A Hamiltonian glimpse in Europe
Thorsten Beck believes that as the compromise reached on the European recovery support will never be enough to overcome the COVID-19 challenges in the EU, it really is an important first rung on the ladder.
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The European Council has come to a compromise on the European recovery support, after four days of negotiations. The primary pillars as proposed by Macron and Merkel time ago still stand – joint financing and a significant grant element. However the grant amounts have been down and many forward-looking programmes, including support for climate change, have already been reduced. So, is this a glass half empty or a glass half full? Taking the viewpoint a year ago none of the could have been even imaginable is a valid point if one takes the long-term view towards a slow move towards European fiscal policy integration. As my buddy Sony Kapoor highlights, however, this will not remember that the COVID-19 crisis constitutes a massive risk to the complete European project, you start with the euro, when there is asymmetric recovery and divergence over the EU (and again, especially the euro area). Many economists, including yours truly, have therefore called in early stages for a joint recovery effort on the European level, on economic, political and social grounds. And as a decade ago with the banking union, when these calls were first dismissed as unrealistic, it ultimately did happen. Angela Merkel and Emmanuel Macron have stepped up to the task.
However the same economists (and other observers) could have preferred a bigger and more courageous deal; the GDP drop is too big for a effort. And even though a 1.75% GDP stimulus each year over the next 3 years sounds large, it pales compared to a GDP drop as high as 10% this season and a potentially sluggish recovery. So, economically it could indeed not be sufficient and therefore might not achieve the target by itself.
In addition, there is the rather unpleasant picture of 27 heads of governments haggling over little details (a million here, some rebates there) and fighting tooth and nail for his or her national interests. This didn’t really inspire any positive feelings for the European project, if they are needed most. However, this is simply not necessarily that surprising; positive cross-border externalities of a big joint COVID-response aren’t considered by governments responsible to national electorates. And the actual fact that was ultimately a political compromise among 27 governments (also to be ratified by 27 national and the European parliaments) clearly puts to the others the accusation (often heard upon this side of the English Channel) that the EU has already been some type of super-state that imposes its will on individual countries. Rather, this compromise means that there is ownership because of this common recovery effort over the 27 countries of the EU!
How about the political repercussions? Yes, failing could have strengthened populists in the South further and enabled them to openly campaign against the ‘useless EU’ (that they might do anyway). However, you need to remember the populists in the North (EU-sceptics in holland, Finland and other countries). Having this deal be owned by 27 democratically elected governments will; seeing their head of government fight for his or her supposed national interest counters populist accusations of a sell-out. You can call this dirty politics, but politics hasn’t regarded as the cleanest of most professions!
Then there may be the kicking the can later on (often an outcome of EU/euro summits) – how will the joint effort be funded (to become more precise: how will the borrowing be repaid)? There is talk of ‘own resources’, new taxes, but no firm agreement. More haggling and more compromises ahead, but also more possibilities for a common fiscal policy. It really is clear that was an initial step and nothing else; an extremely small step indeed, but looking back the future it could have been an extremely big step, indeed!
So, towards the end, I am decreasing on the glass half full side – no, this is simply not the big f*** deal (to quote Vice-President Biden), it isn’t enough to overcome the COVID-19 challenges in the EU and even less so in the euro area. There must more. BUT, it really is an important first rung on the ladder! It clearly implies that fiscal policymakers are prepared to step up rather than leave the ECB alone. It could not need been the Hamiltonian moment, but at least this is a Hamiltonian glimpse behind the curtain, at new fiscal policy possibilities.