Philippe Legrain is calling for a EU-funded COVID-19 Marshall Plan, which, unlike the “Corona bonds” – loans that would add to national debt burdens – should be offered as “grants to suitable recipients” within the Eurozone, which should commit to mobilising “at least €1 trillion (8% of GDP)”. This amount “could pay for medical needs such as testing, support hard-hit Europeans, and help seed the eventual economic recovery.”

According to the author this plan should be “funded by issuing common debt that the ECB would buy and hold for the foreseeable future.” The question is whether the action the European Central aims to take will be enough. The ECB has come up with an impressive €750bn bond-buying programme. The biggest share of the money would go to the neediest countries, to subsidise spending on health, corporate grants, unemployment pay and investment etc.

It remains to be seen whether this programme would effectively avert a self-perpetuating downward spiral while the economies within the Eurozone are already heading toward recession. In the face of failing companies, illiquid banks, and struggling households, national governments could be entering dangerous territory, and the ECB would have no choice but to step in. The more their debt increases, the greater the risk that bondholders will panic, as was the case during the 2010-2012 sovereign debt crisis.

The author says that his “new Marshall Plan” is quite different from the temporary “coronabonds” that Germany, the Netherlands, and others have rejected. This plan would not “cost European taxpayers, northern or southern, anything. And it should come with a sunset clause, to reassure those who fear that a permanent fiscal union will be created through the back door.” Apparently the EU would need to take on a role in fiscal policy, if France, Spain and Italy wanted the EU to issue bonds guaranteed by the member states.

A new Marshall Plan to rebuild the post-pandemic Europe could help its economy bounce back, dealing a blow to the populists, who capitalise on the health crisis to win popular support and seize power. They say countries like Germany, Austria, the Netherlands etc have no appetite to dig deeper into their pockets to help out poorer Italy and Spain, and share out the coronavirus-incurred debt in the form of coronabonds. Unfortunately the EU does not command the resources or loyalties that can be called on by nation states.

The author says “the Brothers of Italy, who are even more extreme than the far-right League party, have been surging in the polls,” due to anti-EU sentiments. “When Italy issued an urgent plea for medical help in late February, not one of the EU’s 26 other member states responded until China did. France and Germany actually banned the export of medical equipment….Likewise, Italy’s neighbors in the supposedly passport-free Schengen Area rushed to close their borders.”

Italians feel that after the Eurozone and migration crises the EU has once again abandoned them. Their economy has scarcely grown since adopting the Euro and public debt is 135% of GDP. The populist Matteo Salvini now questions EU membership and may well-placed win the next election. “A new hardline nationalist government could decide to issue tradable IOUs to ease both its fiscal constraints and Italy’s exit from the euro. That is the last thing the eurozone needs,” the author says.

The problem is that national governments still hold most of the key levers on health, borders and the economy. “Loan guarantees for smaller businesses are helpful. But EU loans to help fund medical expenses and employment-protection schemes actually would compound Italy’s problem, which is not market access but fiscal headroom.” It remains to be seen whether COVID-19 could be the final straw for the EU.

The survival of the European Union is at stake as the continent weathers its worst crisis since World Wr II. Voices calling for a Marshall plan to rebuild the continent’s economies, are loud. No doubt massive public investments are necessary, and risk-sharing to address the financial burden is essential. Yet a middle ground needs to be found, so that aid recipients get their act together seriously. In the longer term they need a credible recovery plan, to put their economy back on track and achieve sustainable growth.