Europe is not wasting this crisis
The European Commission has delivered its proposal for an EU recovery fund. It may not be full debt mutualisation nor a solution to low European growth, but it is a huge step forward.
The proposal of €500bn of grants and €250bn of loans mobilises some 4.3% of the European Union’s GDP based on 2019 numbers and, given the gloomy contraction forecasted, the ratio versus 2020 GDP could be much higher.
It is a substantial amount. And the EU’s allocation mechanism ensures that deeply impacted member states such as Italy will be eligible to receive far more than countries like Germany, repaying far less later on.
This is exactly what supporters of the European project want, and exactly what the eurozone periphery needs: not monetary adrenaline, or concessional lending, but genuine fiscal action.
Still, it won’t be enough. Italy’s economy could be devastated by the coronavirus, with early forecasts indicating that its debt-to-GDP ratio will likely end the year above 150%.
The European Central Bank will keep debt sustainability questions at bay for now, but Italy has needed structural reforms to promote growth since far before anyone knew what Covid-19 was. Italy’s GDP growth has been consistently well below the European average for years.
In an economic catastrophe, it will be difficult to find the funds for that type of reform. The EU’s cash injections will help, but they are strictly temporary, with funds available only until the end of 2022. Rejuvenating Italian growth would require a more protracted engagement than that.
And, of course, in the wash of speeches about European unity, it is easy to forget the objections of the “Frugal Four”: Austria, Denmark, the Netherlands and Sweden.
The EU is, as ever, hamstrung by its need for unanimity. As such, there is still a risk that the Commission’s proposal is watered down to something inadequate during negotiations over the next few weeks.
But setting these challenges aside, the importance of the step that the EU is proposing cannot be overstated.
The Commission is planning to raise the crisis funding itself, by issuing bonds that are backed by budget commitments from member states.
To do this it needs to have a bigger pool of its own resources, which may come through a carbon border tax, a digital tax and an extension of the Emissions Trading System.
If the EU begins to finance budget expenditure with debt, assuming a role as a central fiscal authority for an economy of 450m inhabitants, it will gain a footing with the developed world’s other major economies.
In the middle of the Covid-19 crisis, member states seem to finally recognise that the risks they face as a bloc they also — in one way or another — end up paying for as a bloc.
For all the language that any pooling of fiscal resources will be a temporary measure to deal with a unique emergency, are we not facing other dire emergencies such as climate catastrophe? What about when the bloc wants a unified response to managing refugees?
Now that the EU has admitted the possibility of borrowing for its budget, other reasons will be found. The spell is broken.
This is particularly the case in Germany, the most powerful member of the EU, which turned away from years of blocking this type of plan to present the €500bn blueprint with France last week.
Powers granted in an emergency are rarely given up in peacetime. The EU’s fiscal muscle is here to stay.