TIME FOR EU SOLIDARITY

The European Union is looking at ways to get the economy back on its feet next year after what is expected to be the 27-nation bloc's deepest ever recession, caused by the coronavirus pandemic. The economic recovery will be long, difficult and costly. It will not be like turning on a switch, only a matter of a few days, or weeks, or even months. It takes time to open shops, restaurants, to restore the production capacities of  industrial companies.

EU leaders will hold talks on April 23 and provide some guidance. But the issue is highly divisive because it concerns European solidarity in a crisis -- governments' willingness to share costs and ensure all member countries have an equal chance to recover.  The International Monetary Fund expects the output of the 19 countries that share the euro to contract by 7.5% this year . With such output loss, European politicians compare the task of bringing the economy back on track to the U.S. Marshall Plan for Europe after World War II.

France has proposed a Recovery Fund that would be financed through joint debt issuance with guarantees by all EU member-states to underpin it, where each country is in principle liable for the whole of the debt that will be issued by the new instrument. Common debt  would only be raised for the future. That’s the key difference with Eurobonds, which were also about past debts. The Recovery Fund is also different from Eurobonds because it has a definite end-date, and because it is geared toward a single purpose: investment. Raising debt at very low interest rates allows the cost of the recovery to be spread over time, while spending funds via the MFF places an immediate burden on public finances of member-states.

The money raised by the Recovery Fund, through a special purpose vehicle or through the European Commission would be given to EU member-states in the form of “grants, not loans,” based on the effect of the pandemic on their economy. The precise methodology would be set up by the Commission; it won’t be for the members themselves to decide. Investments would be between three and five years, while debt servicing shares wiould be based on the gross domestic product of each country and would take place over 10-20 years.

The new Fund is vital to dealing with the greatest crisis the EU has faced in its history, as huge public expenses will be required to meet the investment needs of the day after. If all 27 member-states want to move at the same speed, we need common funding for investments. Otherwise, there’s the risk that some countries like Germany and the Netherlands will recover quickly – because they have the fiscal space to fund their recovery, while other countries will lag behind, running the risk of widening existing divergences and leading to the end of the eurozone. Furthermore, if the recovery is slow, the EU risks losing the race of the 21st century and falling behind in technologies like 5G and artificial intelligence. In a few years, the EU won’t be able to compete with China or the US.