The bloc is reeling from the impact of the pandemic, and leaders of the EU27 are due to discuss a 500 billion euro package of measures aimed at mitigating some of its impact, with countries in the south particularly badly hit. Specifically, a rift has opened up between Italy, the worst impacted country in Europe, and northern countries such as Germany and the Netherlands, over Rome’s calls for coronabonds, a form of debt mutualisation, which would share the cost across member states rather than individual countries bearing the burden. Mr Reynolds, a partner at Shearman & Sterling LLB, told Express.co.uk the situation marked the culmination of a process which has exposed the monetary union’s contradictions.
He said: “Money and democratic consent are linked in this context.
“What COVID-19 has done is accelerate a moment that was inevitably coming when the member states have to decide whether they’re prepared to combine into a single unit where money is shared to a large degree, in the way that it is in the United States.
“And the existence and construction of the euro forces that moment to happen at some point because each member state is funding itself individually, on a solo basis, raising debts to pay for its citizens’ healthcare, pensions and so on, but some states can’t keep pace and so build up more and more debt.
“Plus the arrangements operate to the benefit of some states and to the detriment of others, giving rise to debt distribution issues.”
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Italy’s PM Giuseppe Conte is pushing for a system of debt mutualisation
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Explaining further, Mr Reynolds added: “There’s a natural ceiling on how much debt each can raise.
“The nature of the euro is it prohibits individual state currency adjustments – unlike where there are different currencies for each country, like the Lira and the Deutsche Mark, which would mean that if the Italians work at one speed with one type of economy and Germany have another, the currency exchange rate adjusts itself automatically in the market to reflect that and make exports cheaper for a more gently-performing economy and allowing for growth through more competitive exports.”
Therefore there was a situation in some eurozone countries, such as Italy where a ceiling had been reached in terms of the amount of debt they could raise from the financial markets to pay for the state.
Mr Reynolds added: “There’s some flex to that because you can have the ECB buying some of the debts, circumventing the need for the markets, and maybe this can carry on for a while. And then you can have funding centrally from the ESM.
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“But there is no magic trick whereby debt is raised but it doesn’t appear on any member state’s balance sheet. It all keeps adding up in one way or another.
“And at some point there has to be a mutualisation – sharing – of liabilities and the burdens across the eurozone as a whole.
“The collision with reality will occur at some point in the not too distant future.
“Countries are going to want to borrow more to rebound from the COVID-19 crisis, to ensure that their citizens continue with a certain livelihood, but there will be a problem in raising that money unless the wealthier eurozone countries assume some form of liability for southern eurozone’s debt-raising.”
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Failure to do would result in marked contrasts in living standards across the bloc, Mr Reynolds warned.
He added: “Every which way you look, unless there is some sort of redistribution of wealth you will have massive disparities.
“And the question is, will people living in the southern eurozone area tolerate that?
“Maybe in the East they will for a little bit longer because they’ve come from a situation where they didn’t expect so much. But that’ll change over time.
“In the southern eurozone, people are expecting certain things in their economy and in terms of standards of living.
“I don’t think if you look at the reaction that’s taking place in Italy, they expect to be impoverished relative to the north – and yet the north doesn’t appear willing to share with the south.
“Some might try to blame the south but, in fact, the whole eurozone structure has massively benefited the north.
“So the south argues, well you’ve had all these benefits, the moral bargain is you now share some of the spoils with us. The north don’t see it like that.”
The net result, Mr Reynolds predicted, was a “very risky situation”, both financially and politically.
He added: “For the whole eurozone and the rest of the world, because it could give rise to massive civil unrest, if not handled properly.
“There will be a break-point for people’s tolerance, perhaps in Italy or Germany.
“The populations have not really agreed to this bargain, and the eurozone may have thought it had another 20 years to think about how to hold things together, but COVID19 has brought that moment forward.
“The costs of dealing with the aftermath of COVID19 are going to be vast.
“So it triggers this awful discussion of sharing, when perhaps people thought they could get away with not having that discussion for quite a few years hence.”