Strict measures to contain the spread of coronavirus over the first quarter of 2020 have disrupted transportation, severely restricted day-to-day life for millions, adversely impacted economic activity, ravaged stocks and more may be the cataclysmic catalyst which pushes the EU over the brink into the financial abyss.

Aware of the clear and present danger, in the first week of April Brussels convened a mass 16-hour meeting of EU member states’ 27 finance ministers to discuss precisely how to deal with the pullulating tumult. By its conclusion, no resolution had been achieved, although attendees had been provided with much cause for worry.

“It appears to be a financial crisis on steroids,” a Danish diplomat reportedly lamented at the conclusion of the all-nighter - a Spanish counterpart said “virtually nothing was achieved” and likened the disconsolate-tone of the summit to the darkest days of the Greek financial crisis. 

Little apparent unity or clarity within the EU has emerged in the weeks since, which is of concern to Dr Giovanni Di Lieto, lecturer in international business and economics at Monash University in Melbourne, Australia.

The academic believes it’s only via greater coordination the EU will increase chances of achieving a slow but steady recovery similar to the aftermath of the 2008 - 2009 global financial crisis - instead though, a lack of coordination and solidarity in the bloc is “poised to break the EU European Union over the next few years, despite stimulus packages pumping trillions of fiat money onto the global markets”.

“Rather than a unified approach, a number of competing stimulus packages are confronting the EU, all with different national agendas. This lack of cohesion means it is increasingly likely the EU single market will fall into depression and stay there for the long run. Germany has taken the lead in the race to stem the post-pandemic economic depression, but aggressive stimulus investment can create further disruptions in the EU down the line, especially as Germany is taking and thus legitimizing unilateral measures,” he says.

End of Globalisation?

Germany’s stimulus package is worth over 1.1 trillion euros, of which over 750 billion is financed by fresh net borrowing - it’s hope the bundle heralds a steady and cheap flow of cash into Germany from southern Europe, and the rest of the world.

While Dr Giovanni believes German-style measures are the “best placed” to mitigate any economic crisis resulting from the pandemic, but he notes Germany is the only major European country in fact able to enact these measures, due to its pre-existing low level of debt to GDP ratio and its very low cost of borrowing in relation to other EU economies.

”Rescuing the European economy depends on the level of policy coordination between the various national and EU-wide interventions. A lack of coordination will lead to an increase in supply and consumer prices, which will eventually impoverish the European middle and working classes, and deliver ominous prospects for pro-EU liberal democratic forces in the next key electoral contests – most poignantly Germany in 2021, France in 2022 and Italy in 2023,” he says.

Indeed, the academic considers a harmonious socioeconomic response to the crisis, which ensures no countries and major business players “ahead of the curve” seize the opportunity to “go rogue” and “prey on more vulnerable economic systems and people” to be of the utmost necessity - for a failure to do so could unleash “destructive forces” leading not merely to widespread civil unrest, but “major military conflicts”.

”Long-term, the knock-on effect [of coronavirus] is a likely regionalization of the world economy and, second, the decoupling of major economic systems from the US. This could possibly spell the end of globalization as we know it unless one geopolitical block manages to quash all the others and impose its own agenda and standards, like the US did in the 1945-2008 period. Europe’s road to recovery or depression is the most formidable stress test of 21st century economic globalization.

Which way Europe goes in the next few years will determine the political vision and socio-economic choices of ours and the next generation,” Dr. Giovanni concludes. Christopher Bovis, professor of international business law at the University of Hull, is also concerned about harmony - for he forecasts individual industries and sectors in the global economy won’t all suffer the crisis equally.

For one, he suggests bigger EU economies will suffer a “dramatic decrease of economic performance” due to “the seizure of their markets”.

“Germany is the economic and financial engine of the EU. Germany’s economic slowdown will affect the planned growth patterns of the EU. It reflects on a vicious circle of not being able as an economy to produce and to export.

When Germany slows down to currently predicted levels, other economies will reflect on such malaise, even worse. France, which has been going through a very difficult and painful reform of its economic and labour frameworks, will face shockwaves of economic turmoil. Its traditional sectors such as construction, transport, hospitality are threatened by the lack of domestic and international demand. This will reflect on manufacturing and the wider service sectors,” he cautions.

Furthermore, the pandemic has exposed significant weaknesses in labour markets, which reflects on the inability of governments to react to disruptions from globalization - for instance, supply chains are now “broken”, as in recent decades globalization has promoted and enforced a variety of relationships and corporate interfacing which relied on “lean production planning”, a “just-in-time philosophy” which reduced inefficiency in the production process, and when the chain is broken or even disrupted slightly production can stop outright. As a result, Bovis predicts growing national autonomy in economic matters - and a fundamental reconsideration of the role of the state the world over.

”When economic peril is insight, the markets panic and the actors of such markets are looking up to governments for survival. Concepts such as nationalization, enhanced government, market intervention, state aid, subsidies which until very recently ran contrary to neo-liberal economic orthodoxy, are becoming the default norm. Until a vaccine is discovered and safely administered, the pandemic will keep suffocating the economies of every state. Until such time, every government will take a different role in economic planning, market performance and managing its human capital,” he suggests.

Lockdown losses

Marc Ostwald, global strategist and chief economist at UK-based ADM Investor Services International, offers a bleak appraisal of the efforts of EU national governments to deal with the crisis so far. In the first quarter of 2020, Eurozone GDP has contracted 3.3 percent year-on-year, which he feels suggests locking down economists promptly simply hasn’t “paid off”.

”This is in so far as the readings from France (-5.8 percent quarter-on-quarter) and Spain (-5.2 percent quarter-on-quarter) understandably put markets on guard for a worse than expected reading, particularly with the Italian reading expected to be the most grim of all. French Consumer Spending numbers (-17.9 percent month-on-month, and 18.1 percent year-on-year) underline services and personal consumption have collapsed. By extension the data also that caution should be the watchword in lifting lockdown restrictions, as is already evident in Germany, which is watching the pick-up in new cases reported in the past few days, before taking any further decisions,” he warns.

Ostwald likewise predicts crafting a pan-EU package to combat the economic effects of the virus will be extremely challenging. The financing of such a package remainds under dispute and further delays could mean any assistance will be ratified and implemented “too little too late”. 

​“The EU once again managed to agree that more needs to be done via way of a package to combat the impact of Covid-19, but also singularly failed on how this would be financed and deployed - the message from the likes of President Macron was it is effectively better not to reach a deal than agree a bad deal, but he was keen to stress the failure is a material existential threat to the future of the EU/Eurozone. There is an obvious acute need for this package to be implemented immediately. Even if some compromise is finally reached, with each passing day the costs will continue to rise and the failure to reach agreement only exacerbates shattered levels of public confidence, and economic nationalism tendencies,” Ostwald continues.

Moreover, whatever benefits Northern European countries may enjoy due to stronger fiscal position prior to the virus outbreak could be worth “little”, he believes, if intra-Eurozone export demand remains weak.

“This was the case during the past decade, and will be the case again, unless a more effective package, involving some form of transfer payments from the strongest to the weakest, is implemented very quickly. The current package does not appear to be likely to come into force until the start of 2021, by which time the damage may be intractable.

There is also a much broader global perspective: the world economy will see some dramatic changes in the aftermath of Covid-19, [creating] a sharp reshaping of supply chains, in most cases seeing processes shortened both geographically and in terms of processes. Those economies in position to innovate and react decisively will be the winners, those that resist change and are mired in ‘old’ thinking how economies are to be managed will pay a heavy price,” he concludes.