The EU Recovery Fund is in the headlines again, but for all the wrong reasons. An injunction by the German constitutional court has the German president from ratifying the legislation supporting the Fund. Similar challenges delayed the ratification of the EU´s Lisbon treaty and legislation for the European Stability Mechanism by several months. Members of the ECB´s governing council have come out in force expressing worries that any delays to the Fund will put economic recovery at risk.
For example, both Yannis Stournaras the Governor of the Central Bank of Greece and Isabel Schnabel, member of the ECB´s executive board, have issued stark warnings that indefinite delays to disbursements from the Recovery Fund will not only mean that there will be no recovery this year, but also that it would amount to an “economic disaster”. ECB President Christine Lagarde hopes that any delay will be dealt with in short order as she highlighted the urgency for the fund to provide further fiscal support to member state economies. The ECB´s March meeting had asked for the fund to become “operational without delay.”
Meanwhile France´s finance minister, Bruno Le Marie, has said that he is “deeply concerned” about delays to the EU Recovery Fund, and expressed frustration at not having seen a penny yet. His worry that the fund is not track has only been exacerbated by the fact that deep divisions have emerged between member states on how to pay for the European Commission´s “own resources” meant to service the Euro 750 of borrowing envisaged under the Fund. On top of that, a member of Poland´s governing coalition has threatened to veto the fund, which needs to be approved by all EU member states though only 17 of 27 member states have ratified it thus far.
However these legal and political challenges are not the only reasons for delay. Until recently, it was the failure of member states to submit quality spending plans, a pre-requisite for disbursements from the Fund that was slowing the process down with many plans judged to be “sub-par” by the European Commission that has been tasked with approving them. By mid-February, eight out of twenty seven member states had failed to submit any spending plans at all.
But how important the court challenge and delays are, depends partly on how big a deal one thinks the recovery fund was in the first place. As I wrote in Politico in May 2020, the agreement on the Fund “wasn´t Europe´s Hamilton moment”. It is also too small, and with two-thirds of the amount expected to be spent after 2022, it does not add up to a fiscal stimulus for the EU´s crisis-ridden economies. Klaus Regling of the ESM is right in saying that the Recovery Fund ismore a program for supply side interventions designed to enhance productivity rather than a fiscal stimulus. To us, it is closer to Biden´s $2 trillion plan to reshape the American economy and infrastructure than his $1.9 trillion fiscal stimulus.
Meanwhile lot of commentary has been focussing on how the US´s accelerated vaccination program, and its fiscal stimulus is turbocharging the American economy while the EU lags behind on both fronts. But the reality is more nuanced with the EU´s vaccination program finally taking off. And the EU´s spending plans, should the Recovery Fund be finalised, are comparable in size to the American stimulus, but spread over 3-4 years. Direct comparisons also miss the very different nature of the safety nets between the two with the EU having relied far more on national automatic stabilisers and liquidity support, and the US much more on discretionary fiscal spending at the Federal level.
In the EU, it is member states, using the borrowing space provided by the ECB´s pandemic emergency purchase program (PEPP), that have funded their own fiscal stimulus. Examples of this include the €100 billion France Relance and Germany´s €130 billion Kraftpaket für Deutschland.
At €1.85 trillion, PEPP is more than two and a half times bigger than the Recovery Fund, and frontloaded by design to provide the bulk of support between 2020 and 2022.The real legal challenge to worry about then is the one questioning the legality of the ECB´s PEPP filed at the German constitutional court on the 8th of March, not the challenge to the Recovery Fund. The ECB is so keen for the Recovery Fund to go live less for what it may do financially, but more because having a fiscal counterpart to the PEPP to mitigate the effects of the Covid crisis takes some of the political heat off the ECB, especially in Germany.
Historically, the German constitutional court has only delayed, but not vetoed any politically critical EU agreement, and the Recovery Fund is unlikely to become the first exception. And while the legal challenge to the ECB´s PEPP is not frivolous, it is far too macroeconomically important to risk, no matter the legal merit. And the German constitutional court knows that. Don´t Panic!
This piece appeared in Euractiv on the 21st of April 2021 here