Santa Ursula by Professor Iain Begg

SANTA URSULA President of the European Union
By Professor Iain Begg

Next Generation EU (NGE): the Commission’s Covid-19 recovery package

‘Solidarity is back’, according to Manfred Weber (leader of the centre-right European People’s Party in the European Parliament) in his immediate response to the proposals announced on 27 May by Ursula von der Leyen for an ambitious recovery package, to be known as ‘Next Generation EU’ (NGE).

Her plan builds on the proposal put forward the previous week by France and Germany for a €500 billion recovery fund to provide grants to regions and sectors most severely affected by the crisis. The new Commission proposal ups the ante by adding an additional €250 billion for loans.

As a result, the collective EU response to the crisis is shaping up to be massive. The EU has been criticised in the past for being slow to react and for being unable to marshal resources commensurate with the scale of problems. This time is looking very different and has one crucial feature, namely how it will be funded.

It will, for the first time, allow the European Commission to borrow from the markets to finance its spending. Details are not yet fleshed-out, but this borrowing will be ‘repaid over a long period of time throughout future EU budgets – not before 2028 and not after 2058’. In the EU’s chronology, the later date is the very distant future, although some may notice it would be the hundredth anniversary of its founding. Apt?

If, and it remains a big ‘if’, these plans come to fruition, the overall EU fiscal stimulus proposed will become €1.3 trillion, approaching 10 percent of EU GDP in 2019. It comprises the €540 billion for loans agreed six weeks previously, the €250 billion of loans announced today and the €500 billion of grants announced for the NGE initiative. It would complement already large national stimulus packages.

In addition, the Commission is hoping to secure agreement for the next Multi-annual Financial Framework (MFF), perhaps riding the wave of the pressing need for something to be done and the new spirit of boldness.
Somewhat opportunistically, the Commission also wants to try, yet again (and Von der Leyen was vigorously applauded by her MEP audience for mentioning it), to introduce new EU taxes. She mentioned levies on digital companies (Trump will love that…) and on those who cause environmental damage.

Von der Leyen asserted that adding the proposed MFF (€1.1 trillion between 2021 and 2027) takes the headline total to €2.4 trillion. The latter figure is somewhat disingenuous because it is not ‘new’ money and will be spread over seven years. Moreover, the conventional EU budget has to be funded by contributions from member states, many of which are already facing budgetary strains.

Care has been taken to label the resort to borrowing as a temporary solution for exceptional times, and not a ‘Hamiltonian moment’, referring to the decision in 1790 by Alexander Hamilton, Treasury Secretary, to mutualise the debt of US states. Even so, the many fiscal hawks across Europe will view it with trepidation.

Foremost among them are the ‘Frugal Four’ – Austria, Denmark, the Netherlands and Sweden. They had reacted to the Franco-German proposal with that eccentric EU device, a ‘non-paper’, in which, while acknowledging the need for a rapid collective response, they insist it must be in the form of loans, not grants. They also reiterated their well-known demand for a smaller MFF and the continuation of the various rebates from which they benefit.

The sole concession suggested by the ‘frugals’ is ‘frontloading’ of MFF spending. However, they explicitly rejected in advance what is now the NGE proposal to base the fiscal stimulus on allowing the EU to borrow, stating in bold font: ‘What we cannot agree to, however, are any instruments or measures leading to debt mutualisation nor significant increases in the EU-budget.’

Thus far, youthful Austrian Chancellor Sebastian Kurz has been the most vocal, berating the Franco-German plan and rejecting the idea of a ‘debt union’. Connoisseurs of German will know the word ‘schuld’ in German has a double meaning of ‘debt’ and ‘guilt’.
Germany has also long been uncomfortable about allowing anything that looks like common debt, making its support for the new approach all the more noteworthy. Clearly there has been a sea-change and the mood in Germany reportedly backs the Commission, with even hard-liners like former Finance Minister Schäuble said to be in favour.

