Getting Ready for the 23 April European Council

The European Council will meet by video conference next Thursday.  When it does, the three main items on the agenda will be to approve the recommendations made by the Eurogroup on 9 April, to push forward the conversation about a European Recovery Fund, and to restart and restructure the talks about the upcoming multi-annual financial framework.  In English, that means the conversation will be about money.  Like any conversation about money it will be difficult.  The opportunities for misunderstanding are everywhere.  Now is a good time to sort out some of the issues.


First, think beyond the national state

The problem Europe faces right now is too big for national governments to handle on their own.  That does not mean they won’t try.  On the contrary, the first instinct has been and will continue to be to hunker down and look out for the national interest.  The problem is that going-it-alone is not in the national interest.  Governments that try to go it alone will deliver responses that are underpowered, they will get the timing wrong in relation to what other governments are doing, they will squander their efforts, deepen the economic consequences, and prolong the recovery.  This leads to the paradox that nationalism is on the rise at precisely the moment when it should be most resisted.  As I argue in this piece for East West magazine, if you want to be a real patriot and do what’s right for your country, you are going to have to think beyond the national state.  That will be hard, but it is also essential.

The European Council is the right forum for Europe’s heads of state or government to think more broadly and to reinterpret the national interest in a way that makes countries stronger and governments more efficient.  The same is true for the other institutions of Europe as well.  That is how Europe rescued the nation state, as my colleague Matthias Matthijs points out in the most recent issue of Foreign Affairs.  The challenge is to recognize that not all national governments are in the same position relative to the crisis: some have been hit earlier, some have been hit harder, and some came into this crisis with less time to recover from the last one.  You can only guess that I am talking about Italy and Spain in this context.  Both countries were hit late by the last crisis and early by this one; now both countries are reeling from the combination and looking for unconditional support from their friends and allies in other parts of Europe.

That choice of phrasing is important.  Italy and Spain are looking for support from friends and allies, not from ‘other Member States’.  The problem is not that either country forgot the necktie that is required in the dress code for club dinners or that they don’t have enough money to buy a decent looking jacket.  We are not talking about the rules of comportment.  Right now we are talking about how these countries manage to absorb and react to a potentially mortal blow to their people and their economies.  So far they have both managed to hold things together.  I wrote a lot at the start of the crisis about the courage and resilience of the Italians as they went into a national lockdown before much of the rest of Europe even recognized the significance of the threat.  Much of that writing was directed at an American audience that seemed particularly distracted from the lessons that Italy had to offer.  It has been a tough message to get across either in print or through podcasts on both sides of the Atlantic.  Now the message is less urgent because, tragically, everyone is sharing the same experience.


Second, think big

When faced with a massive common challenge, the only solution is to go big – quickly.  This was clear from the outset, even if it made for uncomfortable conversation.  The problem is that different peoples and different governments have needed time to build up sufficient awareness.  This is a learning process.

As we think big about the response, it is clear that Europeans will need to mobilize the resources of every country, from the strongest to the weakest.  To do so, however, they will have to work together.  That is where the whole debate about coronabonds becomes important.  I have tried to sketch that debate on multiple platforms, starting with a Twitter thread and culminating with an essay on the website for Foreign Affairs.  I even shared a lecture I recorded for the students in my course on European Financial Markets.  In all those formats, I have tried very hard to be fair to both sides in the debate.  I know all too well that this is a politically sensitive issue.

The problem is that Europe simply cannot go big enough in its fiscal response to the crisis until this issue gets addressedThe Eurogroup agreement from 9 April works as a stopgap measure.  Even more important, the Eurogroup showed that it can reach an agreement.  But that agreement is still underpowered in the face of the current crisis.  Europe needs a massive stimulus.  So far, that is not what Europeans are getting.  That is why the upcoming European Council summit is so important.


Third, don’t rely too heavily on the European Central Bank (ECB)

Of course, there are many who will look back at the last crisis and say that this is another situation that the ECB can manage.  Sure, there were some troubling elements in how the ECB first responded to the crisis, but the Governing Council soon found its footing and pulled together and impressive package.  Moreover, the Governing Council is only just learning to use the many instruments it has at its disposal.  If you think the ECB is out of ammunition – or even close to being out of ammunition – think again.

That technical argument is persuasive.  The political implications are more worrying.  The more Europe’s heads of state or government try to push the tough political issues they cannot manage onto the ECB, the more they will inevitably politicize the ECB as an institution.  That was true in the last crisis; it is even more true in the present one.

More important, relying on the ECB means sharing risks across European countries.  The difference is that the risks the ECB has to absorb are greater than the risks that could be channelled through other institutions; those risks are also harder for Europeans to see or understand.  So, relying too heavily on the ECB makes Europe’s challenges worse rather than easier to manage.  It may be good politics, but it is bad policy.

Finally, it is not clear that relying on the ECB is wholly credible in the markets.  That is why Italy got into trouble again last week.  Market participants have to wonder if the political constraints on the ECB and the divisions that are apparent within the Governing Council are not more important than any theoretical limits to the use of monetary policy instruments.  What we should all know from the experience of 2012 is that there is no virtue in fuelling suspicions that one or more countries may ultimately find a good reason to abandon the euro as a common currency.  No matter how unfounded those suspicions may be, they nevertheless have real consequences for the ability of the banks in those countries put at risk by the markets to make sure credit flows to where it is most needed.  Now is a time for confidence and not suspicion.


Fourth, focus on rebuilding confidence

That notion of confidence is as important as it is elusive.  The first goal of the European Council should be to inspire confidence both across the peoples of Europe and among financial market participants.  The agenda should start from that objective and work backwards, because the results will definitely be measured by that standard.

If the European Council delivers a complex technical agreement that needs people like me to explain it to graduate students, Europe’s heads of state and government will have failed in their most important responsibility.  Indeed, Europe’s leaders will have delivered a huge gift to the ‘nationalists’ or ‘sovereigntists’ who care more about controlling their own small slice of Europe than they care about the people who live there.

If the European Council comes out with an agreement that is too small to do the job, then they will only succeed in wasting time and condemning themselves to repeat this conversation.  Buying time at this point is not a successful strategy.  Muddling through comes at too high a cost.

And if the European Council shifts too much responsibility onto the ECB, it will jeopardize the only institution that can hold Europe’s single currency and European financial markets together.  The European Union cannot afford to break the ECB simply because Europe’s heads of state or government cannot find a political agreement.

So as you prepare to interpret what the European Council does on 23 April, you should look for them to keep it simple, to make it compelling, to go bold, and to take responsibility.  I realize that sounds idealistic, but it is clear that Europe’s political leaders have the ability to rise to this occasion.  It is also clear that the institutions they require already exist.  They just need to be used creatively.

The focus for the summit should not be ‘coronabonds or nothing’ any more than it should be ‘national responsibility’ or ‘creating the incentives to prepare better for the next crisis’.  The point should be to inspire confidence and security.  Europe’s leaders can do that if they work together.  That is how European integration rescues the nation state; and it is how Europe’s leaders can rescue the people of Europe.