Germany has just taken up the mantle of a six-month rotating Council of Ministers Presidency this past July, in what promises to be a momentous time for Europe. The challenges of the virus, economic collapse, Chinese ambitions and American disarray demand a new cap for the European ship of state. What can we hope to see from this German Presidency, and what can we expect to see from European leaders in light of these challenges?

An Augean Challenge

There are several challenges for the German Presidency which will test Merkel’s mettle, her political alliances and the will of the European population to survive the crisis together or fail separately. The first and most immediate challenge, now overcome, was the unanimous approval of the budget and the Eurobonds that had been proposed to pay for the trillion-euro plus relief and budgetary package.

Calling themselves the “Frugal Four”, Austria, Sweden, Denmark and the Netherlands early on indicated their opposition to Eurobond financing, though not to relief loans. Equal measures of pressure and concessions on budget rebates, though, prevented the unique one “no” vote sufficient to scuttle the whole package. To achieve this, some concessions had to be made on the Hungarian and Polish front, setting aside concerns over the rule of law and political differences.

It was certainly a relief to France and Germany at the start of the process, in spite of other regrets they may have, that a less than communal oriented UK is no longer a voting member. This is not an observation unique to us. In the May 30 edition of the UK weekly The Economist, one of their regular staff writers speculated that even under a Cameron government the UK would have vetoed the budget with Eurobonds and a relief package included. The unwieldiness of unanimous voting in a community of 27, not to mention 28 before the UK left, is clear when major reforms like this one are needed.

The second step for Merkel’s Presidency will be one over which she has no direct control: getting the budget through Parliament. There are issues with research and the Parliament will want to put their own stamp on things, but after compromises agreement is anticipated.

That brings us to the third issue for the six-month German Presidency: institutional reforms. A reform conference on the future of the Union that was scheduled to begin in May has been postponed sine die. The conference is needed and will in all likelihood be rescheduled. Will it be too much for Merkel to handle the pressing needs of the economic and health crisis as well as build consensus around further reform? Or will she see the crisis as an opportunity to push through an ambitious agenda?

Beyond German Leadership: EU Leaders to the Fore

Much of managing a 445 million member community is highly technical in nature. Leadership must demonstrate technical competence as well as personal character. Paying for the huge sums necessary to redress the economic and social issues caused by the virus will be an enduring problem. Christine Lagarde – though attacked for some early faux pas’s in initially addressing the crisis – has the experience and competence as well as character to do what is necessary at the European Central Bank.

No one can ignore the important role Donald Tusk, head of the European People’s Party in the European Parliament, can play. Of Polish (specifically Kashubian) origin, born in a working-class family in Gdansk, Tusk has taken upon himself the task of neutralising the populist political and cultural revolt. This will certainly be key to progress in a European federation, as populist parties have generally been determined nationalists rejecting federalism.

Another emerging leader is the head or the Progressive Alliance of Socialists and Democrats in the EU Parliament, Irate Garcia. She has already been responsible for several important portfolios, notably concerning women and the family, and will continue to play an important role.

Leadership will also emerge from beyond the institutions and from places we might not always expect. George Soros, head of the Open Society Foundation, an NGO founded and financed by him and working on supporting democratic institutions in Eastern Europe is no stranger to European finance. He is also the founder of the Central European University (CEU) recently forced, for having come afoul of the Hungarian Government, to move from Budapest to Vienna. Soros made his fortune, now used philanthropically, as an investor and speculator in currencies, stocks, and bonds. These are markets he knows well and the precise markets which will be needed to finance the Eurobonds. Soros has proposed a novel but not untried idea for low-cost financing of the crisis response: perpetual bonds.

Perpetual Bonds – A Radical Solution?

In 1648, Holland faced an existential threat from rising seawater. A Dutch Water Board issued the first “perpetual” bonds to pay for the building of a massive system of dikes. Now, 350 years later, the bonds are still paying interest to the remaining holders, but they have been forgotten by almost everyone else.

