Europe's leaders gathering for 'moment of truth' as they mull over financial fallout of coronavirus pandemic

LONDON - European Union leaders are convening via teleconference on Thursday (April 23) for a summit which French President Emmanuel Macron has already dubbed Europe's "moment of truth".

For on the agenda of the heads of states and governments of the 27 member-nations is one item which may decide the future of their continent in the decades to come: measures to deal with the economic and financial fallout of the coronavirus pandemic.

And although all leaders share the belief that they must uphold solidarity with one another, navigating the different national positions and the limits of the EU's own treaty obligations won't prove easy.

Nobody knows just how big a hit European economies will suffer as a result of the pandemic; a debate about easing the lockdown measures now applied across the continent is only just beginning, and the process of returning to normality could take many more months.

But the initial batch of national statistics from individual EU member-states indicates that the economic impact of this crisis will be huge, and the hole in European finances will be of gigantic proportions. Most estimates now assume that the countries which operate the euro as their currency may experience economic falls comparable to those recorded during the darkest days of the Great Depression back in the 1930s.

And to make matters worse, Europe's southern states - countries such as Italy, France and Spain - whose national finances were already under strain even before the pandemic, have also suffered the lion's share of coronavirus-related deaths and economic dislocation.

Existing EU treaties which commit countries operating the euro to strict limits on their government spending and borrowing have already been rendered irrelevant by the health crisis; even Germany - Europe's biggest economy, ultimate paymaster and chief proponent of financial austerity - may end up violating these legal provisions this year.

But the fear is that, if additional sources to finance Europe's economic reconstruction are not agreed upon soon, the price which heavily indebted countries will have to pay to borrow on open markets will become unaffordable, unleashing a crisis similar to that Europe faced a decade ago when Greece risked national bankruptcy.

And while Greece could be bailed out from ruin - it accounted for only around 1 percent of the Union's total combined economy at that time - Italy or Spain are simply too big to be rescued, so a crisis there may well pull the entire European edifice down.

Europe is already doing a fair bit to share the burden. The European Central Bank (ECB) is buying member-states' bonds through its so-called Pandemic Emergency Purchasing Programme, worth €750 billion (S$1.16 trillion), so EU countries can continue to borrow at reasonable rates.

But that is already stretching the ECB's legal mandate, and does nothing to address the problem of the long-term volume of such massive borrowing.

Until this week, the fear was that Europe could be torn up by a traditional dispute between its poorer EU countries, which argue that the only way out of the crisis is for member-states to accept joint liability of the debts incurred in tackling the current pandemic - by issuing so-called Coronabonds - and richer norther European states such as Germany or the Netherlands, which oppose the measure, pointing out that they can't undertake such a joint burden without modifications in existing EU treaties, which may take years to implement.

Chances are high that such a bruising debate will be avoided on Thursday, largely because German Chancellor Angela Merkel appears to have thrown her weight behind a plan put together by EU finance ministers to create a special €500 billion fund to sustain Europe-wide economic recovery.

"I can imagine such instruments further down the line," Dr Merkel told a news conference in Berlin earlier this week in reference to this new fund idea, adding: "More generally I would like to say that Germany not only wants to act in solidarity, but that it will act in solidarity."

On Thursday, all eyes will be on how this package would work. It will not finance mutual debts; the fund looks likely to be administered by the European Commission, the union's executive body, and be targeted at providing economic relief.

But questions such as how quickly will the new fund be established and what it will finance remain to be answered. Nor is it clear whether the money will come in the form of loans - in which case the scheme merely increases national debts - or in grants which will provide real relief to the rickety finances of some member-states.

Still, there is no doubt that the EU remains determined to squash any speculation that it is divided over how it should handle its future.