The American progressive or “Democratic Socialist” — think Bernie Sanders — typically holds up some or all of Europe as the model for the U.S. to follow. Now the Chinese virus has hit. Many countries in Europe — starting with Italy and Spain, but also France and others — have it far worse than we do in terms of number of cases, hospitalizations, and deaths per capita. Economic shutdowns similar to ours have swept the continent. Many businesses have shut, GDP has cratered, unemployment is spiking, and millions suddenly can’t pay their bills.  

Over there, they don’t blink an eye before spending as much of the infinite pile of taxpayer cash as it takes to make everything perfectly fair and just. Surely then, Europe has much to teach us benighted Americans about how to use the beneficent powers of government to deal with this new kind of crisis. Or do they?

In fact, it turns out the the EU governing model didn’t anticipate this one. I’m going to say it’s advantage Europe in this instance, but you may disagree.

As reported at this site on April 2 and April 7, the U.S. strategy so far has been that Congress sequentially passes one multi-trillion dollar “bailout” or “stimulus” package after another. Cash from the Treasury then flows to anybody who might be in a tight spot, and to plenty of people who aren’t — payments to states and local governments, loans for large corporations, checks for essentially every individual, tax deferrals for small businesses, grants for not-for-profits, support for the hospitals and healthcare system, etc., etc., etc. With no additional tax revenue coming in (indeed tax receipts are likely to be down substantially) the money comes from massive new borrowings on the credit of the U.S. government. Congress, with the assent of the President, can authorize those in whatever amount it wants and on very short notice.

The problem for the U.S. is that the amounts needed to make everyone whole are enormous, and simultaneously the sense of crisis has caused the loss of all sense of limits or of need for budgets. The money is flying out the door without any consideration of reasonableness or tradeoffs. This will all need to be reckoned with when we return to our senses.

Over in Europe, it’s not so simple. There is no existing mechanism for expedited approval of massive borrowing at the EU or eurozone level to support bailout payments in the various countries. Soeren Kern at the Gatestone Institute on April 7 has a good summary of the existing state of play. The short version is “stalemate.”

It seems that a group of nine eurozone countries that include all of those in the worst shape (Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Slovenia and Spain) have proposed to the others in the common currency that they issue some massive amounts of common bonds, referred to as “coronabonds.” Of course, many of these countries — particularly Italy, Spain and Greece — are exactly the ones that overspend on everything all the time, leaving them in perpetual extremis, whether there is a pandemic crisis or not. After the experience of the financial crisis a decade ago, the more frugal countries are not in a mood to get taken in again:

Austria, Finland, Germany and the Netherlands, dubbed the eurozone's "frugal four," rejected the idea of issuing joint debt to finance economic recovery in Southern Europe. Dutch Prime Minister Mark Rutte said that issuing joint debt would be "crossing the Rubicon" because it would turn the eurozone into a "transfer union" in a way that was not foreseen by the Maastricht Treaty, which established the European Union and laid the foundation for the single currency. "I cannot foresee any circumstance under which we will change our position," he said.

Meanwhile Spanish Prime Minister Pedro Sánchez has recently committed to spending some 200 billion euros to alleviate the consequences of the pandemic. The entire GDP of Spain is about 1 trillion euros, so the 200 billion represents about 20% of annual GDP. How is Sánchez planning to pay for that?

When asked how he would pay for that amount of spending, Sánchez replied that he was counting on financial help from “Europe.”

The problem for Italy, Spain, et al., is that, having joined the euro, they no longer have the ability to borrow in a currency that they can print. In that respect, they are like the U.S. states. The U.S. states learned the hard way, way back in the 1840s, that if you can’t borrow in a currency you can print, you cannot effectively engage in deficit spending over any significant period of time.

Where does this process lead? In the U.S. in the 1800s, eight states defaulted. There was no federal bailout, nor was there a bankruptcy remedy. The defaulting states were shut out of debt markets for extended periods, but most ultimately did deals with the creditors. Clearly, no state left the union over this issue.

On the other hand, Kern of Gatestone thinks that this issue may well cause the breakup of the euro. He quotes German economist Oliver Hartwich:

An almighty economic earthquake is in the making. In a few weeks or months, several large European economies will require bailout and assistance packages. These will be several times larger than anything Europe has seen. Yet no country, central bank or institution will be eager or even able to provide them. Even the gargantuan sums on the table now will not be enough.

It’s the old idea that bailouts are “required.” After all, no one should be forced to suffer any downside risk in life. Unfortunately this time there doesn’t seem to be any mechanism or willingness to provide the bailout, no matter who says it might be “required.”

Just as I said about New York a couple of days ago, this is a fantastic opportunity for the likes of Italy and Spain, in the crunch of exigency, to finally make the cuts in their bloated bureaucracies that they have needed to make for decades, but have been unable to do. If the bailouts come through, those will never happen. And in the next few years, the next “required” bailout will again come around.

According to the latest news on the subject that I can find (from the BBC), “marathon” negotiations among EU leaders have not come to any resolution on the “coronabonds.”