COVID Clean-Up
Carson Rayhill
Fighting for a common European good has been the long-time mission of the EU, but this mission has occasionally been deterred by competing for national interests and hegemony. With an impending debt crisis from the COVID-19 outbreak, the EU is once again finding it difficult to create a multi-lateral solution to avert a looming financial crisis.
It has been a long-time goal of the EU to create a European capital markets union through which there would be a single European market for capital that would be competitive on the global stage. Such a market, would, in effect, make it easier for capital investments and savings to flow across the EU. It would also bolster a more resilient economy that could withstand the effects of Brexit and act as a catalyst in a post-COVID recovery. The idea of a capital markets union was first promoted by the former president of the European Commission, Jean-Claude Junker in 2014 in an effort to integrate isolated European markets by the end of 2019.¹ Since then, however, efforts to create the union have stalled due to the rise of political discord among member nations. In addition, an increase of economic growth in major Eurozone countries such as Germany and Austria has led to reluctance in programs that could force such larger economic powers to bail out countries such as Spain, Italy, and Greece who generally accumulate more failing loans during times of economic trouble.
Such fears, especially during the economic aftermath of the COVID-19 pandemic are not unfounded. Countries like Italy and Greece, which traditionally see higher rates of loan defaults during recessions, have been hit disproportionately harder by the pandemic.² This further exacerbates the loan problem in such countries. Because policies regarding debt differ so greatly from country to country, risk-sharing programs and capital market unions are hard to garner support for, especially in the uncertainty of a pandemic. Consequently, Eurobonds, or bonds issued jointly by all EU members, for example, only gained support in July of 2020, when European countries were strapped for cash during the rollout of COVID-19 stimulus packages.³
The European Central Bank has offered a grim outlook on the European loan situation. In a possible, yet extreme scenario, banks in the EU could face up to €1.4 trillion ($1.7 trillion) in bad loans as Europe recently saw its first quarterly increase in defaulting loans in years due to the COVID-19 pandemic.⁴ One solution to increasing loan defaults has been the creation of “bad banks”, or institutions, often government-led, that buy up failing loans from other banks, allowing them to empty their balance sheet and start lending again. In the case of the EU, countries like Germany and Austria argue they would end up paying a disproportionate amount for these bad banks and their failing loans.
In the past, bad banks have been used, specifically, during the Great Recession to quickly bail out banks and kickstart the economy. Such methods of buying off bad loans are one of the ways that the US saw such a speedy recovery after the 2008 financial crisis, while the EU held off, and their banks struggled to overcome the faulty loans.⁵
Although just like the idea of a capital market union, European countries are wary of forming one centralized bad bank, the EU recently announced that it would support the creation of bad banks within individual member nations, and would help create a Europe-wide database to track defaulting loans.⁶ While a central bad bank would be costly and make it hard to reconcile national differences among loan policies, the hope is that the EU will be able to effectively help member nations create bad banks and facilitate the exchange of financial information among them.
Leaders of the EU have long had a goal of a consolidated European financial system. These leaders should heed the words of former Chicago Mayor Rahm Emanuel, when he said, “never let a serious crisis go to waste”. The Great Recession, the Greek government-debt crisis, and now the COVID-19 pandemic, have all served as financial crises that could have been the impetus for the creation of a consolidated market. For many observers, however, it seems as if the train has left the station. Differences in fiscal policy and laws, an increase in the political division, as well as a global rise in populism, will continue to make it hard to form any form of a centralized financial institution within the EU. Until larger countries are willing to swallow the financial burden or smaller countries can clean up their fiscal policy, European leaders will continue to be confounded during times of financial crisis, especially now, as they await the clean-up of the incoming COVID-19 debt-avalanche.