For the last decade Germany and the northern creditor bloc have done just enough in each euro crisis to avert a collective revolt by Club Med debtors.
Action was always too late - and too little to overcome the Original Sin of the European monetary union construction - but nevertheless sufficient to head off financial Götterdämmerung. The euro remained an orphan currency with no fiscal sibling. The European Central Bank was each time left to do the dirty work and find plausible ways to skirt the EU treaty law.
"Pandemonia" has brought matters to a head. Emotions have become explosive. It is no longer viable - economically or politically - to keep buying time by piling more debt on southern European states already on the threshold of runaway debt trajectories. The momentous issue of fiscal union has to be addressed once and for all.
“The Italians and Spanish will not forgive Europe and we Germans for a hundred years if we leave them in the lurch, and that is exactly what we are now doing,” wrote ex-vice chancellors Sigmar Gabriel and Joschka Fischer in Tagesspiegel.
They invoked the Berlin Airlift of 1948 and the US Marshall Plan, but they also went a crucial step further. The southern states cannot afford to rebuild their economies after the economic holocaust of Covid-19 by raising debt on their own balance sheets. There must be joint debt issuance and debt forgiveness, along the lines of the London Conference in 1953 when half of Germany’s foreign loans were written off - for the good of all.
Unicredit’s latest damage report - “the mother of all recessions” - says eurozone GDP is likely to contract by 13pc over 2020 as a whole (Goldman Sachs says it could be minus 16pc) and by even more in the South. This will send public debt ratios spiraling up to Japanese levels, both through double-digit budget deficits and through the denominator effect of a shrinking base. But these countries are nothing like Japan.
Italy will jump by 33 percentage points to 167pc of GDP, Portugal to 146pc, Greece 219pc (disaster), Spain 126pc, and France 123pc. Some of this will unwind next year if there is a V-shaped recovery. But what happens if Europe goes into on-and-off lockdowns or a second wave? What if Italy is forced to swallow loan guarantees - nearing 50pc of GDP after the latest roll of the dice this week - and has to nationalise banks.
We can argue over whether Italy’s levels are beyond the point of no return for a sub-sovereign borrower with no monetary levers. Markets are taking matters into their own hands. Italian risk spreads traded this morning at 218 basis points over German Bunds despite massive, Italo-centric, front-loaded, purchases of Italian debt by the ECB since late March.
It means that the symmetric shock of a virus beyond any country’s control has turned into asymmetric economic shock for different states, hitting the most vulnerable harder than the creditor core, and further widening the North-South gap.
It rubs salt into Italy’s raw political wound. No EU state responded after Rome invoked the EU’s solidarity mechanism and requested emergency medical kit in the crucial early days. When the vice-president of parliament’s lower house tore down the EU flag in his office last week - in breach of rules - council after council followed spontaneously from Liguria, to Tuscany, and Abruzzo. They may be Rightwing mayors from the Lega or Brothers of Italy. But the Right is the government-in-waiting riding near 50pc in the polls.
What was the response of Eurogroup hardliners to this latterday Risorgimento? After sixteen hours of deadlock until five in the morning it offered the debtors more debt - the Greek template from 2010. These loans have to be repaid later.
Fabio Balboni from HSBC says the Stability Pact may have been suspended for now but deficit rules will snap back later. The Fiscal Compact will return with a vengeance. Italy will have to retrench to cut its debt (1/20th each year for the chunk over 60pc of GDP). It is a Sisyphean task.
The ECB can keep buying Italian bonds but can it really do "QE forever" against the vehement protest of key northern governors (as it is now doing, in contrast to ‘do whatever it takes’ in 2012)? The IFO Institute says the Bundesbank may one day have to suspend target2 payments the ECB system to protect its own solvency.
The Eurogroup dodged the idea of "coronabonds", although they will have another crack on Thursday. The €500bn package includes €100bn in credit for Kurzarbeit jobless schemes and above all loans up to 2pc of each country’s GDP from the EU bailout fund (the European Stability Mechanism) - and even for this the Dutch are insisting on stigma conditions that no Italian government could accept. The money can be used only to fight Covid-19 and recipients must clean up their public accounts.
“It’s a disgrace for the Eurogroup and for Europe,” exploded France’s finance minister Bruno Le Maire. “While we are counting thousands of deaths, the finance ministers play with words and adjectives. We’re going to be judged severely by the markets and by our own populations.”
France, Italy, and Spain have formed a united "Latin Front", something that never happened in the 2011-2012 debt crisis. They are demanding a post-Covid recovery plan funded by joint debt issuance on maturities up to 20 years to relaunch Europe and prevent years of economic hysteresis in the South. This of course crosses the Rubicon. The EU becomes a different animal; that is the whole point.
The French are right on one level, but they are also using the emotions of Covid-19 to bounce Germany into fiscal union, so far without success. They face the inflexible legalism of Wolfgang Schauble, Dr No of the austerity era and now president of the German Bundestag, the ultimate arbiter of what will fly in Euroland. He too is right on another level. That is the tragedy of the infernal EMU project. Everybody is right.
Dr Schauble says it is a dangerous distraction to call for new instruments that require a EU treaty change, and would come too late to make any difference in this pandemic. “Even in a crisis, you have to behave correctly. You have to respect parliamentary democracy and the rule of law. Germans have a constitution that tells us what is permissible or not,” he said.
Germany’s top court has already ruled that joint eurobonds violate Germany’s Basic Law. They eviscerate the Bundestag by alienating powers of tax and spend - the lifeblood of parliaments - to a pan-EU body beyond legislative oversight. No German, Dutch, Austrian, or Finnish voters ever agreed to this. And yet, if Germany sticks to its guns, it risks the death of the euro, and the single market, and the whole post-War European experiment.
Italy’s premier says Europe will lose its “raison d’etre” if it fails to come through with anything beyond loans on insulting Dutch terms in the greatest peace-time shock for a hundred years or more. Why should Italy continue to give up the sovereign tools of self-defence if the EU will not act?
The Lega’s Matteo Salvini has fleshed out his version on the new Italy First Agenda. Denouncing the ESM as Trojan Horse for a troika regime under the EU commissars, he proposed drawing on the €5 trillion of Italian domestic savings to fund recovery.
“I would issue 'Italian pride' bonds to avoid ending up like Greece. I don’t trust loans from the EU. They are sharks,” he said. The ‘mini-bot’ parallel currency is back.
Joschka Fischer and Sigmar Gabriel warn that Europe will “break apart” and surrender its future to “far-right extremists” if it does not meet the challenge of Covid-19. That is the language of the establishment Left of course. You could just as fairly call eurosceptics defenders of the democratic nation state against Monnet-method scofflaws.
But the implication is the same. The years of austerity overkill and mass unemployment left deep scars and an abiding distrust of the EU elites across southern Europe. Euroscepticism went into remission during the QE-driven recovery but it remained festering below the surface waiting for the next crisis.
Europe’s leaders will no doubt come up with a fudge over the coming days, concocting some sort of hybrid debt security to blow smoke and buy time. Whether they can get any deal through their own parliaments at home is another matter. The political geometry of Europe is becoming ever more treacherous.
The fundamental question - genuine federation or reversion to post-euro sovereignty? - must be resolved one way or another before this pandemic is over The EU project can survive one economic depression in the blighted South. It cannot survive two.