Corona crisis and corona relief measures reinforce inequality and the north-south divide within the EU. Germany consolidates its hegemony.
Foreign policy experts in Germany and the EU’s Foreign Affairs Commissioner Josep Borrell are warning that Brussels’ corona relief measures could widen the EU’s economic gap. So far, the EU’s reaction to the Corona crisis has led to companies in economically stronger countries receiving more relief assistance than their competitors in more heavily indebted countries, according to a proximate analysis by the German Council on Foreign Relations (DGAP). After the crisis, German companies will probably be in a stronger position than, for example, their Italian competitors. “The north-south divide that was already in place before the crisis, could become even more pronounced afterwards,” Borrell predicts. The growing inequality could threaten the EU’s “political project” in the foreseeable future, the DGAP writes. In the competition within the EU, German companies are benefiting from the fact that, by fostering a bottom-to-top redistribution, national corona relief measures are already to their advantage – a development that exacerbates the crisis.
Social Inequality
The corona crisis is reinforcing the already existing social and economic inequality in several ways. Studies have shown that lower paid workers are at a higher risk of becoming infected, than the wealthy: They are disproportionately working in “system relevant” jobs, such as nursing care inside and outside hospitals or in supermarkets that continued to function throughout all phases of the lockdown. They are also exposed to a significantly higher mortality risk because preexisting medical conditions are unevenly distributed within the society.[1] Well-paid jobs can often be continued while working at home, whereas millions of low-wage workers often engaged in manual labor only receive payment for short-time work or unemployment compensation, suffering severe losses.[2] This widens and aggravates the social gaps.
Bottom-to-Top Redistribution
The government’s Covid-19 measures for Germany’s economy threaten to accelerate the bottom-to-top redistribution. For example, comprehensive state assistance and short-time work compensation are granted even if the company in question is raking in profits by locating its headquarters in tax havens or low-tax countries,[3] if it pays dividends to its shareholders, or if it repurchases its shares to distribute dividends to a smaller number of shareholders, thereby boosting future dividends. Other countries such as Denmark and France refuse to rescue such companies from financial hardship. Quite unlike the German government, which provides assistance to Lufthansa, for example, even though it maintains three subsidiaries in tax havens and three dozen others in low-tax countries.[4] The government granted a €2.4 billion state-guaranteed credit to Adidas, even though the company has spent more than two billion euros since 2018 to repurchase its shares, the last, being on March 16.[5] In March and April, Siemens had even repurchased shares worth €1.2 billion while forcing 3,000 workers into state financed short-time work. Multiple examples could be added to this list.
Growing German Lead
The Corona crisis is also fostering an unequal development within the EU. This is demonstrated in the comparison between Germany and France. Already in the first quarter, the French GDP sank by 5.8 percent – significantly more than, for example Italy (- 4.7 percent) and Germany, where the slump was calculated at between 2 and 3 percent. The lockdown in France to protect the population is more stringent than the one being applied in Germany. The French lockdown is only scheduled to be gradually loosened on May 11 – which is later than in Germany. Economists are therefore expecting an even more serious economic slump in France for the second quarter as well – possibly up to 25 percent.[6] It is highly likely that Paris will economically fall even further behind Germany. The German lead will grow. Italy will probably fall still further behind. The International Monetary Fund (IMF) forecasts for 2020 that Germany will suffer a 7.0 percent slump and Italy’s will be even 9.1 percent.[7]
Growing Imbalance
The eurozone’s growing economic gap will likely become more pronounced by the EU’s elaboration of specific Corona relief measures. In a proximate analysis published by the Bloomberg news agency in early April, economists had already pointed this out. According to their analysis, recapitalization with government funding will be substantial in fiscally strong European countries, “especially in Germany,” which in the current crisis will be declared permissible, while governments suffering a tremendous loss of wealth, in fiscally stressed countries, like Italy, will not be in the same position to do so.[8] Post crisis, the analysis continues, companies from countries, such as Italy, will face competition from stronger foreign rivals, strengthened by massive state aid. This will increase the imbalance within the Union. Thanks to state support, companies could emerge – relatively – stronger from the crisis, and be in a position to even take over weaker European competitors, the authors conclude. They speak of “the end of the European dream.”
“Political Bitterness”
These forecasts are also being expressed by German think tanks. Shahin Vallée of the Alfred von Oppenheim Center for European Policy Studies at the German Council on Foreign Relations (DGAP) points out that the crisis-induced lifting of restrictions on state aid will primarily benefit companies in those countries with the strongest balance sheets. This is planting the seed of profound divergence between member states, warns Vallée.[9] One must also take into account that the ability to support households or the unemployed will be at least potentially much higher in Germany than, “for example, in Italy or Spain.” The fact that Berlin has only been prepared to agree to EU relief for the member states under the condition of the recipient submitting to strict political control, threatens to “put Europe through a socially and politically destructive restructuring” process, warns Vallée. “It plants the seeds of economic enfeeblement and political bitterness.” If Berlin and Brussels should refuse a change of course, the “political project” of the EU will have “lost its soul.”
“Danger for the European Project”
Even the EU’s Foreign Policy Commissioner Josep Borrell has publicly added his voice to the warnings. “We also need to ensure that national recovery plans do not undermine the single market,” Borrell told the European Council on Foreign Relations (ECFR).[10] Businesses in economically stronger countries, benefiting from “more robust” aid programs than their competitors in economically weaker countries, “might gain a decisive advantage” once the crisis is over – and this could increase economic imbalances in the single market. “The north-south divide that was already in place before the crisis could become even more pronounced afterwards,” warns Borrell, who explicitly makes reference to the fact that the German Corona relief programs are much more comprehensive than in Italy or Spain. Although the pandemic’s origins make it a symmetrical crisis, its consequences are highly asymmetrical, notes the EU Foreign Policy Commissioner, and, in social and geographical terms, its huge costs will not be shared out equally.” Borrell concludes, “and this would inevitably affect people’s support for the European project.”
[1] Jan Paul Heisig, Christian König: Wie und warum die gesundheitlichen Folgen der Pandemie vom sozialen Status abhängen. wzb.eu 24.04.2020.
[2] Lenz Jacobsen, Parvin Sadigh: Hierarchie der Not. zeit.de 21.03.2020.
[3] Among those on the EU’s list of tax havens are American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, U.S. Virgin Islands, Vanuatu, and the Seychelles. NGOs criticize other low-tax countries, including Luxembourg, the Netherlands and Switzerland.
[4] Frederik Obermaier, Klaus Ott: Erst im Steuerparadies, dann vom Staat gerettet? sueddeutsche.de 30.04.2020.
[5] Ulf Sommer: Trotz Corona-Einbußen: Dax-Konzerne ziehen Aktienrückkäufe für fünf Milliarden Euro durch. handelsblatt.com 28.04.2020.
[6] Schlusslicht Frankreich. Frankfurter Allgemeine Zeitung 04.05.2020.
[7] Gita Gopinath: The Great Lockdown: Worst Economic Downturn Since the Great Depression. blogs.imf.org 14.04.2020.
[8] Elena Carletti, Marco Pagano, Loriana Pellizon, Marti G. Subrahmanyam: Germany Will Be a Post-Coronavirus Winner. bloomberg.com 09.04.2020.
[9] Shahin Vallée: Coronavirus Has Revealed the EU’s Fatal Flaw. dgap.org 28.04.2020.
[10] Josep Borrell: The post-coronavirus world is already here. ecfr.eu 30.04.2020.
