In July 2020, EU member states agreed on a recovery fund of 750 billion euros (about 890 billion dollars) to mitigate the economic fallout of the coronavirus pandemic across Europe. This program was lauded as a historic step and as the EU’s “Hamiltonian moment,” according to German Vice Chancellor Olaf Scholz. This was an allusion to the first U.S. secretary of the treasury’s 1790 deal to make the American colonies’ individual debts the federal government’s joint responsibility.

The hope is that EU leaders will sign off on the recovery package in the coming days so that it can be distributed in early 2021. But it may not be that easy. Hungary, supported by Poland—two countries that have been undermining the rule of law—is threatening to veto it. The fund’s distribution is tied to recipient countries’ track record on upholding the rule of law.

That's one impediment, but there is another. What if the EU recovery plan fails to provide the much hoped-for economic and financial relief, especially against the backdrop of a seemingly even stronger second wave of the pandemic? European economies would enter free fall, which could in turn provide fertile ground for the return of populist parties in key EU member states.

As experts have noted, the success of the recovery fund will depend on three factors: the size, the speed with which the money is distributed, and the extent to which the financial support incentivizes member states to tackle structural reforms.

The economic fates of recipient countries can only be changed if the EU gets these three conditions right. This applies in particular to member states in Southern Europe that were already disproportionally affected by the pandemic’s first wave. These countries could suffer significantly larger economic recessions than others, which would compound existing grievances about economic inequalities.

What Might a Worst-Case Scenario Be?

Liana Fix
Fix is the program director for international affairs at the Körber-Stiftung. Prior to this, she was a doctoral fellow at the German Institute for International and Security Affairs (SWP) with a special focus on Germany’s role in Europe, Russian foreign policy, and the South Caucasus.

This question of worst-case planning was at the heart of this year’s Körber Policy Game, which took place in cooperation with Carnegie Europe in July 2020. Four country teams of senior experts and government officials from France, Germany, the Netherlands, and Spain participated. They discussed a fictional scenario that foresaw an unprecedented economic depression, affecting especially Southern Europeans and the political ascent of right-wing populists in Italy and France. How would other member states react? What kind of concessions would they be willing to make to safeguard the European project and the single market? Which coalitions would member states build?

The results exposed sharp divisions on the question of whether to keep member states that are governed by populists in the EU at all costs—and a worrisome preference for muddling through and riding out the crisis in the hope that the storm will pass.

What If Italy Threatened to Leave?

The first part of the scenario foresaw early elections in Italy in 2021, resulting in a right-wing coalition led by the party known as Lega and former deputy prime minister Matteo Salvini. In this hypothetical scenario, Salvini initiates and wins a consultative referendum on his country’s exit from the EU, only to then threaten to implement the result unless the EU agrees to his demands: fiscal transfers to Southern Europe, unlimited debt mutualization with no strings attached, and redistribution of refugees.

Theresa Kirch
Kirch is a programme manager for international affairs at Körber-Stiftung, where she is responsible for implementing the Körber Policy Games and the Berlin Foreign Policy Forum, Berlin’s most important annual conference on foreign policy.

The four country teams discussed whether, in light of these demands, Italy should be kept in the EU at all costs or whether there was a breaking point when an Italian exit would be less harmful than giving in to Italian blackmail. Would Salvini ever be satisfied? For the German team, a fully fledged debt mutualization was unthinkable without a proper governance structure. To avoid rewarding populists, the German team proposed a limit to the concessions that EU members should offer. In contrast, the French team warned that an Italian exit would spell the end of the European project, and therefore should be prevented at all costs. Unlike the UK, Italy is a founding member and part of the eurozone and the Schengen area. Italy’s exit would be unthinkable from a French perspective, not least because the steps taken to avoid such an exit would spill over to French domestic politics and provoke a backlash.

But other participants completely disagreed. The Dutch team also feared populist spillovers but drew a different conclusion: a clear no to any concessions or negotiations with Italy to maintain and preserve the integrity of the EU and the eurozone. Otherwise, the Dutch team’s thinking went, populist parties would flourish everywhere—and a Dutch exit would come at even higher costs than an Italian one. The Spanish team suggested finding a way to keep the EU and eurozone together by finding a compromise. One concrete proposal that came up was to enhance the size of the rescue fund and prolong its duration, combined with strict accountability measures. “Let’s not dream of solidarity,” urged one of the pragmatic Spanish participants. “Let’s talk about common interests.”