Similar bonds, also known as consols, have been successfully used for financing during several crises since the Dutch issuance. The first British Consols were issued in 1751. In 1927, under Prime Minister Winston Churchill, consols were issued again as partial refunding of the 1917 National War Bonds. The UK has a long history of using consols for financing.

The mechanism is simple: perpetual bonds pay interest but the principal is never repaid. Let’s say an investor buys a 10.000 euro perpetual bond at 1% interest – these bonds have been in the past subscribed to at very low interest rates because they pay in perpetuity. The holder would receive 100 euros per year for the rest of his life, at which time the bonds could be passed to his or her heirs. There is no end to this stream of 100 Euro income to the holder.

Perpetual bonds are less costly in the immediate future, the ideal feature in times of crisis when much money is required. However, they are considerably more expensive in the long run, though for the first 100 years or thereabouts depending on their interest rate they would be less expensive than an equivalent bond.

There are further ways that the costs can be curtailed over time. There is the natural attrition of bonds being lost with death and the transfer of estates. In times of inflation, payments become worth less in real terms naturally reducing their real cost. Costs can further be reduced by offering a buyout of remaining bonds, especially if inflation is such that return to the holders has diminished. This was the case with the 1751 British Consols which were bought out and retired in 2015.

One reason why more countries have not used consol financing is that, in order for the bonds to be subscribed to at a reasonable rate, the credit standing of the country must be good. This feature should appeal to the more frugal countries, as the issuance of such bonds will oblige the EU to keep its finances in order and revenues in line with expenditures. All in all, the proposal seems like an excellent way to provide low-cost Eurobonds in a time of crisis.

Where To From Here?

Spain has already proposed consols to the Council, but the proposal was not fully vetted as it came at a time when there was no agreement to use Eurobonds of any type, whether perpetual or ordinary term bonds. Now that has changed with the French and German proposal and Council approval of mutual Eurobonds backed by the credit of the EU.

The German Presidency will have to face these and many other issues and ideas. A new leadership, if not new leaders, will have to emerge to meet these huge challenges. It is difficult to be a leader today as 24/7 media coverage will eventually show off anyone’s foibles in a poor light. But make no mistake, there are real leaders. The question is not so much whether Europe will find the leaders it needs, nor the solutions to today’s challenges, but whether it will find the followers.

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The Effects Of And Strategies Against The New Coronavirus

The medical aspect of this fight is best left to sources that can make qualified statements. But the dangers of coronavirus are clear: it’s a very contagious disease that is mild in most cases, but extremely threatening to the elderly and people with pre-existing conditions. Besides the lopsided mortality rates, which increase significantly with age, the new coronavirus also causes a very high number of hospitalisations, usually due to severe pneumonia. These hospitalisations greatly exceed what any healthcare system on Earth can handle at any given time – in terms of ICU beds, ventilators, doctors required to staff the units etc. Once hospitals collapse, the mortality rate skyrockets – both because coronavirus patients who could be saved in an ICU are left without medical care, and because people getting injured or sick from other ailments would have no access to medical help. Ultimately, the “do nothing” and “mitigation” strategies would result in millions of people dying. Should you wish to dig into the data, we can warmly recommend this fantastic piece by Tomas Pueio.

This only leaves one workable strategy: suppression. That is to say, extreme social distancing to deprive coronavirus of the opportunity to spread quickly, ideally bringing the number of sick people at any given time below ICU bed capacity. While of a more uncertain impact, this could also place selective pressure on the virus to favour less lethal and less noticeable strains. In order to work, however, suppression requires participation from the whole of society, as well as extensive economic mobilisation. The fight against coronavirus will not be won by doctors alone – the entire world will have to mobilise in order to sustain them.

