Publication Inequality / Social Struggles - Analysis of Capitalism - State / Democracy - Economic / Social Policy - International / Transnational - Europe - Corona Crisis The Twilight of the Eurozone in the Coronavirus Crisis

Another financial collapse appears to be just around the corner



May 2020

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ECB Vice President Luis de Guindos (left) and ECB President Christine Lagarde (right) address the audience during the Q&A at the ECB Governing Council Press Conference in Frankfurt, Germany on Thursday, March 12, 2020 CC BY-NC-ND 2.0, European Central Bank

In one fell swoop, it all came back. The corona pandemic has brought back unwelcome memories of the 2007 financial crisis. In effect, the “emergency stop to capitalism” (Nachtwey 2020) as a result of the measures to contain the coronavirus pandemic is triggering a global economic crisis (Projektgruppe Gemeinschaftsdiagnose 2020). A comparison with the global financial crisis of 2007 imposes itself. Like the previous one, the currently unfolding global economic crisis is deeply rooted in an inflated financial market and accumulated overcapacities in manufacturing, particularly in the automotive sector (IfG 2020, p. 8). The shutdown of public life and large parts of production coincides with an economic cycle drawing to a close. A worldwide fall in demand and industrial production could already be observed since the beginning of 2019 at the very latest. In Germany, for instance, economic output in manufacturing was declining by almost 5 percent in the second quarter (BDI 2019). The biggest driver of the economic cycle which began in 2008 was the almost unlimited availability of liquidity provided by central banks, in particular the European Central Bank (ECB) and the US Federal Reserve System. This form of “liquidity management” prevented the reduction of structural over-accumulation and led to speculative bubbles. The stock market crash at the beginning of March 2020 was a direct result of this (Lapavitsas 2020).

Felix Syrovatka is a doctoral student at the University of Tübingen and a Rosa-Luxemburg-Stiftung doctoral scholarship receipient.

Etienne Schneider is a doctoral student at the University of Vienna.

Translated by Gráinne Toomey and Sam Langer for Gegensatz Translation Collective.

Equating the global economic crisis resulting from the coronavirus pandemic with the global financial and economic crash of 2007 would fall short, however, as there are fundamental differences in shape and extent between the two. While the former crisis was triggered by the bursting of the subprime bubble in the USA and spread to the so called “real economy” due to a liquidity crunch, this crisis was triggered by the political measures for containing the coronavirus pandemic, which have brought many sectors of the “real economy” an almost complete standstill for several weeks, if not months. In many European countries, industrial production has been curtailed or stopped entirely. This is resulting in a simultaneous collapse of production and demand in these sectors, with all other sectors also set to be dragged into the maelstrom of crisis. While a ripple effect on the banking and financial markets could still be prevented through robust intervention by the central banks, comprehensive public liability guarantees, and easing of regulatory provisions, the duration of the state of emergency has made this increasingly difficult. The already fragile European banking and financial system will be placed under severe pressure by growing numbers of company insolvencies and resulting loan defaults at the very least, but also by the falling prices on bond and equity markets. The cancellation of leverage loans and collateralized loan obligations, i.e. securitized loans from heavily indebted companies, will heighten the pressure further (IWF 2019).

Despite the differences in the crises, it can be assumed that, as in 2009, the eurozone will be a geographical focus of the imminent economic and financial crisis this time around as well. As we have argued elsewhere, the European Economic and Monetary Union (EMU) is poorly prepared for a severe global economic crisis (Syrovatka and Schneider 2020). The unresolved European debt crisis in Southern Europe in particular and the fragile economic and political situation in Italy must be understood as an accelerant of a new, deep crisis in the euro area (Sablowski et al. 2018). Therefore, the inherent contradictions of the European Economic and Monetary Union (EMU) will exacerbate the crisis in Europe (Syrovatka and Schneider 2020).

In the following, we will place a an in-depth focus on the process dimension of current European conflicts. We argue that contrary to current media coverage, dynamic compromise between Germany and France on EMU matters remains ultimately blocked (Financial Times, 14 April 2020). The 500 billion euro “corona rescue programme” agreed upon in April by the European Council, which is stymied by the German logic of a stability union and postpones the escalation of the crisis through its specific focus on the ESM, does not resolve deeper-set problems. Finally, we argue that the impending “eurozone crisis 2.0” could unfold in a way that is significantly deeper, harsher, and more threatening to the existence of the European project as a whole than the previous crisis.

