The justified annoyance at the behavior of the “Frugal Four” (plus Finland), including Austrian Chancellor Sebastian Kurz, lets one forget the significant breakthroughs that have been achieved. While they are gloating over their success in having reduced the recovery fund grants to €390 bill (from the EC proposal of €500 bilo) and played “beggar-thy-neighbor” by achieving increases in their rebates in the EU budget, it is easy to overlook the important successes of the EU Recovery Fund negotiations.
Two breakthroughs stand out: The seed of creating a „fiscal union“ for the Eurozone, and the commitment that 30% of all expenditures in the forthcoming budget require a “green” or “climate” character. Both are important, if in very different categories.
For the first time the European Commission will be mandated (and allowed) to raise joint debt for the € 750 bill Recovery Fund (part of the 7-year EU budget) at the capital markets. This means that EU members will jointly guarantee these sums. While the avaricious 4 keep repeating that this joint debt issuance (bonds) is time-limited and must not be extended beyond this Corona-induced crisis (“no Debt Union”!), it still is a significant step.
Now, for the first time, a EU-wide „safe asset“ will be created which allows investors to avoid the different risk-rated EU member state bonds and “invest in Europe”.
What is more, this is of global significance. Up to now, the US Dollar reigned supreme as an international currency, with nearly all raw materials, but also major portions of international trade accounted for in Dollars. Furthermore, the US has reinforced and strengthened its global, eminent position over the past few years by concluding currency swap agreements with many countries, guaranteeing them a constant supply of US dollars to cover their foreign trade deficits. The dollar was and still is the pre-eminent „safe haven“ asset, the currency into which investors migrate in times of crisis.
Now there is an alternative: the Euro. It is ironic that the EU heads of state decided on a joint debt instrument just at a time when the U.S. dollar shows significant weakness: Recently the euro has appreciated significantly against the dollar. Analysts name two reasons: firstly, the US is and has been running a significant balance-of-payments deficit, to the amount of around 2.5% of GDP, while the EU is running a surplus of around 2.7% – which makes international investments in the euro more attractive.
The second reason is the withdrawal of the U.S. from the global cooperation scene, be it its attacks on the World Trade Organization, on the World Health Organization, its withdrawal from the Paris Climate Agreement and the Iran agreement, its trade war with China and other countries. To this, observers add grave errors in domestic policy, especially with respect to the handling of the Corona crisis, and the aftermath of the Black Lives Matter activities – in short, the U.S. weakness in domestic and international governance. The imponderables of the looming U.S. elections at the beginning of November add to this weakness.
For Europe, and especially the Eurozone, the “domestic” issues are more important. The joint issuance of debt, and the plans to service these debts by additional “distinct resources”, i.e. taxes and levies instead of direct government contributions, means that this joint fiscal policy will significantly improve the Eurozone’s ability to function. It was (and still is) one of the grave weaknesses of the Eurozone that it runs a joint monetary policy (via the European Central Bank), but disparate, national fiscal policies, the coordination of which (Stability and Growth Pact, debt brake, Two Pack, Six Pack, European Semester) has been difficult to impossible.
Now we have an important element of a joint fiscal policy. If it proves to be successful, I would venture the prediction that it will survive in one form or another beyond the present limits of the Recovery Fund.
The Green Element
When newly installed, Commission President Ursula Von der Leyen wanted to make the European Green Deal her signature policy. The fear was that the devastating health and economic effects of the Corona crisis would sweep this ambitious program off the radar screens. The Green Deal already proposed to use 25% of all EU budget expenditures for climate and environmental objectives. A number of countries (not the Frugal Four) fought valiantly during the recent negotiations to increase this share to 30%. Against a strong front, they prevailed. While at present it is not yet clear what the criteria for being a “green expenditure” will be, we can sure the lobbyists for the “old” industries and services will keep fighting against it. Still, it is a significant step, that could create a dynamic for the transformation of our economies towards social, environmental and economic sustainability.
To be clear, long, arduous, uphill battles lie ahead, both for the completion of a “fiscal union”, and even more, towards a real transformation. There is a strong danger of “greenwashing” projects, of half-hearted criteria, and of a lack of resources to monitor the implementation.
With the welcome step towards a fiscal union, we also need to fight for the “correct” elements to be achieved. If, as before the Corona crisis, “austerity” becomes the defining charactistic of fiscal union, then it would be better to leave it incomplete.
If, on the other hand, the EU and the Eurozone manage to reclaim a “functional” macro-economic policy, geared towards the populations and the real businesses of the European Union rather than the interests of the financial sector – where fiscal policy is coordinated with monetary policy, where structural, supply-side policies do not take precedence over macro-economic policies for the well-being of European citizens – then this devastating crisis will have had a positive effect. It will have shaken the EU authorities out of their dogmatic neo-liberal path towards a better future for all.