dutch finance minister, Wopke Hoekstra, infuriated southern leaders when he argued Eurobonds risked undermining Mediterranean countries' "incentives for sensible policy".

Sociologists have a term for widely held beliefs which people accept as taken-for-granted realities: social facts. The frame of northern saints and southern sinners has taken hold within Europe over the past decade as a sort of social fact, despite its questionable reality. And it has helped build a political barrier to the creation of Eurobonds and to forward movement in the process of European integration.

On the eve of this week's summit, Mr Macron has been attempting to reshape the political frame around Eurobonds and claims he is slowly bringing along his Dutch and German counterparts. Today we will find out whether he and his fellow southern sinners can convince German Chancellor Angela Merkel and other leaders to back away from this north-south divide in the interest of broader European stability and growth.

Mr Macron argues France made a historic mistake in 1919 by insisting Germany had to pay reparations for World War I, as Germans know all too well. We will soon see whether he can persuade northern European leaders not to make the southern European states pay all of the huge political, economic and social costs incurred during this crisis, but to create a Eurobond to jointly address Europe's woes. (© Washington Post)

Kathleen McNamara is professor of government and foreign service at Georgetown University