What Has (Not) Happened so Far

European integration is characterized by a German-French “power tandem” (Bieling and Deppe 1996, p. 500), which gave the main impulse the European project in the past. Cooperation between Germany and France has never been free of conflict. Rather, it has been fundamentally shaped by the contrast between two economic policy modelsa [1] and their translation into European political action by both member states. France follows a “fiscal union” model, according to which economic policy within the eurozone should be discretionary, i.e. have the capacitiy to act decisively and relatively independently from member states,, and should dispose over significant financial means to achieve convergence by balancing out development differences and risks between the member countries. The contrasting “stability union” model, advocated by Germany in particular, follows an ordoliberal logic and in essence restricts convergence to fiscal discipline, stability criteria, and “structural reforms” tied to austerity policies. The marked divergence between the two models means that European integration can be understood as a sequence of bilateral compromises between these two models and the respective underlying constellations of interest within the French and the German power bloc (Syrovatka and Schneider 2019).

Since the eurozone crisis, however, the dynamics of bilateral compromise have been weakened (Schneider and Syrovatka 2017). In the context of the EMU, in particular, no substantial progress has been made for years. In discussions about the future of the EMUsince 2012, wide-ranging proposals were made by the French side in particular. These proposals included the emission of “euro bonds”, i.e. government bonds issued jointly by European countries, the creation of the post a European finance minister together with a comprehensive eurozone budget to fund convergence and to balance “asymmetrical shocks” as well as the introduction of a joint European deposit guarantee (for an overview, see Schneider and Syrovatka 2019). In the negotiations, however, these suggestions were rejected, diluted beyond recognition, or entirely ignored by some Northern European countries in the “Hanseatic League” (Guntrum 2019) and the German government, which considered these proposals to undermine the “stability culture” in the eurozone. As a result, all attempts to establish instruments for risk-sharing and for funding convergence in order to deal with economic imbalances were blocked. While the joint European currency forms a core component of the globally oriented export strategy of the German power bloc, dominant capital factions pursued the strategy to externalize the costs of stabilizing and defending the Euro (Heine and Sablowski 2013). In accordance with the stability union model, austerity policies were implemented in Southern Europe, which not only caused grave damage to social infrastructure such as health systems but has also severely weakened economic development in these countries to this day (Sablowski et al. 2018).

The misaligned dynamic of the compromise between Germany and France in the debate over EMU reform has now led to a situation in which the coronavirus pandemic is affecting an already fragile eurozone characterized by inherent contradictions. German-French bilateralism has thus resulted in an increasingly irreconcilable polarization between the eurozone countries.

The German-French Engines Stutters

For European political elites, the corona pandemic represents the kind of “external shock” that has for years been discussed under the umbrella term of “economic resilience” (Briguglio et al. 2009). Already shortly after the first reports from northern Italy it would have been the right moment for the Eurogroup to act quickly and agree on joint European rescue measures in order to suppress any speculation about the economic cohesion of the EMU. However, just as in the first eurozone crisis, the European heads of state and government reacted primarily along national lines, without European coordination. The EU Commission stood helplessly on the sidelines and watched as the asymmetric economic development in Europe resulted highly unequal national crisis measures. According to a study by the BRUEGEL think tank, the immediate fiscal impulse of discretionary budgetary measures in Germany for the year 2020 amounts to approximately 6.9 percent of its economic output in 2020, while that of Italy lies at only 0.9 percent (Anderson et al. 2020). In terms of moratoria on tax and social contributions as well as other forms of liquidity provision, Italy lags well behind German measures, too. The starkly divergent fiscal reactions reveal that sincethe European debt crisis is not yet over in many countries, the European member states have widely differing capacities to support their economies (Heimberger 2020). As a result, economic recovery will also be highly imbalanced across European countries, with existing imbalances set to deepen, making a break-up of the eurozone more likely in the near future.

Against this background, shortly after the European outbreak of the coronavirus pandemic both the Italian government and the French president had called for a joint European crisis policy and the issuance of euro bonds to enable uniform fiscal reactions. Yet, these proposals, formulated in line with the French fiscal union model, were rejected by Northern European member states. While in Germany,conflicts within the power bloc emerged and even within the state apparatuses the voices in favour of Eurobonds were becoming louder—such as that of Isabel Schnabel, a German member of the executive council of the ECB (Frankfurter Allgemeine, 23 March 2020)—the Northern European states stood firm behind the German government in blocking all attemtps to establish joint European bonds, whether temporary (corona bonds) or not (euro bonds). Instead, the northern countries pushed for a solution through the joint eurozone rescue mechanism, the ESM, and demanded conditionality for loans. This, in turn, was opposed by southern member states led by France and Italy in particular, who viewed the rejection of their calls as a repudiation of European solidarity. For the Italian government especially, a “rescue package” based on loans and tied to conditions as well as the associated “stigma” of the ESM was out of the question. It sought to prevent any deployment of economic “torture devices” (Maas 2020), including “Troika and tough austerity measures”.

