European Union Leaders will meet on Friday at the virtual Council meeting to discuss the COVID Recovery Fund and the EU budget as the bloc faces the deepest recession in EU history. In the first quarter of 2020, the EU saw the sharpest decline in GDP since the early 1990s, and a sharp rise in unemployment, with almost 60 million laid off or furloughed and vast numbers of SMEs on the brink of bankruptcy.
How the EU confronts this issue will have serious ramifications for the populations and businesses of the EU27 and indeed for the viability of the entire EU project. Will they choose solidarity at the expense of the northern states or more austerity and risk division – possibly even disintegration?
The European Commission has proposed a €750bn Recovery Fund, two thirds of which will be distributed in the form of grants rather than loans, in order to avoid generating unsustainable levels of public debt. Funded by joint debt issuance, this would mark a serious move towards closer economic integration across the bloc.
The Commission will also discuss a revised and increased €1.1trillion seven-year EU budget plan, for 2021 to 2027 replacing the smaller pre-Covid plan that had been agreed.
Supporters argue that this recovery plan will save millions of existing jobs, create new businesses and allow for increased public investment. They also fear that economic crisis in one member state or another will lead to a political crisis that will spread to other states and ultimately threaten EU cohesion and the very future of the European project.
Standing in their way are the ‘Frugal Four’ group of Austria, Denmark, The Netherlands and Sweden. This group have pledged their support for loans to aid economic recovery but warn that all spending must be responsible.
In a letter to the Financial Times on Tuesday 16 June, Stefan Löfven, prime minister of Sweden; Mette Frederiksen, prime minister of Denmark; Mark Rutte, prime minister of the Netherlands and Chancellor Sebastian Kurz of Austria set out their vision. Beginning with an acknowledgement of the unprecedented nature and dire consequences of the global COVID pandemic, they express their solidarity with the EU, emphasise the importance of the single integrated market to economic recovery across Europe and give their full support to “building a joint road to recovery.”
“But…”, yes the ‘buts’ come early. Echoing Margaret Thatcher’s famous 1983 adage “There is no such thing as public money. There is only taxpayers’ money,” the four Leaders declare that important principles must be adhered to: “How can it suddenly be responsible to spend €500bn in borrowed money and to send the bill into the future?”
“Part of the EU Commission’s recent proposal is to find new ways for the bloc to finance itself. But there is no such thing as new or fresh money. Money spent will have to be earned and paid back – by taxpayers.”
The Four emphasis that they support a time-limited emergency recovery fund targeted at those hardest hit, but that this support should be in the form of loans on favourable terms and accompanied by reforms. With Spanish, Italian and Greek economies projected to shrink by as much as 10% this year, there are no prizes for guessing where the bulk of funds are likely to be heading.
The letter specifies an emphasis on green and digital transformation – to foster growth and job creation – and that financial help from the Recovery Fund should be targeted based on a specific set of criteria and to alleviate damage specifically and demonstrably attributable to COVID. A veiled warning to those who might see the Recovery Fund as a way to prop up out-of-date and failing industries or to curry favour with the unions?
Regarding the 2021-2027 EU budget, the Leaders call for restraint and realism in terms of spending, with careful consideration of real priorities in light of the hard-hit national budgets of member states. This letter is unlikely to find favour with the southern states who, with their already dangerously high levels of debt, are arguing for grants instead of loans. Mark Rutte will have angered them further by adding that “Countries which are bailed out will have to say what they will do to make sure this situation does not arise again.”
While Merkel and Macron may have been the enthusiastic public cheerleaders of the Recovery Fund, there are plenty who wonder if there isn’t a German tail wagging this particular four-headed dog. The German Constitutional Court rulings in May, that declared the ECB’s public assets purchases programme and ECJ judgement ultra vires struck at the heart of the EU’s icons of integration. What might Karlsruhe make of fiscal transfers outside the treaty arrangements?
In formulating the plan, Chancellor Merkel has broken two rules of Germany’s EU policy: no common borrowing and no transfer union beyond the existing EU budget.
This recovery plan recognises the unprecedented nature of the Coronavirus pandemic and that not all EU countries are equal – the southern states rely heavily on tourism and manufacturing, sectors that have been hit particularly hard. These same states are also not in an economic position to bail out their industries to any great extent – the European Commission has certainly noticed Germany’s mammoth loan guarantee programme to business amid concerns it might undermine the single market.
However, the smaller northern states, and some eastern states are now being forced into being piggy-in-the-middle. Their own economies have been hit hard and they can’t afford to dole out the largesse in the way that Germany can. As net contributors to the EU budget, and with a sizeable hole replacing British funds post-Brexit, their voters at home will be reluctant to shell out even more, especially if it’s in the form of non-repayable grants that are unlikely to benefit them. Why would the Dutch or the Swedish want to saddle their children and grandchildren with vast debt for the Commission’s plans for EU solidarity?
Italian Prime Minister Giuseppe Conti thinks he has the answer, saying “I often say it’s not a handout to benefit the current government, it’s an investment we must make in Italy and in Europe for our children and grandchildren,” and promising that “It’s an opportunity for us to design a better Italy, to work on a serious, comprehensive investment plan that will make the country more modern, greener, and more socially inclusive.” Italy is expected to receive the largest share from the Fund – around €172 billion.
Commission President Ursula von Der Leyen agrees, announcing that “We, the EU, are borrowing money from our children for the first time…So today’s investments must bear fruit for our children… We will not simply borrow money from our children just to spend more today, as our Member States sometimes did.”
However, the COVID pandemic demonstrated a remarkable lack of solidarity when the chips were down. Borders went up at lightning speed, PPE supplies were impounded and ring-fenced, and EU popularity has waned as Brussels was found wanting. Will things change in a post-COVID Europe, or does solidarity all run one way: from efficient, financially disciplined, tax collecting countries to those with a more laissez-faire model?
Are the minds in Brussels focused by the threat of an Italexit? Bavarian president, Markus Soeder, told Frankfurter Allgemeine Zeitung: “Brexit is now underway. I still cannot imagine a strong Europe without the United Kingdom, but without Italy, little remains of the original idea. The Treaty of Rome was the basis of the EU. Italy is the cultural and historical centre of Europe.”
With the proposals requiring the unanimous agreement of all EU member states, it seems likely that there will be fraught negotiations in coming weeks and potentially months before any decision. Fortunately, with the EU and UK confirming this week that there will be no extension to the transition period, the UK’s children can breathe a sigh of relief that Ms von Der Leyen won’t be scoping out a raid on their piggy banks.
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