The depth of anger in Italy is part of the explanation and there are real fears about whether a failed EU response would be a gift to euro-sceptical populists. For Angela Merkel, soon to leave the stage, this may be about her legacy: she will not want her political obituary to dwell on her failure to preserve EU unity and the survival of the euro.

Can it all work? Clearly, with the EU budget requiring unanimity, the ‘frugals’ can block it, but they will now come under immense pressure to concede, and the debate will be fractious. One MEP, Isabella Adinolfi of Italy’s Cinque Stelle party, in responding to the Commission announcement said they should be known not as ‘frugal’, but ‘selfish’.
Perhaps in an attempt to head off resistance from some current beneficiaries, the NGE announcement alludes to additional money for cohesion policy (a carrot for poorer regions) and rural development (for which, read ‘farmers’). Poland and other central and eastern European countries, uneasy about much of the NGE going to the south, will have been paying attention.

Germany, though, holds the key: its economic weight within the EU is more than double that of the frugals who, together account for under 10 percent of the EU population. As a convert and prime mover in the NGE, Germany can both claim to be making the biggest contribution and point to the broader gains from a successful European recovery. Against these arguments, the stance of the frugals looks not only dated, but out of touch with EU citizens.
Expect a combination of a charm offensive and painful arm-twisting. The one significant incentive available is rebates: all four frugals were accorded them (as was Germany… and the UK) in the last MFF. Although Brussels is keen to end these ‘corrections’, retaining them might facilitate a solution.

What the Commission proposes is bold and, many would argue, necessary both internally and globally. The European Union is a member in its own right of the G20 and a stimulus of this magnitude will be welcome well beyond the EU’s border. It deserves to succeed.

By Iain Begg, Professor at the European Institute and Co-Director of the Dahrendorf Forum, London School of Economics and Political Science.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.
https://ukandeu.ac.uk/next-generation-eu-nge-the-commissions-covid-19-recovery-package/

Date: 28 May 2020

Can the EU’s recovery plan also succeed in advancing green goals? By Iain Begg

Two themes will dominate EU policymaking over the next few years: the medium and longer term ‘green deal’ and the much more immediate imperative of an effective response to the Covid-19 economic crisis. Can they be reconciled or does the one risk crowding out the other at a time of severe pressure on public finances?

At one level, the answer should be a resounding ‘yes – they can be reconciled’. A fiscal stimulus is a macroeconomic policy instrument designed to shore-up aggregate demand; precisely how the spending is targeted ought to be a second-order matter. Consequently, projects associated with climate change mitigation or other environmental projects can be just as effective as other forms of spending in boosting demand. However, the details will matter in at least three distinct respects.

The first, and arguably most important, is timing. A fiscal impulse has to act quickly to be effective in restoring aggregate demand during a steep downturn. Cash in the pockets of consumers will do this, but a project that takes a considerable time to move from plans to realisation may take too long.
Some, possibly many, of the ambitious projects envisaged as part of the green deal at the heart of the European Commission’s work programme and central to the proposals in the recovery package announced on 27 May by Ursula von der Leyen – to be known as ‘Next Generation EU’ (NGE) – risk being too slow.

Second, the spending has to target areas of deficient demand and help to avoid divergences in economic activity in different parts of the economy. In parallel, spending which stays within the target economy, rather than leaking to elsewhere will have a greater impact. That said, expenditure on both climate change initiatives and recovery from the covid-19 economic crisis is likely to have significant cross-border externalities, promising mutually beneficial effects.
“The question is whether the balance between ‘repair’ and ‘prepare’ is well-judged.”

A third, more subtle, condition for success is whether Keynesian spending can also yield enduring benefits for the economy, including by contributing to economic sustainability – in its widest sense – and resilience against future risks. This notion of, to use a well-known metaphor, ‘hitting two birds with one stone’ is evident in the Commission’s NGE plan which goes to considerable lengths to stress its salience for coming generations.
This focus is captured in the sub-title of the Commission Communication: ‘repair and prepare for the next generation’. The question is whether the balance between ‘repair’ and ‘prepare’ is well-judged.

