The EU’s massive pandemic stimulus risks fueling discontent and euroskepticism

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The right-wing populist Vox party is calling for the resignation of the left-wing government on May 23, 2020 in Madrid, Spain.

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An uneven recovery in Europe could prop up populist rhetoric and anti-EU sentiment, political experts and economists said, despite major fiscal stimulus programs in the region.

In the wake of the first coronavirus cases in Europe, some anti-EU parties experienced growing public support. This was the case in Italy, where anti-immigration Lega remained the most popular party and the far-right Brothers of Italy (Fratelli d’Italia) rose in the polls.

But up stepped the EU, which detailed proposals for a major new stimulus package. The European Union is working to borrow 750 billion euros ($853 billion) from public markets from January — a step that has never been taken before on such a large scale.

The plan by the European Commission, the executive arm of the EU, would provide loans and grants to the sectors severely impacted by the virus. The idea follows a draft from Germany and France, whose leaders Chancellor Angela Merkel and President Emmanuel Macron surprised many investors when backing some form of common EU debt a few days earlier.

Common European debt had been a taboo for a long time, mainly among German officials who were afraid their citizens would be responsible for high debts in other countries. As a result, the announcement was described as “historic” and a “big step forward” for the European Union. Investors interpreted it as reducing the risk of a collapse of the EU project itself and some believe officials would have had anti-EU sentiment (in places like Italy) in mind when constructing the proposals.

However, despite this unprecedented package, there are still doubts that it will quash anti-EU feelings completely, and put an end to political risks in the region.

“There will certainly be something for the populists to latch on to,” Marchel Alexandrovich, a senior European economist at investment bank Jefferies, told CNBC Monday.

Constantine Fraser, Europe analyst at research firm TS Lombard,  also told CNBC that “opposition politicians have already started to attack the plan, as too small in size, too slow in its prospective disbursements, or as coming with too much conditionality attached.”

“It will almost certainly help the EU’s image in Italy, but how far it goes in undoing years of rising disenchantment is still unknowable,” he added.

There’s an uneasiness that populism will intensify in countries like the Netherlands and Germany, who are expected to make the largest contributions into the recovery plan, analysts at Morgan Stanley said Wednesday.

Though it is too early to forecast how Europeans will feel and vote in the aftermath of the Covid-19 crisis, an uneven recovery in the bloc could provide support for certain parties.

“There will be bigger deficits” and “some countries will be hit more than others,” Alexandrovich said. This might spark a feeling that even though the EU seemed to act together, “we’re not coming out of this together,” he said.

The European Parliament, the only directly-elected EU institution, became even more fragmented at the 2019 election amid a rise in anti-EU rhetoric since the sovereign debt crisis of 2011. 

Holger Schmieding, the chief economist at Berenberg bank, said in a note Thursday that “the costs of the (current) recession fall heavily on less skilled service workers and new entrants to the labour market. This may cause new problems.”

Changing perceptions

However, other analysts believe the additional stimulus will change voters’ views about what the European Union can do for them, which would ultimately support the project.

Nadia Gharbi, an economist at Pictet Wealth Management, said that the political signal is “massive.”

“Even if taboos have not been fully scrapped … it is nonetheless a first step toward fiscal union — in other words, a potential game changer for European integration,” she added.

Erik Nielsen, chief economist at UniCredit, added in a note Sunday that the stimulus will “hopefully start to change people’s perception.”

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