Europe misses another chance to fix its union

Russia’s efforts to use natural-gas exports as a geopolitical weapon present Europe with a challenge: When faced with such a clear and present threat, can it muster the solidarity required of a true union?
Policymakers might be coalescing around what they see as an adequate plan. They should be more ambitious: Europe needs a permanent solution to its chronic coordination failures.
Not since the onset of the pandemic in 2020 has Europe had such an opportunity to demonstrate its cohesion. Vladimir Putin’s energy cutoff is a classic external shock that will affect countries differently according to their dependence on Russian gas supplies, with both Germany and Italy among the hardest hit. To mitigate the impact of rising prices, help the most vulnerable get through the winter and speed the transition to other energy sources, public spending on the scale of hundreds of billions of euros is justified.
In a fully integrated union, the fiscal response would be largely automatic. Support would immediately flow to the hardest-hit areas, initially through direct aid and later through income-tax relief and credits for both businesses and households. This is the kind of burden-sharing required for governments to share a currency.
Not so in the EU. Just as in other crises, its 27 member states have been struggling to mount an ad hoc response to the gas shortage, divided by everything from domestic politics to the physical structure of the energy network. Some countries, including France, Italy and Spain, pushed for price caps that they hoped would reduce the cost of their own liquified natural gas imports. Germany, for its part, unilaterally announced a €200 billion price-mitigation program. Markets reacted to the dissonance by increasing borrowing costs for Italy, where the government’s already heavy debt burden would make additional spending particularly fraught.
Fortunately, Europe’s leaders may be headed toward some form of cooperation. According to Bloomberg News, Germany may be open to providing EU loans to struggling governments, funded by jointly issued debt. This could somewhat lower borrowing costs for the likes of Italy. But it would fall short of the pandemic recovery fund, which was hailed as a breakthrough for including some grants along with loans — and far short of the kind of fiscal burden-sharing required to ensure the currency union’s longer-term viability.
Such half-measures leave Europe unprepared for further challenges and gradually slipping toward another debt crisis. No doubt, efforts to expand risk-sharing face strong political headwinds in individual countries. But at the very least, the EU should be able to establish a permanent fund to provide both loans and grants in emergencies — with clear procedures on its use, so that EU members needn’t negotiate a new program every time a crisis arises.
Ultimately, what’s needed is a central fiscal authority, with its own revenue source and the power to spend when needed to mitigate asymmetric shocks. If neither the pandemic nor a hybrid war with Russia can bring the EU to even consider such a possibility, it’s hard to imagine what will. The longer Europe waits, the greater the chance that its experiment in unification will fail.

—Bloomberg