Europe’s Golden Eleventh Hour

In true EU fashion, a compromise solution is taking shape for member states unable to power up their economy for the post-corona recovery. French president Emmanuel Macron and German chancellor Angela Merkel have proposed the creation of a €500 billion fund to underwrite the economies of Spain, Italy, and other member states that have borne the brunt of the pandemic.

The money is to be sourced by the European Commission which will receive a one-time only authorisation to issue bonds backed by all EU members. Repayment is to take place via the EU budget boosted by temporary surcharges of contributions using the same ratio presently employed for calculating transfers from national governments to the union.

The plan unveiled on Monday by France and Germany does not go as far as southern member states had wanted. It falls (far) short of the €1.5 trillion Spain and Italy say is needed to prevent the current recession from turning into a depression. However, disbursements from the EU recovery funds need not be paid back and are to be considered grants. Payouts are not linked to a particular reform agenda such as the one imposed on Greece during the banking crisis of the early 2010s.

The government of The Netherlands has promised not to veto the new proposal even though it includes an element of mutualised debt. Finance minister Wopke Hoekstra said that a single bond issue for a specific purpose, and coordinated by the European Commission, is acceptable.

President Macron raised the possibility of introducing an EU-wide tax on big tech companies as a way to avoid a steep increase in national remittances to Brussels. He also emphasised that corporate recipients of EU grants should present sustainable business models that contribute towards the greening of the continent. Both President Macron and Chancellor Merkel stressed the need for speed and called on member states to act swiftly. Looking towards The Hague, President Macron warned that there is no more time to lose.

Earlier, the Dutch government had been vehemently opposed to any and all forms of shared debt, playing the evil twin to Germany which preferred not to be seen as the stumbling block of the bloc. According to Minister Hoekstra, that position is unchanged though not inflexible in light of the urgency of the moment.

The Franco-German plan deftly manages to muddle the sharing of debt to such a degree that it is somewhat acceptable to the Frugal Four and their hangers-on. The relatively modest size of the proposed recovery fund also helps make the idea ‘sellable’ to national parliaments weary of taking on additional financial burdens at a time when spending deficits and debts are skyrocketing.

After Chancellor Merkel publicly signed off on the plan, other northern member states had no option but to cease and desist. Germany, which due to its size represents 27 percent of the EU budget, ultimately calls the shots in Europe.

The proposal serves a larger purpose as well. Although the northern economic powerhouses of Europe are loath to say so, they also need the markets of southern member states to remain buoyant in order to keep their own economies humming. It is expected that in the wake of the pandemic, protectionism will rise throughout the world as some countries may suffer deteriorated terms of trade or struggle to keep their balance of payments on a somewhat even keel. Others may want to re-shore production in order to shorten vulnerable supply chains and gain more control over economic sectors deemed of strategic importance. The union’s common market of 450 million consumers allows for the necessary economies of scale and its smooth functioning is widely considered essential to boost the recovery effort.

Although struggling with a politically divisive divergence of national economic fortunes, most European governments recognise that they are condemned to each other: in an increasingly hostile world marked by a new cold war with tensions escalating between two superpowers, the European Union is, perhaps, more necessary than ever before to preserve a way of life and maintain a degree of relevance on the global stage.

For all its shortcomings – and there are many – the EU is the only tool the minor powers of Europe possess to stave off oblivion. On their own, 25 of the 27 member states would be but a footnote on the world stage. Even France and Germany derive their global prominence from their central role as the union’s pre-eminent powers.

Interestingly, euroscepticism – aka the English Disease – has disappeared almost overnight. Given the magnitude of the Corona Recession, no opposition leader dares suggest following the British example by leaving the union. Although many may grumble over fiscal transfers, virtually none of formerly anti-EU politicians such as Geert Wilders in The Netherlands is foolish enough to suggest an exit. Just as the Greeks before them, Italians also realise that, whilst the union is not perfect, their country’s future remains inextricably linked to its EU membership. The same holds true for Spain.

The European Parliament (EP) is expected to have a say too on the Franco-German support plan. Last week, the EP threatened to veto the next long-term EU budget should it fail to include robust funding for member states hard hit by the pandemic. The parliament adopted a resolution that called on the European Commission, the executive arms of the union, to reserve ‘at least’ €2 trillion for the post-corona recovery effort. The EP also wants to have the final say over the spending of support monies, arguing that it is the only directly elected branch of the union and, as such, must be awarded oversight.

Although the details remain sketchy, the plan proposed by President Macron and Chancellor Merkel signals a monumental change in attitude. By agreeing to a modest and diluted form of eurobonds – a word that both leaders took pains to avoid mentioning – Mrs Merkel has broken a long-standing taboo. This helps explain why Mr Macron displayed an almost unpresidential enthusiasm when announcing the plan. A precedent is being set that may, of course, be invoked whenever trouble arises in the future – as it inevitably will.

That speaks volumes about the size of the economic calamity caused by the pandemic. However, Chief European Analyst Mujtaba Rahman of the Eurasia Group seemed elated by the news and called the plan nothing short of ‘revolutionary’. Mr Rahman points out that the beauty of the proposal resides in the fact that the bonds are issued by the European Commission and do not add to the national debt of individual member states. As such, the shared debt does not affect their credit rating, which is sacrosanct in Germany and The Netherlands – 2 of only 10 countries* worldwide (8 of them in Europe) that boast a universal AAA (stable) rating.

At the eleventh hour, the European Union seems to have made a break-through. Some things never change.

* Canada, Denmark, Finland, Germany, Luxembourg, Norway, Singapore, Sweden, Switzerland, and The Netherlands. Australia maintains a AAA rating, albeit one with a negative outlook. The UK shares an AA+ sovereign credit with the US. Both countries were downgraded a single notch due to their relatively high level of indebtedness. Earlier this month, Fitch signalled its intention to shave another notch of the UK’s credit rating to AA- (stable).