A Recovery Plan for Europe – The Weekly 09

Márton Gyöngyösi

29/05/2020

           

The announcement by the European Commission of a recovery plan was hailed as an unprecedented sign of solidarity in the history of the European Union.  

Certainly, the EU has never faced an economic crisis comparable to the one unfolding and this required urgent and substantial financial measures that can assist ailing member states.    

Far from approved, the plan and the numbers are robust. A EUR 500 billion recovery fund pooled by the EU from international stock markets and distributed to stricken member states in the form of grants and loans, coupled with a EUR 1000 billion funding embedded in the multiannual financial framework – as the seven year budget of the EU is known – looks like an adequate answer to fight the negative impacts of the pandemic. Additionally, earlier this year the EU already adopted a EUR 540 billion package, composed of financial loans and funds to help support SME’s and protects job across the continent.

However, despite the presumably good intensions of the decision-makers of the EU it might be too early to rejoice and celebrate. 

Those who follow closely the evolvement of decision-making in the EU know that things are rarely as great as they appear at first sight.

Firstly, the recovery package needs approval by the European Council in one of its forthcoming summits. As we already know it there are already four member states, the so-called „Frugal Four” that oppose a Pan-European rescue package whereby the costs of assisting hard-hit, ailing member states are spread among the 27-state community. These states would be happier to see a higher proportion of loans and less of non-repayable grants in the package. Others are worried about the impact that such a package would have on the debt levels of some Eurozone member states. Such concerns are not entirely unfounded, as some countries like Greece, Italy and France already have a debt to GDP ratio well beyond acceptable based on the stringent fiscal requirements set out in the Euro-charter.

As the recovery package and the pooling of resources from the international money markets would not constitute a Euro-bond, i.e. a de facto transfer of debt from the member states to the EU, these countries would see a significant increase in their debt levels.

This would eventually lead to pressure from the ECB and the Eurogroup for severe austerity in years to come, which would in turn further weaken an already unstable monetary union.

Furthermore, those who criticize the EU for a lack of transparency and a democratic deficit have a point to make. In the case of the EU recovery package it is more than curious that the proposal of the European Commission was presented just a few days after Angela Merkel Chancellor of Germany and Emmanuel Macron President of France announced a deal for European economic recovery, which in all its details is identical to the Commission’s proposal. Of course, from the very beginning it is understood and appreciated that Franco-German reconciliation is the engine of European cooperation. However, that cannot mean and certainly cannot appear to be an intransparent process of behind-the-door deals with 25 other members following suit without a word to say.

Especially in critical times where rapid action is needed, the European Community must act democratically and transparently in line with its most cherished values, otherwise it risks its future and exposes itself to the criticisms of populists ready to capitalize on their mistakes.

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