Will COVID-19 Break Up the EU? (w/ Pedro da Costa and Adam Posen)
PEDRO DA COSTA: That's a perfect segue to Europe, which does have some export dependence. I want to ask you about it in the context of integration in the tug of war between globalization and nationalism that we were talking about earlier. Because of course, we had what, eight years out from Europe, having come to the brink and falling apart, it came back together sloppily. In this moment, it seems to be uniting fairly strongly and even the prospect that it takes a pandemic to have joined euro bonds is tragically ironic, I guess, but what do you make of the future of Europe in this context? ADAM POSEN: It's funny. In 2010 to 2012, which was when I was at Bank of England on the policy committee, that was the worst of the European crisis, especially the euro area crisis within Europe. A number of the issues you raised, I'm glad you raised the magic word nationalism, the evil magic word nationalism. We're part of that. Part of what happened in Europe was, let's call it, lack of solidarity or sympathy. That Northern Europe, Germany, the Netherlands, Finland, Austria is classified as northern for this purpose, were very disdainful of the moral hazard that Southern Europe, Greece, Italy, Portugal, Spain, and initially Ireland was considered Southern, brought this in some sense on themselves, this being the crisis of 2008, 2010. That was wholly unfair, as you've talked about, and we've talked about the past but anyway, so the question was this time around, [?] minutes go, since no one can claim that this crisis was because Italy was the only one to get sick, should there be more solidarity? What we've seen as the limits of solidarity they've ended up as Europe does in a model compromise. The ECB, the European Central Bank, is doing about as well almost as the Fed in terms of providing emergency liquidity, stabilizing markets, ending the financial panic, but that only gets you so far. It's a half empty, half full. You mentioned that Europe seemed to be coming together. My Peterson colleague, Jacob Kierkegaard, has written a piece recently arguing that, yeah, the package that the Europeans have put together beyond the European Central Bank really has some bonds, some spending for COVID response and therefore it is a step forward. There are others of us, myself included, who are more skeptical that if not now, when? If you're not going to give real solidarity and join bonds now, when are you going to do it? The junk bonds is really important. It's important politically and economically, because it's the one thing that keeps cropping up as the weakness of euro area, so you see the wedge, the spread between Italian and German government bonds has stayed around 200 basis points, which is a big number, especially when interest rates are so low. That's because there is no common fiscal capacity. The Netherlands and Germany and others have insisted that even if there are COVID bonds, they have to take the form of traditional loans and not be called mutual bonds and very limited. You end up with this halfway house that doesn't satisfy anybody. It may satisfy the financial markets literally overnight since there's enough money in there, and it certainly will help Italy and others cope, but the northern Europeans say, well, we're reopening. We're Denmark, we're Austria, we're already reopening because we ran it right and we have lots of reserves to pay for things so why did they get our money? Okay, it's an act of charity, we'll give you this little bit of money. The Italians and others in the south are saying, why the hell are we staying in the euro area or the European Union even if in this emergency, we don't do anything right. Oh, by the way, Italy says we've run a primary surplus for the 19 of last 20 years or something so don't talk to us about not running too much debt. We have a bit. I actually am not as sanguine and thrilled about Europe as some of my colleagues are. I hope I'm wrong. PEDRO DA COSTA: Well, it's a very good point and where does this leave Brexit by the way before we come back to the States, because is it on hold, or does it just accelerate a hard Brexit that has no real shape or resolution? ADAM POSEN: Well, again, the economic nationalism as a subset of real nationalism, obviously reared its ugly head very vociferously in Brexit. There's a lot to talk about there, but in terms of what happens from here, the government, the Conservative government, and Boris Johnson has done a number of U-turns, which I welcome particularly in fiscal policy, and now potentially on the NHS now that Boris Johnson, the National Health Service there know that Boris Johnson has been saved by it. Again, I'm not being unsympathetic to him. This isn't cynical if this leads to this damacy conversion that him seeing it in person with his life on the line how foreign nurses and doctors working under harsh conditions National Health Service save lives and that convinces him to change his mind, I'd love him and love Dodd for doing that. Brexit, there can't be a total reversal but there is this ridiculous wing of the euro skeptics, as they're called, who want Brexit to be implemented before yearend, even in the midst of all this. We've already seen that because of the Brexit uncertainty, not in the sense that they don't know what's going to happen but in the sense of the way the British government is handling it, there were three opportunities The Guardian reported for UK to join a joint buying scheme for medical supplies, PPE, personal protective equipment, things like that, like New York is doing with several other states of US and the UK blew it three times. There are very tangible costs that are going ahead with the Brexit mindset brings an implementation right now.