The financially well-off members such as Germany and the Netherlands are hesitating to help Italy, Spain and France, where thousands have been killed by Covid-19.
The Covid-19 pandemic that has killed thousands across Europe, mostly in economically distressed Italy, Spain and France, has put to test the solidarity of the European Union like never before.
European leaders are bickering over who would foot the bill for the funds that need to be raised to provide much-needed resources to overworked hospitals and benefits to those who have lost their jobs.
At the heart of the issue is the indifference of the financially prosperous northern European nations of Germany, Netherlands and Austria towards the plight of their southern neighbours.
Italy, Spain, France, and others want to issue so-called corona bonds, which is essentially a debt that can be collectively guaranteed by the block.
This makes sense for countries such as Italy, which has to pay high interest rates if it borrows money on its own because of its high debt and concerns over its ability to pay.
“The image that Italians have of the Netherlands has been drastically polluted in just a few days,” former Italian prime minister Enrico Letta told Dutch newspaper De Volkskrant.
“And not just in Italy … Look at the reactions in Portugal and Spain. They are surprised, severely disappointed reactions. Nobody expected that the Netherlands, one of the founders of the European Union, would behave like this at just such a moment,” he added.
German and Dutch leaders have drawn a widespread backlash for what many see as their insensitive behaviour at a time when Europe needs cooperation to fight the pandemic.
Wopke Hoekstra, the Dutch Finance Minister, was criticised by the Portuguese Prime Minister Antonio Costo for questioning why other countries were not as financially prepared as the Netherlands to deal with the fallout of the coronavirus.
German Chancellor Angela Merkel shot down the idea of a mutual debt instrument in a virtual meeting of European leaders last week.
"From the German side and from other sides, we said that this was not the view of all member states,” she said.
Berlin takes pride in its austerity and low debt-to-GDP ratio. But experts say the present economic crisis is not a result of wasteful spending on part of Italy or Spain but a pandemic that’s not going to spare anyone.
In an open letter, seven top economists from Germany and Austria said it was high time to take joint action.
“In the past, European states have assisted one another time and again when faced with serious economic crises. The European Community issued a Community Bond to combat the consequences of the 1974 oil crisis, for example,” they said, proposing that a debt with a liability shared by members of the Eurozone was needed.
“Now, once more, the time for European solidarity and risk-sharing is upon us.”
They have asked for a bond issue in excess of one trillion euros.
The European Central Bank (ECB) has introduced a 750 billion euro stimulus package, which includes the purchase of government bonds. But that’s not enough as the countries might need much more in the coming months.
The European Commission has also removed limits on how much a member country can borrow. Obviously, it works only if creditors are willing to lend them the money at acceptable interest rates.
But there are concerns that countries like Italy, where debt is 130 percent greater than its GDP, could become a target of speculators.
Germany and the Netherlands are proposing that instead of the corona bonds, the European Stability Mechanism (ESM) should be used to help the struggling EU members.
Established in 2012, ESM has the capacity to give more than 400 billion euros in loans. But those funds come with certain conditions and limits on how much a country can borrow.