Coronavirus: EU recovery fund is further step towards fiscal union | Business News

Tradition dictates that there is always hyperbole when, at the end of a long EU summit, a last-ditch deal is agreed in the early hours of the morning.

However, with Tuesday’s agreement to establish a €750bn EU recovery fund, the hype is justified.

Make no mistake about it – this is a hugely important milestone in the history of the EU.

For the first time, EU member states have agreed a principle of massive collective borrowing.

To grasp the significance of this, think back to the eurozone sovereign debt crisis, when such a measure was explicitly ruled out.

Yes, the European Commission was part of a so-called ‘troika’ (along with the European Central Bank and the International Monetary Fund), which administered the bailouts awarded to Greece, Cyprus, Ireland and Portugal.

But the EU itself left all the heavy lifting, in terms of monetary stimulus, to the ECB.

The European Central Bank is in Frankfurt
The European Central Bank is in charge of the eurozone’s monetary policy

To be clear, the announcement does not achieve fiscal union in the EU.

There had previously been suggestions that this could be the EU’s ‘Hamilton moment’ – a reference to how Alexander Hamilton, later US President, converted the debts of individual US states into federal debt and, in the process, turned the United States into a fiscal union and a political federation.

That has not happened. Italy’s debts have not suddenly become the debts of France, Germany or any other EU country.

Malcolm Barr and Marco Protopapa, economists at the investment bank JP Morgan, told clients: “Claims that the recovery plan is the EU’s ‘Hamilton moment’ are, in our view, an over statement.

“But if anything closer to Hamilton’s mutualisation of US state debt is ever to occur in the EU, the recovery fund agreement will have been a significant landmark along the way.”

What this deal does mean, though, is that the EU will now be borrowing money on a collective basis on a major scale and will be collectively due to repay it.

And that is a huge development when you recall, during the Eurozone sovereign debt crisis, the reluctance of countries like Germany to dish out money to countries like Greece.

As Sven Jari Stehn and Alain Durre, of the economics team at the investment Goldman Sachs, told clients today: “Although the negotiations were tough, EU leaders showed strong commitment to finalise agreement at this summit, which we think points to continued EU integration down the road.

“In particular, the agreement to adopt the recovery plan through front-loaded EU bond issuance creates a precedent in the EU institutional framework and into the functioning of the EU budget.

“And this may become more permanent than the difficult negotiations of the last four days suggest.”

The negotiations said much about how the EU, its rules and institutions, will evolve now Britain has left.

French president Emmanuel Macron and Germany's Angela Merkel prepare for a news conference after the deal was struck
French president Emmanuel Macron and Germany’s Angela Merkel prepare for a news conference after the deal was struck

The plans for the recovery fund were drawn up by the German Chancellor Angela Merkel and the French President Emmanuel Macron. France and Germany are now free to push for closer European integration without Britain holding up the process.

Yet the old divisions between the more fiscally conservative countries of northern Europe and the freer-spending countries of southern Europe were also in evidence.

The so-called ‘frugal four’ – Austria, the Netherlands, Denmark and Sweden – argued that money disbursed through the recovery fund should be via loans and not grants.

To an extent, they succeeded, as the original Franco-German proposals were for €500bn of grants and €250bn of loans – whereas, under the deal agreed, the breakdown is €390bn of grants and €360bn of loans.

Dutch PM Mark Rutte led the so-called frugal five nations which wanted strict economic reforms attached to the rescue package
Dutch PM Mark Rutte led the so-called ‘frugal five’ nations which wanted strict economic reforms attached to the rescue package

The ‘frugal four’ also won agreement for a so-called ‘super emergency brake’, proposed by the Dutch, allowing any EU member to hold up payments if they suspect the money will be used inappropriately.

The north-south divide is not the only one which may hold up further integration.

There were also arguments about the conditions to be attached to loans and grants. The so-called ‘Visegrad’ group – Poland, Hungary, the Czech Republic and Slovakia – blocked an attempt to tie disbursements to what Ms Merkel called “respect for the rule of law”.

That was seen as an attempt by Paris and Berlin to rein in the growing authoritarianism of governments like that of Viktor Orban, the Hungarian prime minister, which also hints at future potential divisions.

Another could be the divide between eurozone members and non-eurozone members.

If this agreement is a precursor to full-blown EU fiscal union then it is hard to see, logically, how non-eurozone members like Sweden and Denmark cannot ultimately avoid euro membership.

Fiona Frick

EU ‘becoming a fiscal union for first time’

Fiona Frick, chief executive of the asset manager Unigestion, told Sky News: “[The agreement] makes [non-eurozone members] weaker because for the first time we have a European bloc and we can have euro debt issued [by it]. It makes a third bloc with the US and China. So I would say, for those countries outside [the euro], it makes the situation a bit weaker.”

Today’s agreement also revealed something else about the EU – which is that, although Britain has left, its influence remains.

The price of the frugal four’s support was a big rise in the rebates they receive on contributions to the EU budget.

The rebates exist due to Margaret Thatcher’s successful campaign to secure one for Britain in 1984.

Mr Macron, in particular, had hoped to abolish them altogether after Brexit.

But now the Dutch will see their rebate rise by almost a quarter while Austria’s will double.

Who knows – some taxpayers in those countries may even raise a glass tonight to the memory of the former British PM.

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