During the negotiations, particularly the Dutch government acted as a spearhead for the stability union model. In reference to the concept of economic resilience, finance minister Hoekstra drew attention to the fact that Italy and Spain had failed to build up the financial reserves necessary to respond to such a crisis, in contrast to Northern European member states (Wirtschaftswoche, 3 April 2020). Accordingly, he suggested European solidarity meant loans conditional upon neo-liberal structural reforms that would facilitate this kind of policy in the medium term. The German government also initially insisted upon strict loan conditions but relented shortly before the breakdown of negotiations.

Altough an agreement was ultimately reached, the agreed-upon resources will not be enough to keep the eurozone together in the medium term. Even if, as argued by Philipp Heimberger (2020), it can be viewed as an initial step towards joint European crisis management, the agreed-upon package of measures follows the logic of the stability union rather than a compromise between the two core models. The package of measures consists of the following elements (see Eurogroup 2020):

  1. An ESM credit line of up to 240 billion euro. Although subject to only minor conditions, this is restricted to covering costs in the health sector, which will greatly limit the loans’ macroeconomic effect; relative to the total costs of the crisis, healthcare costs are anticipated to be slight. At the same time, due to the attached conditions, it remains debatable whether Italy will use this kind of credit line, not only because it holds little attraction due to its restriction to health costs, but also because it is heavily politically contested within Italy due to its ties with the ESM.
  2. On account of pressure from the European Commission, an unemployment re-insurance scheme (SURE) has been created with financial assistance of up to 100 billion euro to finance bonds issued by the European Union. The unemployment re-insurance scheme is intended to allow member states to obtain loans from the Commission at favourable rates in order to refinance costs for short-term work schemes.
  3. The European Investment Bank has, in addition, approved credit guarantees for businesses in the amount of 200 billion Euro.

This programme, which amounts to 560 billion Euro, does not represent a departure from the stability union model and the competing national methods of integration. This is demonstrated not least by the fact that European member states do not mobilize any additional means to supplement the ESM. In addition, EU member states had to pledge to comply with debt regulations in the aftermath the COVID-19 crisis.

Moreover, the decisive questions for the post-COVID-19 era have been left out of Eurogroup resolutions. There are only vague formulations about a “reconstruction fund” beyond ESM loans; and even the European Council at the end of April 2020 has left the concrete form, extent, and type of refinancing structure for this vehicle open for further discussion. It is true that “innovative forms of financing”, including corona- or eurobonds have been discussed, but this could mean anything, as underlined by Dutch finance minister Hoekstra (Krämer and Strupczewski 2020).

The End of the Euro or the Return of Austerity?

Against this backdrop, the return of European austerity measures following the peak of the coronavirus pandemic appears to be a realistic scenario. It is already certain that the measures taken will lead to a massive increase in national debt far beyond the Maastricht criteria (Handelsblatt, 17 April 2020). This is likely to justify an early reactivation of the Stability and Growth Pact as well as the macroeconomic surveillance procedure. We see the following three points as indicators of a return to budgetary surveillance and neoliberal structural reforms:

