legrain32_STEPHANIE LECOCQPOOLAFP via Getty Images_eu recovery fund

Europe Rescues Itself

Jul 22, 2020 Philippe Legrain

Once again, the European Union has shown that it is capable of rising to the occasion and coming to the assistance of Europeans in a time of need. A groundbreaking agreement for a new EU-financed recovery fund may not satisfy all of Europe's needs; but it is precisely what the bloc needs now.

LONDON – After four days and nights of tough negotiations and many painful compromises, European leaders have reached a deal on a groundbreaking €750 billion ($868 billion) recovery fund. As a gesture of solidarity toward Italy, Spain, and other countries still reeling from the COVID-19 crisis, the agreement is a major step forward for the European Union. Even so, it does little to address the eurozone’s deepest problems.

The COVID-19 crisis has strained the monetary union to breaking point. While the pain has been widely shared, some countries have been hit harder than others. Italy, France, and Spain have suffered the most deaths and the deepest recessions, and tourist-reliant southern Europe seems headed for an especially slow recovery.

Worse, while government debt is soaring across the eurozone, it is reaching perilously high levels in many southern countries, particularly Italy. The initial response to the pandemic left Italians feeling aggrieved, owing to the perception (not unjustified) that northern Europeans had been quicker to blame them for their plight than to offer assistance. Even the pro-European Italian mainstream – from President Sergio Mattarella on down – felt politically alienated from the EU at the height of the crisis.

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j. von Hettlingen Jul 29, 2020

Philippe Legrain is – for once – not critical Angela Merkel, because she has thrown her weight behind the €750 billion ($868 billion) recovery fund, after four days and nights of “tough” negotiations and many “painful” compromises. This deal demonstrates the EU is capable of showing solidarity when countries like France, Italy, Spain have been hard hit by the Covid-19 pandemic, and that their economies are in shambles. Yet it remains to be seen whether it would “provide a sorely needed antidote to Euroskepticism and alleviate the anger generated by the crisis.”
The author fears this “groundbreaking” agreement for a new EU-financed recovery fund “may not satisfy all of Europe's needs; but it is precisely what the bloc needs now.” He says its “biggest benefit” though, is “political.” The EU shows that it can come to assistance when the Continent is in dire straits. The huge economic boost breaks some political taboos, and suggests a willingness for genuine integration. But “it does little to address the eurozone’s deepest problems.”
According to critics, the 2008 global financial crisis had exposed the inherent fragilities and incompleteness of Europe’s monetary union, prompting a decade of agonising debate over a fiscal union. Ultimately sharing a common currency without sharing a real budget was always going to be unstable. Now EU leaders seem to be finally facing up this profound architectural problem – common debt, common expenditure and the possibility of common taxation.
But it does not necessarily mean that they have acknowledged the indispensability of a common debt as the glue that holds the monetary union together, making a leap towards a closer union.
In the past weaker countries in the Eurozone could only hope for EU loans with strings – austerity conditions – attached. Member states whose public finances were shaky can now point to a political backing for their increased government spending. Yet it may just be a matter of time that resentments grow within the coalition of small countries led by the Netherlands (including Denmark, Sweden, Austria and at times Finland), dubbed “the frugal” member states.
The author is right that the agreement raises a number of questions. In order to finance this recovery fund, member states would have to agree to cut their budget, involving some of the most important and future-oriented projects, in particular in research, healthcare and the green-energy transition. Luckily, the European parliament that has to approve the deal is already threatening to block it if these critical spending items are not considered.
As the compromise required unanimity there is only a very superficial control of the compliance of the spending with the EU’s climate objectives. More importantly, there is no clear mechanism for ensuring that recipient countries abide by the essential rule of law and democratic values enshrined in European treaties. These concessions were particularly important, because Hungary and Poland subvert the rule of law with impunity while misappropriating EU regional cohesion funds for their own benefit. It makes sense that “one of Merkel’s top priorities had been to tie future EU funding to respect for the rule of law.”
The lack of a clear commitment to common European taxation will make a closer monetary union less efficient. However some member states desperately cling to their "tax sovereignty" even though it only leads to a tax evasion to tax havens. No doubt the recovery fund does not resolve the fundamental problems that dog the money union. One the one hand we have Italy’s “unsustainable debt dynamis,” and Germany’s “deflationary bias" on the other, as well as "the lack of a fiscal rebalancing mechanism.” The Eurozone may be able to dodge a bullet once in a while, but it will always remain “an open target” in the absence of meaningful reforms.
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