Europe’s Financial Response to the COVID-19 Pandemic Has to Be About Democracy

The argument about funding Europe’s relaunch from the COVID crisis is also an argument about democracy — and the answer has to involve more democracy.

The immediate response to the crisis has been rapid, but has also shown the limitations of current structures. In the clearest example, the EU used existing funding mechanisms to get money out quickly, leading to the grotesque spectacle of Hungary’s authoritarian government receiving billions more in financial support than harder-hit Italy. Italians and many others are outraged. Hungary’s hardline Eurosceptics will certainly not give Europe any credit.

Now, the discussion is turning to funding the relaunch, and that promises an argument every bit as difficult as that around the initial response.

Several states favour European debt, issued by all European countries jointly, or by the Commission borrowing against their multiannual budget, the MFF. The argument for doing so is that the COVID crisis is a common one, hitting all countries alike, but not all countries are able to respond in the same way.

If Italy and Greece seek too little money because their debt burdens are already high, the crisis will hit them harder, and the economic division in Europe will be dug that much deeper.

Even if they raise enough, and their debt ratio spikes up to 160% or 180% of GDP, that debt will be on their national books, restraining future action. it’s not hard to imagine some northern European finance minister in 2030 forgetting all the solidarity rhetoric of today, and blaming Italy for its high level of debt.

Other states are strongly opposed to any sort of common debt. During the eurozone crisis at the start of the last decade, the issue was “moral hazard” — if you help countries that are seen to have managed their economy badly, what incentive do they have to reform? For the most part, this sort of judgement has been absent from the debate — no one can be blamed for getting sick. However, lying behind the concerns about shared debt obligations is an issue of democracy.

Any money available would be borrowed on the credit of the Eurozone states or the EU institutions. The states’ governments, who would ultimately be responsible, are rightly thinking about their voters’ attitudes. Dutch voters will not want to throw money over a wall with no idea of what is being done with it on the other side. Italian voters are equally unlikely to accept a foreign government overseeing their public spending in the midst of an economic emergency.

The solution to this double problem is to bring democracy and accountability into the process, at the right scale — the European scale on which the debt will be issued. This can assuage concerns on both sides — Italian voters will see that any oversight is part of an accountable process, and Dutch voters will see that the money is not being gifted to a government that they did not elect.

For approach to work, the right governance mechanisms will need to be developed within the EU institutions. That will be a matter of months, not days. Leaders meeting this Thursday need to make the immediate commitment to providing the money Europe needs, without burdening countries with outsized debts. They should also make a commitment to creating robust democratic governance arrangements for it, and to do so with broad public engagement in how the money to repay the debts will be raised.

The last point is particularly important. One of the main points of debate is whether funding will have to be repaid by the member state that receives it, or whether interest and capital payments would be handled at European level. The Spanish government has proposed a new range of European taxes to pay back interest on the loans.

Some states will be unwilling to create new European taxes, or to be required to pay higher sums into the European budget. There is a risk that the whole relaunch package will break on this concern, which would be a crisis for all of Europe. Why not, instead, undertake a public participation process to understand what trade offs and hard decisions European citizens want to make, how much they want to repay as Europeans and how those taxes should be raised.

As luck would have it, there is a process ready and waiting.

The proposed Conference on the Future of Europe. The leaders should commit to starting it quickly, with an early strand that brings European citizens together to make recommendations on oversight, balance and sources of COVID debt repayment.

Those states that are most wary of common European debt issuance would be able to point to a democratic process, and citizen views, involved in the design of oversight and some of those difficult choices. Those most in need of support would have the confidence that they and their citizens will not have repayment plans imposed on them.

The final decision, of course, will need to rest with the European institutions and national governments. But Europe can learn from the experience of Ireland’s citizen assembly on abortion. That process demonstrated that citizens are able to have radical conversations and reach clear recommendations, even on the most difficult issues. In doing so, they liberate politicians to break seemingly insurmountable barriers. Today, that’s just what Europe needs.