Although any joint EU action should be welcomed, the current COVID-19 response plan hardly amounts to a radical break with business as usual. Far from a long-awaited embrace of debt mutualization, the newly proposed European recovery fund risks being both politically unpalatable and economically inadequate.
NEW YORK – This past week, the European Commission unveiled a plan to help European countries manage the Great Depression-scale shock from COVID-19. Building on a recent Franco-German proposal, the Commission is calling for a €750 billion ($834 billion) recovery fund (€500 billion of which would be distributed as grants, and €250 billion as loans).
The money issued through this so-called “Next Generation EU” plan will flow through European Union programs, in order to achieve the Commission’s goals, including its green and digital economy agenda. The Commission will raise funds in the market by issuing long-term bonds, and their efforts will be backed by a suggested increase in new taxes, such as those on greenhouse-gas emissions, digital services, and other areas of supranational commerce.
Though we are among the few commentators who anticipated that the EU would offer a plan much larger than what most market participants and pundits expected, we also would advise European policymakers to remain realistic about what can be achieved at the moment. Celebrations of the EU’s long-awaited “Hamiltonian moment” of debt mutualization are premature.
As matters stand, the EU is still an incomplete transfer union in which resources (human, physical, financial) so far move from the periphery to the center – which is to say, to the United Kingdom or Germany. Ironically, one of these poles of attraction, the UK, has decided to leave the EU, ostensibly to end the flow of migrants into its economy. With Brexit, which officially occurred on January 31, the EU has already literally begun to disintegrate.
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