EU leaders will gather in Brussels later this week to try to hammer out a deal on a proposed €750bn recovery fund, financed through commonly-issued debt, to cushion their economies from the damage of coronavirus. There are forces shaping Europe’s destiny that the bloc can do little about, such as American unilateralism and Chinese authoritarianism. But pooling their economic resources to protect jobs, salvage the single market and safeguard the euro is well within their power if they can see beyond short-sighted national self-interest.
To help Europe through a once-in-a-lifetime crisis like this pandemic, any recovery fund has to be big enough to have a real macroeconomic impact. It has to be redistributive to offer a financial advantage over the debt markets or the EU’s existing rescue funds and it has to dispense the money swiftly. The proposal from the European Commission, which builds on an agreement between Paris and Berlin, is not perfect. Its formula for sharing out the money would reward countries that had higher unemployment before the crisis but who have not been hit by it as severely as elsewhere. It should be amended in the talks. Brussels also seems conflicted about whether the purpose of the fund is to pull economies out of a slump or persuade governments to implement overdue reforms. By and large, though, the plan meets the criteria for a timely stimulus.
To its credit, Germany has recognised the exceptional circumstances of this health shock. The Netherlands, Sweden, Austria and Denmark, lacking Germany’s burden of history and farsightedness, have not. The so-called Frugal Four are resisting the plan as proposed. They are against dishing the money out as grants rather than loans and want tough conditions and strict oversight, attached to any aid.
The unofficial leader of the frugal refuseniks is Mark Rutte, the Dutch prime minister. Perhaps realising he cannot hold out forever against the fund, Mr Rutte is insisting that The Hague and every other national capital, rather than the commission, has the final say on whether a country deserves its aid payments. In his mind, a national veto is the democratic price of solidarity. But the idea of the Dutch parliament dictating terms to the Italian or Spanish one is profoundly undemocratic. It would also be counterproductive and politicise the whole process, with governments doing deals with each other.
Mr Rutte pays lip service to the idea of a stronger, geopolitical Europe but is unwilling to accept the price tag that comes with it, especially with national elections looming next year. Far-right Eurosceptics remain a threat although a majority of Dutch appear committed to EU membership. Mr Rutte’s opposition to the recovery has strong support in parliament. His moralising tone plays well with a public who have prospered from an open, liberal economy and seven decades of EU membership and wonder why Italians and Greeks cannot be more like them. But nobody is to blame for this crisis.
Productivity-enhancing reforms are sorely needed in much of southern Europe. Northern members need to rebalance their economies away from excessive surpluses. Other capitals might ask if their public finances would be in better shape if The Hague did not poach their tax revenues through a highly favourable corporate tax regime. Every country needs to do its bit. They should all use recovery fund money to help reduce carbon emissions and improve digital skills. But tying crisis aid to complex and contentious reforms imposed from afar would be a costly mistake from which all Europeans would lose out.
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