EU leaders must not behave like generals fighting the last war. If the Recovery Fund is to be adequate to the challenge of the coronavirus crisis, this time must be different.
Europe is at a crossroads. Again. The Covid-19 pandemic has had a massive impact on European Union member states—posing a serious threat to the resilience of our healthcare systems, disrupting whole sectors of the economy and exposing the frailties of increasingly unequal societies.
Faced with a global pandemic carrying enormous social and economic, as well as human, costs, EU leaders have been struggling to provide a common response. The last couple of months have been marked by repeated postponements of much-needed decisions, signalling a deep divide between groups of countries.
Later this month, the European Commission is expected finally to announce the EU’s Recovery Fund, which has been hailed by officials as extending financing and resources. We must not forget, however, that the EU has made similar promises in the past—the ‘Juncker plan’ being the most prominent example of such bold claims.
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In practice, new resources under the plan launched in 2014 by the former commission president have been limited, dependent on the leveraging of private investment. It would be wrong to assume that the EU could pull this trick again, having failed before—particularly as private investment is unreliable with such a grim economic outlook.
The Left in the European Parliament is launching a call for a radical reimagining of the EU. Our priority is to ensure that the Recovery Fund is sufficient to face a recession of historic proportions.
Taking into account the outlook proffered by several institutions, such as the European Central Bank, the amount on the table, €1.5 trillion, is a bare minimum. But we cannot just focus on the size of the fund. How it is to be financed is a crucial question.
We side with the growing consensus among economists, of different political orientations, about the need for the recovery to be financed by central banks. The EU treaty’s absurd ban on monetary financing can be circumvented by the commission through bonds, which the ECB can then buy and keep on its balance sheet until the necessary changes in EU law are faced. The ECB can then replace them by perpetual bonds, with zero interest rates, or simply erase them from its balance sheet.
Grants, not loans
The fund must be distributed fairly. To be a driver of economic recovery and real convergence within the EU, monies should be allocated in the form of grants, not loans, and the distribution should follow the method used for cohesion funds.
This, crucially, is the only way to guarantee that member states can finance the rebuilding of their economies and promote the fight against poverty, inequality and climate change without generating a mountain of new debt on top of the existing one. Additional debt would not only fail to tackle the problem—it would also impose rising financing costs on peripheral economies, even with the ECB’s asset-purchase programmes, as investors would rightly start weighing the risks of default or even of eurozone break-up.
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In addition, it is crucial to ensure that these grants are not subject to any macroeconomic (or other) conditionality. The Stability and Growth Pact should remain suspended until it is possible to revoke it permanently.
The last crisis showed that austerity measures are not appropriate to deal with a recession, given the basic economic principle that one person’s expenditure is another’s income and so their depressive effect on effective demand. By restricting public expenditure during a recession, austerity measures not only deepened the economic downturn: they also raised the public debt burden by shrinking economic growth (and thus raising the ratio of debt to gross domestic product). Europe cannot afford to repeat the mistakes of the last crisis.
Nor can the economic recovery be seen as a ‘time travel’ back to pre-crisis certitudes. The Recovery Fund should be used to finance the reshaping of our economic system—which is, in any case, inevitable. This means that financing should be targeted at promoting the transition to a greener economy, the redistribution of income, stronger public services and the fight against tax evasion and secrecy jurisdictions.
This will mean a less globalised economy—which of course has huge implications, for both the inner workings of the EU and its economic relations with the rest of the world. The freedom of capital and trade flows will have to give way to the most significant freedoms of people, such as health, labour or environmental rights.
Such an economy, though, will have a future.