Even though in my view this is the only possible way to move forward for Europe, it has done nothing to reduce the vulnerability of the European project - on the one hand because the monetary union will now become a debt union with limited budgetary room for manoeuvre and on the other hand because the European democratic gap is only becoming bigger. For the next generation this is first and foremost a guarantee for more debt and only limited sustainability enhancement.
A monetary union alone is not possible
Economists have been saying this for years. A currency union will always run into trouble if the economic policies of the member countries are not aligned. And that is of course exactly what has been happening since the introduction of the euro. It had been hoped that economic reforms would bring Southern European economies more in line with economies in Northwest Europe. This was supposed to be the path towards a uniform economic zone with each country undergoing a similar evolution towards liberalised markets, privatised public services and limited social arrangements. However, this project was never completed - if it ever actually came off the ground at all. Because so far, the outcome of the currency union project has been that countries such as the Netherlands and Germany have been able to compete on the world market much too cheaply, while the opposite has been true for Southern European countries. The very limited economic convergence was initially offset by the fact that Southern European countries were able to borrow cheaply on that same world market. Until the 2008/09 financial crisis put a stop to that. But we subsequently did not solve this problem either. Due to the global monetary anaesthetic - in the shape of incredibly low interest rates - Southern European countries are still able to borrow relatively cheaply, so reforms are not given a very high priority.
And so the European Central Bank again had to pull out all the stops to resolve the problems caused by the corona crisis. Through large-scale intervention in markets, the biggest panic at the start of the corona crisis had already been allayed.
Many economists have, therefore, been saying for years that this mechanism needs to end. And that a common currency also requires a common budget policy and common economic policy. In that sense, the new deal is finally a real step forwards: we will have a fund that is funded on a European level, as well as an option for levying taxes on a European level.
From a currency union to a debt union
The package constitutes the first step towards mutualisation, or sharing, of European debt. This does not apply to the existing debt of the various countries, but only to the new debt of EUR 750 billion under the European recovery fund, of which EUR 390 billion will be disbursed in the form of grants. An important point, especially for Southern European countries, is that the aid is not subject to any conditions (conditionality) regarding economic reforms. And although this is temporary, European history teaches us that instruments that are implemented on a temporary basis often become permanent.
Disbursements will be based partly on the size of a country’s economy and partly on how hard that country has been hit by the crisis. As a result, the Southern European countries have a bigger claim to this pot of money than countries in Northwest Europe. The solidarity that everyone is so full of, has its limitations: all existing government debt will remain as is. The solidarity only applies to the additional debt.
The fund will initially be funded by issuing bonds on a European level. This finally ends the taboo that the European Union itself may not call on the capital market and thus also opens the way for further expansion of the European federal budget.
Another new feature is that Europe now has the option of financing these debts by levying (new) taxes on a federal level, for instance a plastics tax or a tax on the CO₂ emissions of imported products. These tax sources fit in well with the direction of the recovery fund and the new European budget: more opportunities for enhancing sustainability.
But, as I said before, the existing debt will remain unaffected; the European federation will basically become an even bigger debt union.
Is this enough?
The package has not yet been finalised. The European Parliament and all national parliaments still get to have their say. So we are likely to see a lot more wrangling still.
Moreover, what is now on the table also has several large drawbacks. First, the package is much too small to have a substantial impact. EUR 750 billion is less than 5% of the European Union’s GDP. The money will be disbursed over a period of several years (2021- 2025), so this will not be nearly enough to counter the impact of the corona crisis. Second, the procedure that needs to be followed before even one cent is made available is very complicated. National governments will first be required to submit plans, which must subsequently be assessed on a European level. Only then can a grant or loan be disbursed. Also, unlike previous forms of aid, the new loan will not be subject to any conditions regarding reforms. Third, the compromise will reduce the funds that could contribute to enhancing sustainability within the EU: money for research and health care and part of the money available for bringing about a sustainable recovery.
And the final and possibly major drawback: this agreement once again shows Europe’s democratic deficit and keeps the divergence between the various countries intact. The average citizen has not had any say in the next step towards European federalisation. Furthermore, it has turned into such an abstract compromise that most Europeans cannot fathom the consequences. And it is not the size of the package that is crucial, but the taboo that has been broken: more room for federal policy, but no further support for economic convergence. As long as no clear choice is made to promote convergence, various groups of countries will remain on opposite sides of the fence and solidarity will remain elusive. Consequently, we can already see how the federal debt mountain is only going to get higher: Southern European countries will continue to struggle within the Eurozone and will still not be compelled to implement structural reforms. In addition to the monetary anaesthetic, we now have the European debt transfer option as a second safety valve. The only advantage is that this option has become a little bit greener, but there is no prospect of the European Union becoming any more stable. The only thing that future generations can count on is that they will be lumbered with more debt.
If COVID-19 has made one thing clear, it is the need to build an economy that is fit for the future: one that is more resilient, more sustainable and more inclusive. Read more about our 'Radical agenda for economic transformation'.