We are at war. This is not just a metaphor: suppressing a pandemic is functionally very similar to fighting a war. Just like in wartime, there is a physical space of concentrated effort – in this case, hospitals, where loss of life is the norm. Just like during a war, sustaining this physical effort requires a complex logistical supply chain that includes coordinated production and distribution of essential equipment, like ventilators and face masks. The civilian population is also asked to make sacrifices – in this case, by staying indoors and following government directives. There is one major difference between a war and a pandemic, however. During a war, industrial production is maximised. The opposite happens during a pandemic, because the lockdown inevitably results in lower output.

The European Union has introduced a sweeping set of countermeasures – which are a good start, but only a start. As we look into what has already been done, remember that this is just the beginning of a drawn out effort that can only work if we act together. Suppressing coronavirus will change the European Union (and likely the world) in ways we cannot fully anticipate, and the pandemic is expected to trigger the worst economic recession since 1945, further increasing the complexity and fluidity of the situation. This is a world-upending, historical moment of rare magnitude, and we must all rise up to the challenge. Make no mistake: this will be a very long fight – but it’s one we can win together.

What The EU Has Already Done Against Coronavirus

The EU has a checkered record when it comes to dealing with crises. This is a product of its institutional set up and small mandate: the EU is built as a leadership avoidance scheme, which gives every Member State the breathing ground they need to come to bargains with one another, and have confidence that such bargains will be respected. This is great for wider European integration, but terrible in times of crisis, where clear leadership, fast decision-making, and an unequivocal chain of command are essential to response coordination.

However, the EU has learnt its lesson since its abysmal handling of the Euro debt crisis in 2012, where only the help of the Federal Reserve kept the Eurozone away from the abyss, as we detailed here. The measures being undertaken today at a European level are the right ones, and compatible with the small mandate of the Commission, they also display a refreshing dynamism.

First, the EU set up a Corona Response Investment Initiative, freeing up €25 billion that will shore up national healthcare systems, and shield workers and companies from the economic fallout of the suppression measures. It also allocated funds to vaccine research, as well as research of treatments that might make the pandemic more manageable. Additionally, the Commission has triggered the Stability Pact’s General Escape Clause, and greatly relaxed State aid rules. This will allow Member States to pump as much money into the economy as needed in order to fight coronavirus, bail out companies, and shield workers from the economic fallout.

These financial measures are paired with logistical and industrial interventions: the European Commission is coordinating, and massively ramping up, joint industrial production of all essential medical equipment, like face masks and ventilators. It has also forbidden exporting these products to third countries – with the exception of the United Kingdom, which is great news for London, since Britain only possesses 5,000 ventilators and lacks the domestic capacity to build more. Brussels is also setting up a common stockpile of all this essential equipment, to hand out to Member States to make sure that no one runs out. Once treatment and a vaccine are available, these will also be made a part of this common stockpile.

Further, the EU is also moving to ensure that the 300,000 EU nationals currently stuck outside the EU can make it back home safely, by pressuring other countries into keeping a select few airports open for emergency return flights, and ensuring the smooth functioning of the internet at a time of surging traffic through deals with Netflix, YouTube, and others.

However, the real centerpiece of the wider European effort to fight the new coronavirus comes from the ECB. It’s the so called “bazooka”.

Deploying The Bazooka

Following an embarrassing gaffe by Christine Lagarde, and after the global nature of the threat became evident, the European Central Bank introduced the so-called Pandemic Emergency Purchase Programme, also known as PEPP or, informally, the bazooka. This is the single largest measure so far at a European level. It’s an emergency €750 billion package to buy government and  company debt across the Eurozone. What this means in practice is that the ECB will guarantee Member States’ liquidity, so that whatever amount of money they spend to fight coronavirus will be backed up by the might of the ECB. The extension to private debt also means the ECB will be playing a hands-on role in protecting companies and ordinary people from the inevitable economic recession that will result from suppression measures.