The recession now affecting all of Europe – and much of the rest of the world – has the unusual characteristic of being a deliberate policy choice aimed at containing the spread of Covid-19. In an initial phase, the policy response has sought to limit the damage caused by the lockdown by supporting business unable to trade, maintaining household incomes and preventing disruption of economic relations. Rent and mortgage repayment holidays, tax deferrals and the many other initiatives are intended to mitigate the scarring effects of the decline in GDP.
As the lockdown is eased, the policy emphasis will need to shift rapidly towards more conventional Keynesian policies. Many national treasuries will have used up spare fiscal capacity and some will have increased debt to potentially unsustainable levels, making an additional fiscal boost hard to achieve or risking it being unbalanced. The threat here is of those most in need being least able to afford further fiscal action, and those with the capacity to act being least in need of doing so.

“There is reference to a ‘focus on creating jobs in construction, renovation and other labour-intensive industries’, certainly the right approach to bolstering employment. But it needs to be reinforced by a criterion of immediacy:”

The proposal from the Commission to spend 500 billion Euro through the NGE, in addition to the Multi-annual Financial Framework, undoubtedly puts substantial resources on the table. There will clearly also be pressure on recipients to give priority to climate change initiatives, with a reference to the principle of ‘25% of the budget spent on climate investments’.
However, how much of this will be the kind of short-term spending required to stimulate the economy now is not explained. There is reference to a ‘focus on creating jobs in construction, renovation and other labour-intensive industries’, certainly the right approach to bolstering employment. But it needs to be reinforced by a criterion of immediacy: small scale projects which generate income now have to be a first priority; and there should be caution about grand green infrastructure projects which take years to materialise.

The combination of the new MFF plans and the grants component of the NGE is around 10% of 2019 EU GDP. Add in the 540 billion Euro for loans to cushion the shock of the covid-19 economic crisis already agreed by the European Council and the further 250 billion Euro of loans announced in the NGE package and what the EU is proposing amounts to a very large fiscal stimulus. But the MFF is spread over seven years and it is not yet clear how quickly some of the NGE grants can be mobilised and over what period they will be spent.

Whether these plans come to fruition is open to doubt as they will face strong opposition from the ‘frugal four’ group of net creditors – Austria, Denmark, the Netherlands and Sweden. They published a ’non-paper’ in response to the Franco-German proposal which, while acknowledging the need for a rapid collective response, insists that the NGE must be in the form of loans, not grants. They also reiterated their well-known demand for a smaller MFF.

The fact of German backing for the Commission plan is politically crucial and will leave the frugal four looking exposed and out-dated. However, the reactions of the Visegrad four will also be pivotal, especially that of Poland which has reservations about aspects of the green deal and objections to bringing ‘rule of law’ into the proposals. Other Eastern-European Member States will be uneasy about the expected bias towards richer Southern Member States in NGE spending.
Nevertheless, two strong messages should be stressed. First, the EU needs effective action from Brussels to deal with the devastating economic consequences of the Covid-19 crisis. Second, soundly judged EU expenditure can achieve the ‘double dividend’ of contributing to resolving the economic crisis while also advancing green goals: they are not mutually exclusive.

Iain Begg
May 29, 2020
With our warmest thanks to the

Can the EU’s recovery plan also succeed in advancing green goals?

Iain Begg is a Professorial Research Fellow at the European Institute, London School
Professor Iain Begg is the Academic Co-Director of the Dahrendorf Forum and Co-Chair of the Dahrendorf Working Group “The Future Of European Governance”.
The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School and London School of Economics or its funder Stiftung Mercator.
This post represents the views of the author and not those of the Brexit blog, nor LSE.

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