The European Union (EU) is looking for cures to weather the upcoming economic storm, caused by the Corona pandemic. Similar to the eurozone crisis, initial negotiations about sharing debts have been blocked by Northern member states. The upcoming EU budget negotiations pose a second opportunity to set up a meaningful response for the years ahead. Yet again, similar to the eurozone crisis, the EU might be forced to rely on financial markets rather than increasing member states contributions to turn the tide. Here is why this is problematic.
The COVID-19 pandemic will have strong effects on the economies in Europe. A recent estimation by the WTO speaks of a potential reduction in global trade by 13% to 32% percent in 2020. The IMF is no less pessimistic. This marks a crisis of unprecedented extent for the European Union and its member states (MS). Throughout the EU’s history, crises and shocks have provided windows of opportunity for far-reaching changes for better or for worse. Confirming the mantra of Winston Churchill “never let a good crisis go to waste”, the eurozone crisis in 2010, for example, deepened the prevalence of austerity politics (Blyth, 2013). Ten years later, the Corona crisis could offer an opportunity to leave this path. In the spirit of “sharing is caring”, the upcoming EU budget negotiations pose a second chance for financial solidarity. Rather than relying once more on cheap loans and financial innovations, the EU needs to find a solution which lifts the burden of its most indebted and crisis-ridden member states. The window of opportunity opened by the current crisis might just be the fuel needed to introduce the change and reform needed.
The Juncker Plan: Relying on Financial Markets
Analysing the conflict dynamics back then between member states, Benjamin Braun and Marina Hübner make the following observation: The resistance of Northern member states to raise common debts and to share financial risks with their indebted Southern neighbours encouraged the Commission (EC) to search for less conflict-ridden policy solutions (2018).
Somewhat surprisingly, the EC and the European Investment Bank (EIB) found an alternative in innovative financial products, based on public guarantees and leveraging mechanisms. This EU flagship project to fight the persisting credit crunch – the “Investment Plan for Europe”, also known as the Juncker Plan – was based on this strategy. In the words of the EIB: “you take a bit of money, invest it wisely and within three years it will have multiplied 15 times over”.
Using an initial small sum from the EU budget, the Juncker Plan raised €350bn euros on financial markets. It was extended to €500bn later on and is continued under the label of InvestEU. The Green Deal also rests partly on such logic. Unlike sharing debts (like Eurobonds do) between member states, this solution entails fewer potentials for conflicts. It rests on blending public and private resource to create cheap loans for companies and (local) governments rather than redistributing resources between member states. We have analysed the role of ‘blended finance’ more thoroughly in a previous blog post.
The Commission termed the Juncker Plan a success story. Others were more critical in their assessment. The Court of Auditors, for example, raised doubts in how far the plan has actually been able to “unlock” additional investments. Others have criticised its prevalence for setting up public-private partnerships (PPP). These cost-sharing schemes have often turned out more expensive to the public purse than initially planned and have a legacy of commercializing public services (Mertens & Thiemann, 2018, Whiteside, 2011).
Since the Euro crisis in 2010, the architecture of the European Monetary Union (EMU) hasn’t changed much. Thus, when it comes to setting up adequate responses to the COVID-19 crisis, we currently observe similar conflict patterns as outlined by Braun and Hübner. The renewed proposal for Eurobonds – or Coronabonds – has again been fought tooth and nails by Germany, and especially the Netherlands. Instead, the member states reached an agreement on setting up loans worth €500bn by reopening ESM credit lines, strengthening the EIB and setting up a support scheme to counteract rising levels of unemployment (SURE). As this will probably not be enough to cope with the Corona crisis, a second round of negotiating a European response has just started. But will the EU turn to a less conflict-ridden solution again and rely on financial markets to boost investments?
The EU Budget as a Tool of Crisis Prevention?
This question will have to be taken up in the current negotiations over the next EU budget. The pandemic hit when EU budget negotiations over the next multiannual financial framework (MFF) had just been found in a deadlock once again, as groups of member states could not appear to find a common ground for their positions. Now, the question of loans versus grants as a crisis response spills over into the MFF negotiations. Commission President Von der Leyen’s recent call to turn the EU budget into a “mothership of our recovery” leaves room for speculation. According to the Financial Times: “The guiding idea will be to find ways of leveraging the EU’s funds to produce trillions of euros of investment”. The European Commission Vice President Valdis Dombrovskis spoke of additional €1.5tn to be unlocked in this regard. Von der Leyen termed such an approach: “known territory”, only to be put through at a much bigger scale. Thus, starting off with €350bn (Juncker Plan) and now reaching a proposed €1.5tn, the Corona crisis seems to continue an institutional transformation which started ten years ago rather than provoking a sudden break with established institutional configurations.This resembles neatly what Wolfgang Streeck and Kathleen Thelen have described as “incremental change with transformative results” (2005, p. 9).
