Recovery in Italy and Spain is in our best interests

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We took a gamble, and we lost. But what was it precisely that we lost? The Netherlands found itself arguing, almost by its own small self, that economic support should be made contingent on reforms. On Thursday night, however, the country was put in its place with overwhelming force.

Economists are falling over each other to present complicated constructions such as eurobonds to minimise the risk of abuse. Sandra Phlippen Chief Economist ABN AMRO

It was perhaps naive to think that we could make any sort of fist without the Germans and the British backing us. Instead of admitting this, though, the Dutch cabinet has managed to spin it into “a fine result in the end” about which Finance Minister Wopke Hoekstra could be “very happy”  on Thursday night after a tough battle within the Eurogroup. “We’ve managed to block the eurobonds,” the chorus rings out in The Hague.

A glance at any international newspaper will show a different picture: more than 500 billion euros has been pledged towards emergency relief. Some of it will go to an emergency fund for governments: the ESM, which you will remember as the big gun that was rolled out during the financial crisis. Governments can draw funding from the ESM to help them overcome the direct and indirect impact of the COVID-19 crisis. Essentially, this funding comes with no strings attached, except that the fund is temporary and its spending is restricted to a rather nebulously phrased purpose. This virtual absence of any conditions for tapping into the credit facilities is far from the position that Wopke Hoekstra had championed: he was willing to provide medical support freely, but economic support only in exchange for promises to implement reforms as soon as the crisis is past.

While we can become worked up (or not, as the case may be) about these European decisions, the real cuckoo in the nest has yet to come: the inevitability of a fund to help Europe recover from its lockdown. It will be touch and go: not who will pay and on what terms, but whether all the affected sectors and industries can be given a powerful boost to restart production.

The question is whether we can avoid years of unemployment in the aftermath of the crisis. It would be futile to think that every country in the eurozone can manage perfectly well by itself. If the Netherlands is up and running in no time, but Italy and Spain struggle for another ten years, that will mean ten long years of euro crisis for all of us – assuming that the euro still exists by then.

So it is in our own best interests to help them make a proper economic recovery. Unfortunately, this will be very difficult, given Italy’s huge pile of debt. Economists are falling over each other to present complicated constructions such as eurobonds to minimise the risk of abuse. Personally, I would prefer a simple solution: a one-time or temporary payment, but in the amount of several percent of the GDP, to give those countries a chance to recover. It will be a bitter pill, but the Dutch are smart enough to understand why they need to swallow it.

Every week, Sandra writes a newspaper column for daily newspaper AD (in Dutch only), which can also be read here.

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