At a press conference on May 18, French President Emmanuel Macron and German Chancellor Angela Merkel announced an action that could finally unite the eurozone financially with a stimulus fund of 500 billion euros, which would distribute subsidies to the hardest hit regions and sectors. the EU. Similar proposals by “coronabonds” have been launched by particularly hard-hit southern European states and, so far, have been vetoed by the wealthiest northern nations – including the Germany. With this proposal, considered by Macron to be a “game changer”, each man, woman and child in the EU could potentially receive around € 1,000 each.
The move would allow the European Commission to borrow money on the capital markets on behalf of all EU states against the security of the next seven-year EU budget. Repayment would be expected after 2027. In other words, the EU would jointly increase debt for the first time, thereby bringing the euro area closer to a true fiscal union. It also represents a commitment to European solidarity; a dramatic change from the lukewarm support offered after the sovereign debt crisis almost a decade ago, which, thanks to austerity, has hampered growth and recovery for a decade, helping to boost growth in eurosceptic movements. The fund’s proposal needs unanimous support to pass, but opposition remains from Austria, Denmark, Sweden and the Netherlands, who have been dubbed the “four frugals”.
It is, however, a huge turnaround for normally fiscal-minded Germany, whose chancellor has for years opposed similar proposals. But between the double pressure to face COVID-19 and the recent decision of the German Constitutional Court according to which the program of purchase of public assets of the European Central Bank did not fall within its mandate, Germany has finally removed from its conservative position. “When people write the history of European integration in a few years it will be seen as a turning point,” said Andrew Watt, head of the European economic policy unit at the Hans-Böckler Foundation. Highlighting Germany’s commitment to financial solidarity, Merkel said in a speech in April that “Europe is not Europe if it is not there for each other in times of undeserved hardship “
The proposal establishes four pillars, which include improving overall healthcare, accelerating green and digital transitions, tightening controls on Chinese and other non-European investments in strategic sectors such as energy and ports, and the real stimulus fund itself. The southern European states, Italy and Spain, immediately supported the initiative, which, although distant from the often offered “coronabonds”, is still an important step. When the news broke, markets rose while Italian borrowing costs plummeted – and French media had a day of campaigning. “I feel much more optimistic about the prospects for Europe” because of this proposal, said Spanish MEP Luis Garicano, who notes that “if Macron and Merkel succeed in carrying out this plan, it will have completely changed the an account of Europe’s role in this crisis ”… I think this is something we will be proud of. “
European Commission President Ursula von der Leyen welcomed the proposal, saying in a statement that it “recognizes the scale and breadth of the economic challenge facing Europe, and rightly puts the emphasis on the need to find a solution with the European budget at its core. Later, when the version of the European Commission was unveiled in the European Parliament, von der Leyen said: “The things we take for granted are questioned. None of this can be solved by one country alone … It’s all of us and it’s much bigger than any of us. “
The European Commission presented its own proposal for the stimulus fund, called Next Generation EU, on May 27. The Frugal Four, led by Austrian Chancellor Sebastian Kurz and Dutch Prime Minister Mark Rutte, favor an alternative configuration based on the provision of loans, not grants. Meanwhile, Hungary and Poland are claiming larger payment shares than their neighbors, which is an additional factor that could threaten their votes needed to pass the proposal. Nationalist and Eurosceptic leaders from across Europe also opposed the proposal, opposing the expansion of the EU mandate it requires – including commitments by member states to follow sound economic policies and to join an ambitious reform program.
However, the pressure that the pandemic is putting on EU member countries could play in favor of the joint Franco-German proposal. “The Frugals, on paper, have a fairly strong position in the sense that all of this is in the budget of the European Union,” said Watt. “In practice, however, none of them wants to appear in history books as the country that, faced with a pandemic, after all these countries have crossed, left them starving. “
A bailout, but make it green
An important aspect reserved for the corona stimulus fund proposal is the substantial green stimulus package called the Just Transition Fund, which should devote resources to green sectors such as domestic energy efficiency and green heating, renewable energy, clean cars and car charging ports. Under this proposal, up to € 60 billion will be invested in zero-emission trains and the production of clean hydrogen, and more than one million “green jobs” will be created, including options for help eliminate workers from polluting industries and retrain them for new roles. A border tax on industrial, carbon-intensive imports could also generate more than € 14 billion and offer countries trading with Europe the opportunity to switch to more carbon-neutral options.
The more than five-fold increase in funds for the Just Transition Fund is a measure to curb protests from coal-dependent states like Poland and Romania, which have resisted previous green measures and will now receive more investment. important to transition to clean energy sources.
The European Commission said in a statement that “public investment in the recovery should follow the green oath to” do no harm “”. But environmental activists worry that there is no firm guarantee against the money allocated to the transition in less environmentally friendly projects, especially since the COVID-19 crisis has seen industries pollutants lobby for bailouts. In addition, the crisis has prompted part of the EU to lift climate conditions on aspects of its budget frozen for three years – and the proportion of the global budget allocated to climate-related projects remains frozen at 25%, despite many wishing raise it.
Even if the proposal is adopted successfully, it remains to be seen whether the fund will effectively allocate funds where they are most needed. There are often conditions attached to stimulus funds – something that the nations of southern Europe know all too well. Meanwhile, Europe already has almost half a trillion euros of funds available for pandemic relief under the European Stability Mechanism, but exploiting that money is usually accompanied by strict conditions in terms of economic policy, budgetary management and reform. Greece has suffered hard over the past decade under such conditions. Spain, Portugal, Italy and Greece are wary of European Stability Facility funds for this very reason, and Greece has flatly refused to use pandemic funds which have onerous terms due to stigma. “Cross compliance has become a very bitter pill, especially for Greece,” said Eileen Keller, a specialist in European economic integration at the Franco-German Institute.
The Franco-German proposal is subject to conditions and notes that access to the stimulus fund “will be based on a clear commitment by member states to follow sound economic policies and an ambitious reform program”. What exactly this entails has not yet been clarified. “We will see in the negotiations what conditions they attach to the grants – it will not be a completely free lunch,” said J.H.H. Weiler, European Union expert at the Faculty of Law, New York University.
The biggest difference between the existing mechanism and the Franco-German proposal lies in the strength offered by the common debt. Under the proposal, the Member States receiving the funds – mainly Spain and Italy – would not need to repay the money. Responsibility for debt would be added to the EU budget, to which Member States’ contributions vary according to the size and prosperity of their respective economies.
This would provide a major boon for southern European countries, many of which have been particularly hard hit by the coronavirus and face a steep road to recovery – a path many had just reached after years of austerity. . The move also runs counter to the initial lack of EU solidarity at the start of the pandemic, when Brussels was slow to provide countries like Italy with essential medical supplies.
The conflict between the German courts and the European Central Bank, which has bypassed the latter’s power, is also likely to have ramifications downstream. While prompting Merkel to partner with Macron, it has also caused unrest in Italy and Spain, where the ECB plays a crucial funding role. The head of the European Central Bank, Christine Lagarde, warned last week that the Union’s collective GDP should decrease by 8 to 12% this year. Lagarde will likely use a meeting with the ECB’s management board this week to expand its 750 billion euro pandemic emergency purchasing program (PEPP), which has been important to many struggling European economies during the locking.