“The deal broke two historic taboos,” writes The Economist.
“First, Europe’s leaders agreed that the European Commission … may incur debt at an unprecedented scale. The NGEU will be funded by borrowing over six years, with bonds issued at maturities extending to 2058. Second, €390bn of the €750bn will be distributed as grants, and hence will not add to governments’ debt loads—breaching what had been a red line over substantial intra-EU fiscal transfers. Both developments would have been unimaginable just six months ago.” read The Economist article here
The FT’s Martin Sandbu couldn’t agree more. “EU crosses the Rubicon with its emergency recovery fund – European federalists have more reason than frugal northerners to be pleased” reads the headline of his eulogy. Unlike some critical commentators Sandbu focuses on the relevant structural changes. read Sandbu’s FT article here or below
An historic outcome indeed.
Merkel moment or not, the recycled Franco German tandem has crossed a big fat red line and sent the EU toward a future euro debt yield curve. That is progress.
If only minimal necessary progress. As Thomas Pickety argues “Adopting the means to issue a joint debt with one and the same interest rate is a matter of urgency. Contrary to what one sometimes hears, the aim is primarily to mutualise the interest rate and not to force some countries to repay the debt of others.”
Having crossed the Rubicon, one is likely to discover the sunny uplands of perpetual euro bonds. As Martin Wolf suggests : “If, for example, the EU would float an irredeemable bond at 1 per cent (a conservative assumption), it could borrow €100bn, forever, on €1bn of annual revenue. That is a very big deal.”
Indeed. Bloomberg reckons this “… new kid in debt town” is the “closest thing so far to a true “euro bond” … and may “… gradually take over from the bund as the euro-debt benchmark. … The EU could issue nearly 200 billion euros next year. This is less than Italian, French and German plans but it’s of a serious scale. Before long there may even be derivatives related to it.”
Whatever next? QE into Helicopters? Direct financing? Euro UBI?
But not as unlikely as only yesterday. Note, e.g. , how all of the above get a mention in The Economist’s latest plague – inspired macro reflections. read the article here
Unfortunately new money doesn’t guarantee new thinking. As Mazzucato and Skidelsky point out, “There is … little evidence that any new fiscal thinking is underway. Yes, emergency financing is being deployed. But unless this spending is structured, the post-2008 outcome will be repeated, with the liquidity driving up asset prices in financial markets but doing little to help the real economy.”
Just follow the money…
“Now the dust has settled, let us acknowledge how remarkable it is that European leaders required only four days and nights to agree an unprecedented common economic programme. They overcame resistance from the small but rich “frugal” countries and permanently shifted the politics of the EU’s future economic decisions.
Many reactions to the European Council’s decision on a recovery fund and a long-term budget focus on the ways it fell short. But too often, they look at the wrong thing. The common EU response was never going to carry the bulk of the fiscal effort to pull the bloc’s economies out of their Covid-19 slump. For that, it is neither sufficient nor necessary. The output loss and required fiscal response are much bigger than the recovery fund, so, as usual, national budgets will do the lion’s share. But they will have no difficulty doing so, since the European Central Bank is ensuring very favourable financing conditions and the EU has set up big crisis lending programmes for governments.
The agreement struck on Tuesday is nevertheless a big deal, even economically. It roughly doubles the regular EU budget’s size for the next three years. Some recipients stand to receive significant transfers. Italy can hope for a total award of perhaps 5 per cent of its annual national income, smaller and poorer countries quite a bit more. Loans of a similar magnitude, if not larger, will come on top.
But the real importance of the deal is how it reshapes the EU’s political economy. First and most obviously, the bloc has crossed the Rubicon of debt-financed deficit spending at union level.
As the frugals knew and feared, what can be done once can be done again. Less remarked upon but equally important, a market and a “yield curve” for all maturities of EU debt will be established because the leaders agreed a very long repayment schedule for the common loans that will extend to 2058.
When people ask whether this was Europe’s “Hamilton moment”, they are referring to the first US Treasury secretary, Alexander Hamilton, and the decision to mutualise the states’ debts. The EU has not done that. But a more sophisticated reading is that by creating a market in US debt, Hamilton assured the new federal government permanent access to affordable market credit. In this sense, Tuesday’s deal is Hamiltonian indeed.
Second, while leaders dodged the question of how to raise money to service the common debt, they committed themselves to increase the EU’s revenues. Now they must find new common tax bases, albeit modest ones. They only agreed on a plastic tax, but committed to considering proposals for carbon border fees and expanded carbon taxation in Europe. Whatever solutions they choose, they have boarded the train towards more common taxation and cannot get off and turn back.
Third, the governance mechanisms for the new spending contain more than meets the eye. The leaders compromised between the Dutch demand for a national veto and the purely administrative controls sought by the European Commission. There is a requirement for leaders to endorse countries’ spending plans (but by qualified majority, not unanimity) and a national right to delay, but not stop, a commission decision to grant money. This reintroduces a role for cross-border politics in what the EU has fruitlessly tried to codify in rigid rules.
But they have avoided the political hold-ups and policy extortion that made rescue loans so toxic during the eurozone debt crisis. If managed well, the new governance structure could be the embryo of truly pan-European economic policymaking.
The agreement also subjects transfers to a “regime of conditionality” with respect to the rule of law — code for northern states not wanting to give money to illiberal rulers such as Hungary’s Viktor Orban and Poland’s Law and Justice party. Many have dismissed this provision as too vague. But it will be the first time leaders empower the commission to come up with sanctions for rule of law breaches that they will pass by qualified majority. Anti-democratic misbehaviour of the Hungarian and Polish kind will become more central to the politics of the European Council, which will have a nimbler tool to deal with it.
The flip side of these changes is that what was not changed will become more entrenched, in particular the normal budget’s size and structure. EU money will continue to be spent mainly on agricultural subsidies and “cohesion fund” aid to poor regions.
It is puzzling that the frugals, who care the most about this, did not pick their battles accordingly. Instead they fought successfully to trim the recovery grants and their own budget contributions, choosing short-term savings over long-term re-prioritisation. Yet they have not stopped the move towards more common fiscal policy. Their victory is mostly Pyrrhic. European federalists have the most reason to be pleased.”