But the essential question is: Will the availability of additional cheap credits help strongly indebted nations and regions to turn the tide against a looming recession? With a 134,8% debt to GDP ratio, (and despite having the most frugal primary balance in the EU) Italy will face serious problems financing rescue measures if left on its own. Although loans with low-interest rates can partly improve the situation of borrowers to get through the Corona crisis, in principle, they add to the accumulated pile of debt. Analogies to a new Marshall Plan (See for example the Handelsblatt) are therefore misleading, as this history-making policy relied predominantly on non-repayable grants (Agnew & Entrikin, 2004, p.110). Thus, Von der Leyen’s statement that “we’re not talking about a billion (euros), we’re talking about a trillion” rather echos the World Bank’s “billions to trillions” strategy to reach the SDGs targets. The underlying blended-finance concept has been critically assessed by both Daniela Gabor (2019) and Emma Mawdsley (2018) respectively.
Can the Spanish Proposal Turn the Tide?
However, much will depend on the details of the upcoming proposal by the Commission as things could be set up in a different way, too. Spain has just circulated its own ideas about a more ambitious response. It also foresees raising €1.5tn for Corona crisis-ridden member states backed by the EU budget. But unlike the Commission’s position which seems to favour financial magic tricks, it “will be allocated via grants – and not debt” – as the newspaper El País emphasized. Besides Italy, Spain might have found a strong ally in Emmanuel Macron, who spoke of a “moment of truth” for the cohesion of the EU with regard to the Corona crisis. He and his minister of finance, too, proposed a recovery fund based on grants. What might be regarded as mere financial technicalities, may turn out to be the game-changer to convince frugal northern member states. Emphasising that the fund should finance future (not past) public expenses for Corona crisis recovery and by linking the fund to the EU budget, the Spanish proposal is clearly defined. This could reassure those member states, who fear that they will suddenly be jointly responsible for the old debts of all member states. Meanwhile, Angela Merkel has also signalled that she is prepared to take further European measures as long as these stay in the realm of the existing European treaties, another condition probably abided by the Spanish proposal.
The next meeting of the Eurogroup on the 23 April 2020 will show if Northern member states are prepared to bite the bullet and set up a meaningful transfer mechanism for the European Union as a whole. Rather than propping up solutions based on innovative finance, it should strike out a new path and start standing up for each other in solidarity amidst this crisis. With the economic storm still ahead, Europe cannot afford to let this crisis go to waste again.
Agnew, J., & Entrikin, J. N. (2004). The Marshall Plan Today: Model and Metaphor.
Braun, B., & Hübner, M. (2018). Fiscal fault, financial fix? Capital Markets Union and the quest for macroeconomic stabilization in the Euro Area. Competition and Change, 22(2), 117–138. https://doi.org/10.1177/1024529417753555
Blyth, M. (2013). Paradigms and paradox: The politics of economic ideas in two moments of crisis. Governance. https://doi.org/10.1111/gove.12010
Gabor, D. (2019). Securitization for Sustainability. https://us.boell.org/sites/default/files/gabor_finalized.pdf
Mawdsley, E. (2018). ‘From billions to trillions’: Financing the SDGs in a world ‘beyond aid.’ In Dialogues in Human Geography. https://doi.org/10.1177/2043820618780789
Mertens, D., & Thiemann, M. (2018). Market-based but state-led: The role of public development banks in shaping market-based finance in the European Union. Competition and Change, 22(2), 184–204. https://doi.org/10.1177/1024529418758479
Streeck, W., & Thelen, K. (2005). Introduction : Institutional Change in Advanced Political Economies. In Beyond continuity: institutional change in advanced political economies.
Whiteside, H. (2011). Unhealthy policy: The political economy of Canadian public-private partnership hospitals. Health Sociology Review. https://doi.org/10.5172/hesr.2011.20.3.258