international analysis and commentary

The need for a European shock therapy: a Marshall Plan model


“Money has to serve, not to rule.”, Pope Francis stated on the occasion of the World Financial Forum in 2013. Being a strong advocate of reform of our financial system and economy ever since, the Pope teaches an important lesson here; one that could (and should) guide us in the years to come.

Being asked about the possible effects of the 2020 pandemic, the Dutch investor and writer Willem Middelkoop has noted recently: ‘The corona crisis leads to a severe economic crisis, which will lead to a financial crisis, which in turn will lead to a new Euro crisis.’ In fact, the old Euro crisis, which started in 2010, has never been solved. The difficult decisions that were needed then where postponed and kicked further down the road.

Seven good years have passed since Pope Francis made his call for systemic change. But unfortunately, our central bankers and Finance Ministers did not use these years wisely. On the contrary, the broken monetary and financial system was held together by draconic patchwork measures such as negative interest rates and large-scale bond buying programs by the European Central Bank. But, even before the current crisis, everyone knew that this situation was not sustainable nor desirable. Eventually, a shock of some kind would lay bare the old systemic imbalances and the mountain of public and private debt on which our financial system and economy float. This crisis has come.

Today, Europe faces a challenge posed by the very draconic measures that have been introduced. As hundreds of millions of Europeans are locked down in their homes, our societies have come to a near standstill. And no one knows for how long we have to endure this situation to get the pandemic under control. It is therefore logical that countries in Southern Europe, that took the hardest hit, ask for financial support from their neighbors. This support should be provided, immediately and effectively. The crisis can only be overcome if Europe sticks together.

Italy, one of the European countries most hit (so far) by the pandemic


The important question is what is needed to bring us forward, united. The answer, at least in the long-term, may lie far beyond the horizon of our current policymakers.

In the short-term governments will need to borrow money in massive quantities and the ECB will have to act like a money-creation-machine. Eurobonds, as a form of collective borrowing, would increase trust in the financial markets (and lower the borrowing costs for countries like Italy and Spain), although they still meet strong opposition in some key countries; what matters most is to understand that the current crisis is about much more than keeping the Euro together.

Let’s be clear: survival of the Euro needs the creation of a real political union too. At the same time, contrary with what some politicians have tried to sell the public, Europe does not need the Euro to survive and prosper in the long term. One could think of various forms of economic cooperation that would strengthen the EU as an economic bloc but provide them with the necessary monetary and fiscal flexibility to develop their respective economies (which differ greatly) and support them when needed.

The time has come to think out of the box. The Euro certainly has many advantages for Europe, if the system works properly. But if there is not enough electoral support to form the political union required to maintain the Euro as a stable common currency, leaders must stop muddling through make plans to unwind the project as orderly as possible. Otherwise, the dysfunctional Euro system will do more harm than good and lead to a disorderly collapse, which could be a disasters for all European citizens.

In the short and medium term, what is needed is more borrowing and more money creation, but the long-term answer is far more challenging, as the pandemic lays bare fundamental flaws in our global production and distribution system.

Mário Centeno, the Portuguese minister of Finance and Chairman of the Eurogroup, has pointed to the need for a kind of “Marshall Plan” for Southern Europe. He is right, but it is the EU as a whole that will need a plan of that magnitude.

The most important difference with the original Marshall Plan, of course, is that this time the Europeans have to save themselves.

We face challenging times, no doubt. But there is an opportunity to create a new thinking on social, economic and political cooperation in Europe. An economic model can be created that serves as an example to the rest of the world; an economy in which money serves, and does not rule.