At today’s just concluded videoconference meeting of European Union leaders, there was universal agreement that Europe needs a recovery package, and that it needs it fast.
*** Apart from that, from what we understand, there still was disagreement on every major element of the European Commission’s Recovery Fund proposal: the overall 750 billion euro size, the proportion of grants to loans (500 to 250), the allocation criteria, whether there should be new EU tax revenue streams to repay the borrowing to fund the plan, and whether net contributors to the EU coffers should continue to enjoy rebates. ***
*** That said, the goal of today’s cautiously downplayed meeting was already modest – for leaders to present their respective negotiating red lines to European Council President Charles Michel to construct what in EU jargon is called a “negotiating box” — a detailed proposal with numbers spelling out how much money would go towards various policies. ***
*** As envisioned, after today’s meeting Michel would then have roughly two weeks to prepare this “negotiating box” before a summit on July 9, at which point the haggling would begin in earnest, to be concluded at a later meeting in July, ratified by national parliaments over the fall, and with funds ready to be deployed by the first quarter of 2021. But that timeline appears to be slipping. ***
*** After today’s summit, there has been no reference to an exact date for the next summit, save “mid-July.” And while we believe the chance of a total breakdown in talks, for all practical purposes, remains negligible, that originally envisioned timeline is now a best-case scenario, and we would suspect at some risk of falling short of by now heightened market expectations. ***
No Mystery on Positions
At this point there is no mystery as to the battle lines between the Commission proposal reflecting in large part a Franco-German plan, and the “Frugal Four” positions of Austria, Sweden, Denmark, and the Netherlands, who have publicly laid out their objections in various speeches and in earnest op-eds. But is also clear that not a single EU member state has rejected the overall concept or need for a Recovery Fund (see SGH 4/23/20, “EU: Hashing out a Recovery Fund”).
The slower than hoped for progress in negotiations is clearly an issue, but the differences are still not insurmountable, and we believe will be overcome. But that, for all the efforts of Germany’s Chancellor Angela Merkel and exhortations from ECB President Christine Lagarde, will still follow EU time.
Contours for a Compromise
A compromise will still likely need to entail a massaging of the most public disagreement over the proportion of grants to loans (500 to 250 billion currently proposed), some additional allocation criteria, tighter oversight of how the disbursed money can be spent, as well as revisions to the proposed terms over which loan disbursements can be repaid to address concerns by the frugal countries over saddling taxpayers with 30 years of additional debt.
The top three beneficiaries of the scheme now would be Italy, Spain, and Poland, as the criteria the Commission has proposed for the allocation of capital include factors such GDP per capita and historic unemployment levels from 2015 through 2019. The predictable pushback over how exactly the money gets allocated (and who gets side-bribes to go along) is not just led by the Frugal Four but has been joined by Finland as well.
There may also be trade-offs between the Recovery Fund and long-term EU budget that will all be negotiated in tandem – for instance the frugal countries may hold out agreement to the 750 billion euro size of the fund and a larger grant proportion in exchange for reducing the proposed size of the long-term EU budget.
But the political ship that has already sailed is the baby step towards European fiscal union, even if through the back door.
No Free Lunch
An agreement by the EU to jointly borrow, via the Commission, large amounts of money over a long period of time has clearly broken a long-held taboo. But to comply with EU law (sort of, but who are we to argue), repayment of funds to the Commission is still likely to require assigning new revenue streams directly to the EU – a not insignificant step towards mutualization in and of itself.
Ideas include a tax on non-recycled plastic, on large multi-national corporations benefiting from the single market, on goods imported into the EU from countries with lower CO2 emission standards, on CO2 emissions trading in the maritime and road-transport sectors, on financial transactions, and on digital services (see SGH 5/28/20, “EU: The Recovery Fund Plan”).
There is plenty of opposition to such new taxes going to the EU. But the alternative is higher national contributions or smaller EU budgets in the future – neither of which is particularly appealing.
Interestingly, the Recovery Fund, as designed, may also serve as a back-door channel for the EU to be able to finally impose the European Commission’s annual economic recommendations on member states.
Disbursement of recovery funds as proposed could be linked to adherence to the Commission’s annual recommendations. These usually eminently sensible proposals are designed to make member state economies more resilient to shocks and better prepared for the challenges of globalization and ageing – all of which to date have been basically ignored without any consequence.
Who knows these days, but there may, it turns out, be no such thing as a free lunch for borrowers.