Our shot? On the EU recovery fund

While we all move faster in times of crisis, driven by an innate and sometimes unhelpful urgency to act, few surviving entities have in the past century alternated such marked periods of relative stagnation and rapid reform as our sui generis European polity. It is therefore unsurprising that, in the midst of perhaps the largest crisis of its existence, a mere few weeks have made a substantial difference to the state of the EU’s debated response to the economic fall-out.

In the final days of last month, I had the chance to discuss this EU response, in the context of OpenEUdebate’s ‘Europe after coronavirus’ series, with Michele Chang and George Pagoulatos, both Professors at the College of Europe, as well as with host Carlos Carnicero. At the time, a certain pessimism prevailed; Michelle rightly pointed out that the leaders of euro area countries had «rejected redistribution» on a large scale in the past, and debt mutualisation remained a recognised taboo. I naively hoped for bold EU action in the podcast’s closing lines, yet thought the prospect remained bleak. Since then, the leaders of France and Germany have presented an ambitious proposal for an EU recovery fund that breaks old taboos and includes both redistribution and the issuance of joint debt at the EU level. ‘Next Generation EU’, the Commission’s proposal, expands upon this. This brief piece hopes to examine the proposed response and the circumstances that lead to it.

The EU economic debate has recently concentrated around the creation of an EU recovery fund, both the vaguest and most promising aspect of the 9th of April Eurogroup conclusions. It took some weeks for this fund to take shape, and when our podcast episode aired on the 29th of the same month little was yet known. The Commission was asked to put forward a proposal and national public debates slowly moved on from the north-south conflict that had been brewing. Spain put forth a bold non-paper, which received ample media buzz but was likely too ambitious for many member states. A more crucial development was a ruling by the German constitutional court on the ECB’s Public Sector Purchase Programme (PSPP), which poured uncertainty on the ECB’s actions in dealing with the crisis, actions which have been and remain pivotal. The ruling is outside the scope of this post, yet it is safe to say that a potential weakening of the ECB’s ability to combat the downturn placed increased onus on a prospective EU fiscal response. While perhaps not the defining factor, it is also likely that this judgement (unfortunate for multiple and often longer-term reasons) egged Germany along. 

[Recibe diariamente los análisis de más actualidad en tu correo electrónico o en tu teléfono a través de nuestro canal de Telegram]

This brings us to the Franco-German EU recovery fund proposal, introduced last week in a joint virtual event which caught both markets and politics off-guard. Crucially, the proposal represents two pivotal shifts. Firstly, the joint position called for the first large-scale instance (500 billion euro) of European Commission debt issuance to support EU budgetary expenditure, within the context of the next MFF. EU member states will be (indirectly) jointly responsible for this debt. Secondly, this fund will target the most affected sectors and regions, thereby resulting in evident redistribution or fiscal transfers between member states (albeit through the EU budget). While both France and Germany made concessions on their original position, this represents a more substantial evolution of the German stance that had previously included a reluctance (to put it mildly) both to debt mutualisation and to programmes based on grants instead of loans.

The Commission’s proposal takes this further, calling instead for 750 billion euro (of which 250 billion would take the form of loans) and highlighting the need to protect single market integrity and the level playing-field. Many had considered the Franco-German proposal the upper boundary of what could be achieved. With this move, the Commission has ensured that the debate will be two-sided; compromise will move in both directions.

These proposals have been hailed by the most fervent European optimists as a possible turning point in the European construction and the beginning of genuine fiscal union. Many have dared refer to it as the EU’s Hamilton moment, in reference to the first US Treasury Secretary who federalised the debt of the different US states in a key state-building move (and recently immortalised in the hit Broadway musical). Even Manfred Weber, the German conservative known for his stoic nature, referred to Alexander Hamilton albeit without hiding his original scepticism for debt as the binding glue.

[Escuche el ‘podcast’ de Agenda Pública: ¿Se lo dejamos a los expertos?] 

Caution remains necessary, two conclusions are important here.

The first is that there is a long way to go yet. The Franco-German proposal has received the support of Spain and Italy, but Germany was hardly the only obstacle to closer fiscal integration. The frugal four member states (the Netherlands, Austria, Sweden and Denmark) have put forward a non-paper in response, rejecting both debt mutualisation and the substantial increase of the EU budget. That said, Denmark has already expressed a willingness to negotiate, and the Austrian Greens (junior government coalition partner) could facilitate an Austrian compromise. Even Weber spoke optimistically about the Commission’s proposal, reminding the frugal four that their prosperity depends on a well-functioning single market. In theory, France, Germany and other willing member states could also threaten to work outside the EU framework (opting instead for enhanced cooperation, provided for in the treaties) and thus potentially goading these frugal four to agree to the proposal for fear of being left out. As of yet, this appears improbable. A compromise approach is more likely.

The second conclusion is that, breaking these two taboos (mutualisation and transfers) is big, and it may (but may not) be of transcendence. Both proposals highlight the exceptional nature of the situation, warranting an unconventional response. While the precedent could make a substantial difference, it could also remain a one-off. Furthermore, while a political precedent would be established, it would not be the first time that the Commission issues debt, while structural and cohesion funds have long resulted in fiscal transfers between member states through the EU budget. That is not to say that the success of this proposal would not be of great political significance, just that it remains to be seen whether it will be game-changing. 

In the last couple of weeks, the debate on the EU economic response has advanced rapidly and should be a cause of optimism. The Franco-German proposal is bold, the Commission took it one step further and ensured the discussion will move in both directions and not just in that of the frugal four. If a sufficiently non-watered down version of these proposals succeeds it could make a substantial difference to the countries that most need it. Whether it sets the precedent for future integration is less clear, and remains to be seen.  

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