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Europe’s Faustian Bargain

Lost behind the news of the European Union's budget and recovery fund is a long-awaited improvement in the eurozone's internal balance. The convergence between north and south is such an important development that it is likely to take precedence over guaranteeing member states' adherence to the rule of law.

NEW YORK – The second wave of COVID-19 infections has struck Europe harder than many expected. The hope of a V-shaped recovery has been replaced by the fear of a double-dip recession, implying that there will be no quick return to normal European Union budget rules. More worryingly, Europe now finds itself forced into a tradeoff between two objectives, both of which are critical to its long-term viability as a supranational political and economic bloc. Now more than ever, the EU’s commitment to the rule of law appears to be on the chopping block.

The news is not all bad. Owing to farsighted policy decisions by EU leaders, north-south relations within the Union are on a firmer footing than they have been for many years. One sign of this is that the spreads between German and Italian interest rates are at a record low, indicating that Italy’s position in the euro is now rock solid. “Spread anxiety” about the sustainability of the euro has abated across the entire southern tier of the eurozone.

Forget the political hurdles recently introduced by Central European member states with their threats to veto the EU’s budget and new COVID-19 recovery fund. Sustaining the long-awaited north-south political and economic convergence will be the EU’s top priority in the weeks and months ahead.