What If France Turned Against the EU?

The second part of the scenario imagined an even more significant escalation: a victory of Marine Le Pen in the 2022 French presidential elections. In this potential scenario, she demands a reorganization of the EU as “L’Europe des Nations.” Her proposals include removing legislative initiative from the allegedly undemocratic Commission to the Council—transferring power from the EU’s central body to individual member states, which would weaken the supranational elements in the EU. She would also try to reform the single market, including by abolishing temporary postings of workers to other member states; and she would attempt to prevent EU interference in internal affairs through the rule of law framework. If these demands were not met, France would boycott decisions requiring EU unanimity, echoing former French president Charles de Gaulle’s “empty chair” policy.

First, the four country teams reflected that this scenario might present an even bigger threat to the EU than the exit of a member state—a big member state attempting to hollow out and renationalize the EU from within by trying to get its fingers on the right buttons in Brussels— rather than threatening exit as a so-called nuclear option. In responding to this scenario, the country teams discussed to what extent Le Pen could be constrained. The French team was pessimistic, pointing out that the French presidential system provides limited checks and balances. Yet despite this, the EU should not try to constrain France by isolating it with sanctions, as in the case of Austria in 2000. The Spanish team also warned against a confrontational approach toward France; instead, the EU should start negotiations and keep the French busy with talks as long as possible. The Dutch agreed: keep talking with Le Pen in the Council and keep things up in the air to delay French plans.

Meanwhile, the German team proposed focusing on protecting the Schengen Agreement and the internal market, which allows for the free movement of persons, goods, and services, hoping that Le Pen’s presidency would not exceed one term. The biggest uncertainty for all teams would be Le Pen’s unpredictability—if she were to cross red lines in terms of rule of law, which options should member states pursue and in which coalitions? The Dutch team demanded German leadership, but thinking beyond the German-French engine posed a challenge to the German team.

Stalling for Time Is Not Enough

Most teams jumped on the opportunity to buy time, delay decisions through negotiations, and maneuver for room in the hope for only a single Le Pen term followed by a return to normalcy. Among the teams, there was a deep concern that the EU might not get out of this crisis stronger than before, as is usually the case. On the positive side, even this worst-case scenario did not feel like an existential crisis anymore to most participants.

However, muddling through and hoping for the storm to pass is not a sufficient strategy for the EU. If there is anything to learn from the 2016 U.S. elections, it is that the legacy of even one divisive term can linger long afterward. To prevent this, the EU must maintain its appeal as a convergence machine that reduces economic disparities among different regions in the EU, especially in an hour of crisis. By emphasizing the bloc’s collective economic responsibility to its members, the EU recovery fund is a first important step.

 

Liana Fix is the program director for international affairs at the Körber-Stiftung. Prior to this, she was a doctoral fellow at the German Institute for International and Security Affairs (SWP) with a special focus on Germany’s role in Europe, Russian foreign policy, and the South Caucasus. She was a DAAD/AICGS Fellow from October to December 2015. Previously, she was affiliated with the German Council on Foreign Relations (DGAP). In 2012/2013, she was a Mercator Fellow in International Affairs, working on European and transatlantic policy toward Russia at the German Foreign Office, the Carnegie Moscow Center, and the EU Delegation in Georgia. Ms. Fix holds a master’s degree from the London School of Economics and Political Science and is a member of Women in International Security (WIIS.de). She wrote her PhD on Germany’s role in European-Russian relations. The book will be published in Spring 2021 by Palgrave Macmillan.

Theresa Kirch is a program manager for international affairs at Körber-Stiftung, where she is responsible for implementing the Körber Policy Games and the Berlin Foreign Policy Forum, Berlin’s most important annual conference on foreign policy. Before joining Körber-Stiftung in 2017, she gained professional experience at Polis 180, a grassroots think tank for foreign and security policy, as well as the German Marshall Fund of the United States in Washington, D.C. Ms. Kirch graduated from TU Dresden (BA International Relations) and Free University Berlin (MA North American Studies) with study visits to Indiana University Bloomington and the State University of Saint Petersburg.