Rift fears as eurozone bailout fund is sunk

Linda J. Dodson

The eurozone’s emergency plan to fight Covid-19 has unravelled within days. Italy’s prime minister has rejected the central element of the €540bn (£470bn) package as a “trap”. 

No Italian leader in the current febrile mood could accept it and survive for long. The country’s parliament would in any case reject the terms. 

The minimalist array of loans – unwisely sold by Eurogroup finance ministers last week as a historic breakthrough – scarcely moves the macroeconomic needle. “The deal is an admission of European inadequacy,” said professor Adam Tooze, of Columbia University.

The plan eschews joint debt issuance and amounts to extra debt foisted on states already at the outer boundaries of debt sustainability, pushing them further into a “bad equilibrium”. 

Jean-Paul Fitoussi, of Science Po in Paris, says the package amounts to “collective suicide” in the face of a colossal economic shock that demands a complete shift of gears. “If there is no real mutualisation of debt, we will either slide further underwater, or take the inevitable politically incorrect step and say, ‘Enough is enough, let’s get out’,” he said.

Above all, it misjudges the simmering anger in Italy. The mayor of Stazzema in Tuscany has written to German chancellor Angela Merkel with a pointed reference to “history” and more than a hint of emotional blackmail. “The next victim of Covid-19 will be Europe unless there is more solidarity between states,” he said.

Whatever artificial unity was achieved – or claimed – after last week’s tense marathon sessions did not last long. Giuseppe Conte, Italy’s premier, has in effect repudiated the deal agreed by his own finance minister and is again vowing that his country will never accept the EU bailout fund (ESM). The fund is the core component of the package. But it is also toxic in Italy, widely deemed to be a tool of coercion and a Trojan Horse for a Troika regime under EU commissars.

In a fiery speech over the weekend, Mr Conte vowed to block next week’s video-summit of European leaders unless they agree to the huge step of debt mutualisation, a constitutional change in the nature of the European project. “We will fight for eurobonds,” he said. “The ESM is a totally inadequate and improper instrument for the emergency we are facing.”

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