  1. The central role of the ESM in current crisis management: Already during the negotiations over the last European package of measures, Northern European member states pushed for European “rescue measures” to be organized through the ESM. This follows the goal of maintaining the principle of conditionality in the near future and strengthening it on a long-term basis. Designed as the central vehicle for implementing austerity policies in the past eurozone crisis, the ESM follows a particular regulatory logic due to its architecture and material structure and can hardly be applied for a discretionary, demand-driven economic policy that follows the fiscal union model––especially since Germany and other countries in the Northern European bloc have veto rights within the ESM, given that it is an intergovernmental institution outside of EU law. This would even be the case in an agreement upon corona bonds, which would be issued by the ESM (Pröbstl 2020). Thus, it is also plausible that Northern European member states will make a shift of budgetary surveillance competences from the European Commission to the ESM a condition for potential corona bonds. This would correspond with a strategy to strengthen the ESM which has been pursued by Northern European member states since 2010 and has been repeatedly further elaborated by the German Federal Ministry of Finance (BMF 2017).
  2. The centrality of the resilience approach within European discourse: While the attitude of Dutch finance minister Hoekstra was indeed viewed as a snub and was criticized for showing a lack of solidarity by Southern European member states as well as by progressive actors in Europe (Khan 2020), it was deftly geared towards a discourse which in recent years has become a central idea within European institutions. Economic recommendations by the Commission within the framework of the “European Semester” have increasingly followed the concept of economic resilience, which, in simple terms, describes the economic capacity of a country to react to “external shocks“ (Syrovatka 2019). The coronavirus pandemic is being viewed precisely as this kind of “external shock”. The Dutch finance minister’s question regarding the causes of the Southern European member states’ limited fiscal room for manoeuvre therefore complies with a specific logic and discourse. As absurd as this question seems in light of the current pandemic, it will be reformulated by European institutions after the climax of the health crisis, especially regardinghigh levels of national debt, inflexible job markets, strong dismissal protection as well as social expenditure, particularly in the pension system. These areas were already earmarked before the current crisis by various European commission studies as key obstacles to a resilient economy in the Southern European member states (COM 2017; JRC 2018).
  3. Conflicts in the German power bloc: In the past, weakening the principle of conditionality, suspension of a limit for ECB bond purchases, and especially the issuance of joint European bonds of any form were red line issues for relevant factions in the German power bloc, including parts of social democracy. Intense conflict within the German bloc can thus be expected. In light of recent party in-fighting, this could serve as an acid test for the CDU (Christian Democratic Union) and manifest in renewed gains for the AfD (Alternative for Germany). To glue these cracks in the German power bloc, the German government, in coalition with other countries that adhere to the stability union model such as Finland, Austria and the Netherlands, will push for a tightening of fiscal regulations and macroeconomic monitoring.

A return to austerity measures and neoliberal structural reforms would strengthen the centrifugal forces of the EMU in both economic and political terms. Economic imbalances would loom not only due to unequal national fiscal-political action programmes of the euro area countries but also due to renewed austerity policies and weakened growth resulting from this. The contradictions and centrifugal forces could escalate to such a degree that ECB policies would no longer suffice to keep the eurozone together in its current form.

A return to austerity policies would also be politically disastrous, having in the past––particularly in Italy––strengthened forces that were agitating for re-nationalization. By this, we explicitly do not mean those forces advocating from the left for an alternative European project beyond the market-liberal economic union, but nationalist and fascist stakeholders who will know how to capitalize on the eurozone crisis again. 49 percent of the Italian populace today are in favour of the country leaving the European Union, and according to Eurobarometer, 44 percent in August 2019 agreed with the statement that their country would progress better without the EU (COM 2019). This situation, which is currently coming to a head against the backdrop of a lack of European solidarity for Italy in the coronavirus crisis, could ultimately prove to threaten the existence of the European project as a whole.

A Window of Opportunity for Post-Neoliberal Politics in Europe

As in any time of crisis, the impending eurozone crisis also represents an open historical situation, a window of opportunity for alternative approaches (Gramsci 2012, p. 354). Above all, the coronavirus pandemic offers the possibility that the experience of the importance of a well-functioning public health care system and other critical social infrastructure of the foundational economy will be deeply inscribed in collective memory. These collective experiences could become an important basis for counter-hegemonic projects and strong mobilizations against the encroachments of austerity politics. To this end, there is a need for a broad movement for foundational-economic renewal in Europe (Foundational Economy Collective 2020), as well as individual member states that systematically flout fiscal regulations in the sense of “strategic disobedience” (Schneider and Mittendrein 2017) and thus increasingly undermine them. Success will come down to the solidarity of broad political coalitions in powerful hubs, that is, particularly in Germany and France. It could work if the public budget is consolidated on the income side instead of implementing austerity policies, by introducing or increasing taxes on capital, inheritance, and land price increases, while at the same time preventing the flight of capital to other European member states.

The blow of the crisis could consequently also be softened by socio-political means. That pertinent production structures collapse and major companies must be supported with public funds as a result of the crisis may not be preventable. But this too presents new possibilities: business aid could be bound to the implementation of climate measures for a socio-ecological reconstruction and transformation of production structures, and key sectors of the economy could be democratized through public participation. Ultimately, in the course of such a socio-ecological transformation, dependence on the global market, particularly in critical areas such as the supply of medical equipment, could be reduced by a balanced, needs-oriented re-regionalization of production in Europe.


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[1] Our understanding of model here is a “dialectically inter-related ensemble of objectives as well as patterns of perception and interpretation … , which confer a specific ‘structure of relevance’ upon a concrete situation.” (Bieling 2010, p. 42). Models thus entail a dimension of purpose that is historically driven by power and interests and is conveyed through communication. Simultaneously, models must be understood as the condensed result of social struggles and conflicts, whereby they are connected to economic interests and strategies and thus exhibit a material foundation (Syrovatka and Schneider 2019, p. 164).