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‘Nothing Is So Permanent As . . . .’

Outside the European Commission headquarters in Brussels, Belgium (Yves Herman/Reuters)

Here’s the Economist from July, describing the deal in Brussels under which (subject to various approvals) the EU agreed both its latest multi-year budget and a COVID-19 rescue package:

The deal has two elements: the regular EU budget, or multiannual financial framework (MFF), worth nearly €1.1trn ($1.3tn) over seven years; and a one-off “Next Generation EU” (NGEU) fund of €750bn to help countries recover from the COVID-19 recession (both figures in 2018 prices). Rows over the second of these explain the summit’s length: at one point leaders spent over an hour arguing over whether to replace the word “decisively” with “exhaustively” in the communiqué. But in the end, each returned home broadly satisfied.

“One-off.” Hmmm . . . .

I described the NGEU fund in an article written about a month later:

The rescue package is formally known as the “Next Generation EU” (NGEU) fund, a name unremarkable — in Brussels — for its pomposity, but unusual in that it may really mean something this time. This is less a matter of all those billions than how they will be raised –through direct EU borrowing on the international markets — and then dispensed by Brussels. This is an innovative (to use a kind word) development in that, as Päivi Leino points out in an article for the Centre for European Policy Studies (CEPS) written before the Brussels summit, the EU treaty was “universally seen as prohibiting the EU from borrowing to finance its expenditure.”

Oh.

The money must be repaid no later than 2058, with the help of the revenues from new EU taxes…

I noted how

Dutch prime minister Mark Rutte may like to claim that the NGEU is a “one-off,” but among the promises that won him reelection in 2012 was that the Netherlands would not participate (“not one more cent”) in a third Greek bailout. But in 2015, it did.

And:

Although the EU’s long march towards “ever-closer union” has, on occasion, taken place in the sunlight, with declarations, fanfares, and flags flying high, it has often crept ahead, not exactly under cover of darkness but assisted by the inability or the unwillingness of some of its enablers to come to grips with the implications of what they are agreeing to.

And part of that process has, from the beginning, included the creation of institutions ready and waiting to take that next step, ranging from the European Court of Justice, which started showing its federalist colors in the early 1960s, to the ESM to, now, the NGEU.

In her article for CEPS, Päivi Leino recognized the institutional significance of the NGEU:

“By precedent, and by its very long duration (until 2058), the NGEU will, in practice, ultimately become a permanent structure. With the taboo [against borrowing] broken and legal limits dissolved, there will be little to stop it resorting to similar measures again. New emergencies will arise, and debt will each time appear to be a convenient way of financing them. Union debt will become a matter of contemporary political decision. The result would be a fiscal capacity for the EU, with a permanently altered division of competences….”

The EU is only set to move in one direction, and that’s forward: “ever closer union” means what it says. That said, I hadn’t expected the process to press for the institutionalization of the NGEU to begin quite so soon.

From the Financial Times, last week:

[The European Central Bank (ECB)] noted that although the fund is “a one-off” it “could also imply lessons for economic and monetary union, which still lacks a permanent fiscal capacity at supranational level for macroeconomic stabilisation in deep crises”.

The EU should consider making the fund a more permanent part of its policymaking arsenal when it restarts talks on its budget rules, the ECB said. The finance raised by the fund will increase the EU’s outstanding debt 15-fold, the ECB estimated.

ECB officials have long argued that the EU should issue a large, commonly guaranteed pool of debt to rival German Bunds in a bid to reduce the bloc’s vulnerability to future national sovereign debt crises. However, the idea is contentious among conservative policymakers who insist the recovery fund — dubbed Next Generation EU — should only be a temporary crisis-fighting tool and worry that some countries may not make efforts to repay EU loans.

Jens Weidmann, president of Germany’s central bank, warned this month about the risk of “creating the impression that debt at the EU level somehow doesn’t count or that it is a way of evading tiresome fiscal rules”. He added that the recovery fund should “remain a clearly defined crisis measure and should not open the door to permanent EU debt”.

What underlies Weidmann’s warnings is his deeper fear that the NGEU will be used to take the EU even further along the path towards fiscal union.

In my article I described how

The EU’s most prosperous states (which tend, mysteriously, to be its more fiscally disciplined) have long worried that the union would be run in a manner that transformed them into milch cows for its more feckless members. Aiding, say, thrifty Estonia after nearly 50 years of Soviet occupation was one thing; being made to pay for Italy’s perennial failure to get its house in order is quite another. Thinking of this type helps explain why the euro zone was set up as a currency union without the safety net of a fiscal union. A fiscal union, fretted some (most importantly in Germany), would be a “transfer union,” a means to siphon taxpayers’ money elsewhere.

Now, returning to the Financial Times, take a look at the ECB’s rationale for making the NGEU more “permanent”:

The [NGEU’s] centrepiece — €390bn of grants — would provide a net benefit worth more than 10 per cent of the pre-crisis Croatian and Bulgarian economies and almost 9 per cent for Greece, the ECB estimated in a research note published on Wednesday. Also among the net beneficiaries are Portugal, which will gain 5.4 per cent of its 2019 GDP; Spain with a gain of 3.4 per cent of GDP, and Italy with a gain of 1.9 per cent of GDP.

The scheme “ensures stronger macroeconomic support for more vulnerable countries”, the ECB said.

The heaviest net losers include the “frugal four” countries that initially opposed the new fund. Austria, Denmark, Sweden and the Netherlands will all lose out on a net basis by nearly 2 per cent of pre-pandemic GDP, as will Germany, according to the central bank’s analysis.

Put another way, the NGEU is looking, just as the frugal four originally feared, like a useful mechanism for bringing a transfer union closer, if only de facto rather than de jure.

“One-off”?  We’ll see.

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