There is no time-frame from when this will end, except that it will in any case last to the end of 2020 at a minimum. The timing of the maneuver is up to the ECB’s judgement. Ultimately, the pace of the fight against the pandemic, as well as the stimulus required to kickstart the economy after the outbreak , will determine how long this massive purchase of assets will go on. One thing is certain – this is a watershed in the history of the European Central Bank. Not even Draghi’s famous “whatever it takes” statement extended this far. In all the doom and gloom about the slow progress of European integration, we must also acknowledge that the progress done since 2012 is clearly on show here. This level of interventionism places the ECB much closer to a traditional central bank. There is free talk now of the PEPP helping guarantee jobs and companies as well as currency stability, after all. This may not have formally expanded the the Bank’s mandate, but in practice, it already has.

The Central Banks To The Front

This is a global pandemic, and as such it naturally warrants a global response. We have already witnessed a number of efforts at international cooperation against the new coronavirus, with varying degrees of success. For example, countries are trading doctors and task forces, ventilators and face masks, and the global scientific community is focusing on vaccine research. But what about financial and economic mobilisation?

Here, too, the EU does not operate in a vacuum. The ECB’s bazooka, in particular, is not an isolated measure: it is part of a wider effort by several central banks to guarantee that the global economy will survive the pandemic, and keep the machine of health and research running. The US Federal Reserve, the ECB, and the central banks of Japan, the United Kingdom, Switzerland, and Canada, are coordinating financial action in this respect. The reader might ask, why these central banks in particular, and what it is they are doing exactly. The answer lies in the lessons learnt during the Great Recession of 2008, and the Eurozone debt crisis of 2012. In that occasion, the Federal Reserve provided liquidity to other central banks – and in the latter case, particularly the ECB. These are currency swap lines, so called because the liquidity is denominated in multiple currencies. In effect, the Federal Reserve acted as the lender of last resort for other central banks. This was part of a “backroom deal”, and not widely publicised – American public opinion was vehemently against it, pushing the Obama administration to operate discreetly.

Today, these currency swap lines have been expanded. The same central banks that tried them out in 2008 and 2012 are now leaning on them even more strongly. What consequences this will have on world finance in the long term is hard to foresee, but in the immediate, the strategy is clearer: these measures prevented a heart attack of the world economy both in 2008 and 2012. The hope is that they will do so again.

European Coronabonds

Talk of coronabonds has also greatly intensified over the past week, with Commissioner Gentiloni quite open that the proposal is on the table. Fiscally conservative countries like the Netherlands and Germany have opposed any sort of financial risk-sharing at a EU level for years. They remained so even at the height of the Euro debt crisis in 2012, with Merkel famously saying that risk-sharing would not happen in the EU “for as long as I live”. This opposition to joint bonds has not dissipated, but the reality of the pandemic has significantly weakened it. Merkel is allegedly open to the idea of coronabonds. The Netherlands are still looking for an alternative solution they could table. However the rapid evolution of the pandemic makes the adoption of coronabonds increasingly likely. Italy and Spain are the hardest-hit countries, but almost every Member State is weeks behind them in the curve of contagions. As such, things will get worse at a European level before they get better.

Total War Against The Coronavirus

As should be apparent from everything we have outlined thus far, these are extraordinary measures that might have appeared radical only a short time ago. Now, they have become widely accepted – to varying degrees – as the correct measures to fight the global pandemic. But what happens after the world emerges victorious from the pandemic – however long that might take?

They will likely roll back some of these measures, though perhaps not all the way. Others will remain in place. Every major crisis in the past century or so has resulted in fundamental changes at an institutional and policy level. It was the Great War that first introduced the managerial State we are familiar with in the 21st Century, introducing a level of government intervention in the economy that would have been unthinkable before 1914. The Great Depression fundamentally reshaped the way statesmen thought about world trade, and the Second World War provided the shock that ushered in the contemporary global order. The Great Recession of 2008 has defined early 21st Century political culture, from the rise of the far right to the quasi-institutionalisation of currency swap lines between central banks. It is hard to see how a global pandemic of this magnitude could fail to do the same. It’s a historic moment that will lead to a profoundly changed conception of European institutions and their mandate. For better or for worse, we do not yet know. What we do know is this: there’s no going back.

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