A decision by European Union (EU) officials to unveil a gigantic economic recovery package worth up to €2 trillion (S$3.1 trillion) was deliberately designed to impress by lumping all EU spending together.
For the bulk of the sum offered represents the regular EU budget for the next seven years, money which would have been made available regardless of the emergency created by the coronavirus pandemic.
Still, if the spending proposals unveiled yesterday by the European Commission, the EU’s executive body, are approved by the Union’s 27 member states, at least €500 billion of this total amount will be new cash intended to help Europe’s nations bounce back from what is anticipated to be their worst economic recession since World War II.
The half-trillion recovery plan originated in a joint proposal made by German Chancellor Angela Merkel and French President Emmanuel Macron, who surprised most Europeans last week by agreeing on the creation of a special fund which, unusually, would be used to provide grants rather than loans to countries ravaged by the coronavirus-related economic downturn.
The plan was a compromise for both leaders.
President Macron initially wanted to persuade other members of the EU to create a joint scheme of borrowing, to allow countries like France, Italy or Spain, which are already heavily indebted, access to the funds necessary for their economic reconstruction.
He, therefore, supported a plan to issue a so-called “Corona bond”, whose repayment would be guaranteed by all member states.
But Dr Merkel, who has always argued that the mutual issue of debt is not allowed under current European treaties, found her room for manoeuvre even more restricted by a recent decision of Germany’s Constitutional Court ordering the country’s national bank to stop participating in a Europe-wide purchase of debt, similar to what the French-led scheme proposed to do.
The current deal tries to bridge the differences between the French and Germans.
The €500 billion which is to be allocated for economic revival projects throughout Europe is going to be borrowed on the open financial markets, but will not be classified as joint EU debt; instead, each country will be responsible for repaying its share of the borrowing in proportion to the country’s size.
The borrowing will also be done by the Commission, rather than the European Central Bank, thereby avoiding another confrontation with Germany’s Constitutional Court.
But, at the same time, the money raised will be used to finance grants, rather than simply be lent; that will mean that European countries will not face the prospect of a vicious circle of borrowing their way out of a recession only to see their economy sink even further under an unsustainable level of debt.
The Commission is also proposing to add a further €250 billion to the €500 billion programme, in the form of loans which have already been previously announced.
Overall, this is a huge undertaking, but one which Commission president Ursula von der Leyen considers inevitable.
“Things we take for granted are being questioned. None of that can be fixed by any single country alone,” she told the European Parliament yesterday.
“This is about all of us and it is way bigger than any of us,” she added.
We also will support some kind of recovery fund but we will have to discuss exactly how it will look like, and from our perspective, we think it has to be realistic both when it comes to size… (and) the conditions.
SWEDISH FINANCE MINISTER MAGDALENA ANDERSSON
However, the plan, which requires unanimous support of member states, will need to overcome some big hurdles.
There is fierce political opposition to the scheme from rich northern European countries weary of such massive cash transfers to poorer EU member states.
“We also will support some kind of recovery fund but we will have to discuss exactly how it will look like, and from our perspective, we think it has to be realistic both when it comes to size… (and) the conditions,” said Sweden’s Finance Minister Magdalena Andersson.
Equally sceptical is the Netherlands.
And although the recovery plan – which Dr von der Leyen now dubs “Next Generation EU” – may sound impressive, it is still puny if compared with the economic tasks which lie ahead.
Most importantly, however, there is no consensus on how it will be disbursed, and what it will seek to achieve.Overall, it amounts to less than 1 per cent of EU gross domestic product and it will barely scratch the surface of the continent’s financial needs.
Tellingly, the plan is presented as being targeted not only at propping up EU states, but also EU “sectors”, implying that grants may be used to subsidise European industrial sectors, something which could unleash trade tensions between countries.
The poorer central and eastern European nations remain worried that most of the cash will pass them by because it will be swallowed in bigger schemes on the western part of the continent.
Intensive discussions between member states are likely to follow in the weeks to come, culminating in a special summit to settle matters next month.