COVID-19 threatens to fragment the EU further

Subject

Euro-area unity.

Significance

A serious divergence has emerged between northern and southern EU states over how to respond to the economic impact of COVID-19. At least nine mainly southern members want a consolidated euro-area fiscal response through the issuance of Eurobonds -- a shared debt instrument -- but they face strong opposition from Germany and the Netherlands in particular, who fear they may have to underwrite the debts of poorer countries. Failure to resolve this dispute could result in a euro-area crisis and undermine broader EU unity.

Impacts

• Eurobonds should lower the spread between Italian and German bonds as they would make Italy’s public finances more easily sustainable.
• A Eurobond issuance could slow the rise of populists in some poorer countries by giving governments greater capacity to deal with COVID-19.
• A deeper and longer-term economic crisis caused by COVID-19 could expose Europe further to influence from Russia and China.