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Covid-19 could bring an end to Maastricht criteria

The current pandemic has laid bare the need to inject flexibility into the EU’s financial framework, writes François Le Goff.

State interventions in the economy have made a dramatic comeback in response to the coronavirus pandemic, just over ten years after the huge bailouts and re-nationalisations of the global financial crisis. The size of the fiscal packages announced to minimise the impact of the severe restrictions put in place across Europe is astonishing. And these rescue plans come at a time of already high levels of public debts incurred following the 2008 crisis.

This forced the EU to temporarily suspend the Maastricht convergence criteria obliging Member States to have a deficit of no more than 3% of GDP. The activation of the so-called general escape clause was of course designed to cope with external shocks like Covid-19. But given the seriousness of the present situation – forecast to cause the deepest recession since the 1930s – it remains to be seen whether the activation of this clause will really be temporary. The sovereign debt crisis of 2010-11 had already brought the Euro to the brink of collapse. Will the Eurozone be able to weather this storm?

Longstanding critics of the 1992 Maastricht Treaty see the Covid-19 crisis as further evidence that it was ill-conceived and that the Economic and Monetary Union’s convergence rules are unworkable. At the opposite end of the European spectrum, a group led by President Macron is pushing for the mutualisation of national debt in the form of ‘corona bonds’, invoking the need for necessary European solidarity.

The EU is now better equipped to deal with major economic shocks than it previously was. Banks have more capital and liquidity and the European Stability Mechanism (ESM) is there to support them. The European Central Bank is also going to partially absorb the impact through its bond-buying programme. But public finances are nonetheless expected to significantly deteriorate in the coming months and some degree of austerity is anticipated.

Although it will be hard to avoid it, European governments are going to be under enormous pressure to resist austerity. There is considerable austerity fatigue among Europeans after years of higher taxes and cuts to public spending. Last year’s Gilets Jaunes protests in France revealed large scale and deep-rooted discontent within French society. Another decade of fiscal discipline will therefore not be tolerated. Politically, it would be a major risk for Emmanuel Macron as the 2022 presidential election approaches and open a boulevard for a far-right power grab. The rest of the continent would also fall further under the spell of populism with devastating consequences for European stability and prosperity.

One decisive factor will be whether Germany is going to adjust to this new reality. As leader of the ‘Frugal Four’ group of countries insisting on fiscal discipline, it once again voiced its opposition to the mutualisation of European debt during EU discussions on the ‘corona bonds’ proposal last month. But Germany is no longer in the strong position that it was during the sovereign debt crisis and Greek bailout negotiations. Its economy was already slowing down long before the pandemic and it was forced to abandon its sacrosanct ‘Schwarze Null’ debt policy in February.

A sign of openness came in a joint article signed by the German foreign affairs and finance ministers Heiko Maas and Olaf Scholz and published on 6 April in five national newspapers. In a reassuring tone, the ministers promised there would be no “rerun of the austerity policy that followed the financial crisis”. Instead of ‘corona bonds’, they propose using the ESM to give struggling countries the liquidity they need. No troika, inspectors or reform programme attached, they insist.

The German proposal will no doubt be received positively by Member States. Without solutions like an ESM adjustment or ‘corona bonds’, the days of the Maastricht convergence criteria might be numbered. Unless Maastricht itself is overhauled to establish a nationally differentiated set of convergence criteria as advocated by some economists. Each of these options would inject much needed flexibility in the EU’s financial framework. Whatever course of action is decided in the end, the Covid-19 pandemic could finally put an end to years of debate between France and Germany over how to further consolidate the Economic and Monetary Union.

François Le Goff is General Secretary of the Club of Three. The views and opinions expressed in this article are personal. 

Published in April 2020