The Franco-German plan for a €500 billion “recovery fund” has been welcomed with superlatives such as “Hamiltonian,” “stunning,” “a game-changer” and the somewhat slightly less hagiographic “surprisingly ambitious.” In actual fact, it is just a damp squib.
The appropriate criteria by which to judge such a proposal are 1) Is it big enough? 2) Is it timely? 3) Does it set a powerful new precedent? 4) How does it fare in the context of the times? and the 5) What is its long-term impact? Sadly, the recovery fund falls far short of even “adequate” on all five.
Let’s start with the fund’s size. The coronavirus has trigged a global economic crisis in which the economies of some EU countries could shrink by between 10 percent and 20 percent. The recovery fund’s €500 billion amounts to a mere 3.5 percent of EU GDP to be distributed over three to four years. That’s not a game-changer.
Nor are the countries that were hardest hit by the crisis likely to get the most money. Resistance from Northern and Eastern Europe make it highly unlikely that hard-it southern countries such as Italy or Spain will get more than twice their quota of about 1 percent of GDP per year. Is a 2 percent of GDP grant to Spain and Italy helpful? Yes. Is it macroeconomically significant? No.
The fund also fails the test of timeliness with disbursements unlikely to reach countries before next year. To offset the permanent economic damage being done by lockdowns, governments need money now.
While Germany has been able to act decisively with more domestic economic support than all the other EU countries put together, Italy and Spain have been more hesitant to act, because of their heavy debt burdens. Further delays in getting aid will leave even deeper scars in their economies that could have been prevented.
The picture is no better when it comes to setting a precedent. Even commentators who acknowledge the fund is far too small have waxed lyrical about how it “crosses the Rubicon,” “breaks taboos” or change the game the way the U.S. Revolutionary War hero Alexander Hamilton did when he federalized the debts of the various U.S. states in 1790.
In truth, the idea that this is the first step in the creation of a “fiscal union” is nothing but hyperbole.
First of all, there’s little here that’s actually new. The European Commission already has €52 billion of bonds outstanding, and cohesion and structural funds already entail transfers between EU countries. The European Stability Mechanism and the European Financial Stability Facility already saw EU governments band together to borrow to aid troubled members, albeit in the form of loans, not grants.
What the recovery fund does not do is make provisions for a permanent increase in the EU’s meager budget or give the Commission the ability to raise own funds. Nor will existing debt be subsumed into a fiscal union as Hamilton did. Not even the responsibility for the new debt being created will be shared jointly among all EU countries, as the now abandoned “Coronabond” initiative proposed. The recovery fund is a step toward a dead-end, not a fiscal union.
Put in the context of the time, the recovery fund looks even worse. The initiative can be seen as the German establishment’s attempt to make up for the sins of its constitutional court, which threw a Molotov cocktail into the EU’s legal and economic order in early May by challenging the actions of the European Central Bank and the Court of Justice of the European Union.
However the German court’s decision finally plays out, its immediate impact is to put a de-facto political constraint on the size and asymmetry of the ECB’s quantitative easing programs, thereby limiting the ability of the most effective institution in the eurozone to respond to a crisis with appropriate size and timeliness. Italy and Spain would have been better off with an unconstrained ECB and no recovery fund.
The longer-term consequences of the fund itself may also prove to be negative. It has killed any genuine prospect of a true, much-needed eurobond for good, leaving any “Hamiltonian moment” for future, potentially weaker, leaders. Even worse, absent future political agreements, the need to repay the debt incurred by the recovery fund will hollow out the already scarce EU budget.
EU politics is becoming more, not less contentious. If we can’t set aside our petty, parochial politics amid a global pandemic to move toward a fiscal union now, we never will.
This piece was first published by Politico on the 22nd of May 2020 here