‘Untenable’ Coronavirus has exposed fragility at the heart of the EU, says legal expert
And Barney Reynolds warned Brussels the longer it “kicks the can down the road”, the worse the situation will get. Mr Reynolds, a partner at Shearman and Sterling LLB, was speaking as financial ministers from the EU27 thrashed out a 500 billion euro-financial package of measures aimed at mitigating the pandemic’s economic impact. However, they have so far stopped short of agreeing to issue coronabonds which would allow the burden of debt being shared across the bloc.
Northern European countries including Germany, and particularly the Netherlands, feared such a system would trigger massive public spending in Italy and Spain for which they would be jointly liable.
Mr Reynolds told Express.co.uk: “The eurozone has always required fiscal integration in order for it to work properly.”
The EU has done “80 percent of the work” to create a single currency, he explained, but had left out the part which costs real money, “the bit that matters”, which involves joint and several liability for member state debt – in other words, the aspect which involves spreading financial liabilities across taxpayers throughout the eurozone and equalising within the zone.
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He added: “At some point the status quo becomes untenable.
“The ECB can carry on buying southern member state bonds but at some point it will end up controlling whole economies through its stakes, which then become economies governed by a central bank committee.
“Its purchases of corporate debt are likely to lead to inflation, and risk hyperinflation, since many of those assets will likely turn out to be bad assets, so there will be no way to remove that cash from the system after this is over.”
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Mr Reynolds was highly dubious about the idea of countries in the north of the continent – Germany and the Netherlands for example – agreeing to full mutualisation, whereby the bloc would assume joint responsibility for debts of individual member states.
He said: “It’s a project without sufficient popular acceptance.
“As a result, the current position in which the eurozone has been allowed to pollute the world with massive financial risk, which is then mitigated in the City of London, will continue, and they will continue to run the currency at the expense of investors and savers around the world.
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“The sweetheart trading arrangement under which some eurozone member states’ companies are subsidised internally within the eurozone through the TARGET2 system and also internationally through an artificially low value of the euro (which is the very currency they aren’t ‘paying for’) will continue, causing tensions elsewhere, including in the UK after Brexit.
“It is something the UK will need to counterbalance as part of any UK-EU FTA at the end of this year.”
There may be partial mutualisation of new debt issuances, Mr Reynolds acknowledged, but then the question is what the political ramifications would be in terms of control by northern countries of economic and financial policies in the south – and of course it’s only partial and does not deal with the backlog.
He added: “It’s unlikely to be cost-free and the politics could have spill-over effects not just throughout the EU but for the UK and the rest of the world.
“The kicking-the-can-down the road method is therefore highly dangerous in that it builds up more and more risk, financial and political, for the future, which at some point could prove catastrophic.
“The underlying philosophy seems to be ‘trust us, we’ll figure this out somehow’ – and yet there’s no obvious basis on which to play along with that assertion.”
After the deal was agreed last night, Wopke Hoekstra, the Netherlands’ Finance Minister, proclaimed himself “very satisfied” with the outcome on coronabonds, tweeting that “there won’t be any”.
However, in a clear indication of conflict to come, France’s counterpart Bruno Le Maire suggested some form of mutualisation was inevitable.
He said: “Who’s going to raise the debt? There’s a lot of uncertainty that remains to be determined.
“But I have a firm conviction that the fund will see the light of day and there will be debt raised jointly in a form that remains to be determined.”
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