The recovery fund agreed between EU leaders on 21 July is a big step forward for the European Union’s structure. Unfortunately, it is still an insufficient contribution to the post-pandemic European financial system and the path towards a low-carbon economy. More innovative monetary policies by the European Central Bank will still be needed to complement the EU’s recovery fund in the future.
On 21 July, European leaders agreed to create a €750 billion fund to help the European Union’s (EU) economy recover from the Covid-19 crisis. After four days and nights of intense and difficult negotiations in the European Council, the decision is the result of a compromise between heads of states and was praised as a historic milestone for Europe.
New powers for the European Commission
The decision is positive for three reasons.
Firstly, a key characteristic of the EU deal is that it will allow the European Commission to issue its own debt by borrowing on financial markets – something that was thought impossible until now due to the resistance of countries like Germany. In comparison, last year the Eurogroup had miserably and painfully agreed on a tiny €25 billion fund for stabilising the Eurozone – a figure dwarfed by the newly agreed recovery fund.
Secondly, the Commission will distribute this money to EU countries either in the form of grants (€390 billion) or cheap loans (€360 billion). The major advantage of this is that EU countries will benefit from more funding without having to increase their public debt. This should, therefore, help the weakest EU Member States to support their economies, although this is still open to debate.
Thirdly, the EU will agree later on on setting up ‘own-resources’ (i.e. EU-level taxes) that will be used to repay the debt. Although leaders have not agreed on this yet, they have mentioned several options such as a financial transaction tax, a carbon tax or a tax on multinational corporations. It is clear that the new debt will force EU leaders to find a compromise on this.
It is worth noting that the European Central Bank (ECB) will undoubtedly support the EU’s recovery package, not least by purchasing EU bonds on secondary markets through its ongoing quantitative easing programme – as is already the case with European Investment Bank bonds. By doing so, the ECB could significantly reduce the borrowing costs for the European Commission.
Too little and possibly too late
But there are many ways in which the deal falls short.
Firstly, as Positive Money Europe has warned since the beginning of this crisis, the recovery fund is not as big as it appears. In our opinion, the €360 billion of loans from the EU to member states are irrelevant, as they will only slightly lower the borrowing costs for some countries but not create additional stimulus (countries would have borrowed the money anyway on their own). Only the €390 billion of grants is actual additional stimulus, although at a macroeconomically insufficient volume for economies most affected by the crisis, such as Italy and Spain.
The timeliness of the spending is also key. To prevent a long-lasting recession, the money should be spent now rather than later. Under the agreed deal, the European Council wants to spend €200 billion between 2021 and 2022 – already a significant delay. This €100 billion per year is also significantly smaller than the EU budget (€148 billion in 2019) and represents only 0.7 percent of EU GDP. This is not an insignificant amount, but is insufficient given the massive scale of stimulus needed to avoid a cascade of bankruptcies for companies and citizens, let alone for funding the low-carbon transition.
Ultimately, given the difficulty convincing countries like the Netherlands to agree on this, it is possible that this deal effectively represents the limit on what Keynesian economists can hope for under the current status quo within the EU. In other words, after this agreement, we see little realistic prospect of the EU or the Eurozone to set up more ambitious central fiscal instruments to boost the recovery.
If Positive Money Europe’s fears are realised and the recovery plan is not enough to prevent a long-lasting recession and economic suffering for citizens, then other solutions will be needed.
The ECB is still the main player in town
Given its ability to create money, the ECB will once again be the main player. This puts other economic remedies to the Covid-19 pandemic on the table. Firstly, the ECB could deploy ‘helicopter money’ by distributing money directly to citizens in order to help people pay off their debts and stimulate an economic recovery through consumption. Secondly, the ECB could also theoretically write off the EU’s institutional and Member State debt that it owns as a result of its quantitative easing programmes, thus creating ‘fiscal space’ for governments to increase national investments.
In short, although Positive Money Europe welcomes the EU’s recovery fund plan as a big step forward for the EU’s fiscal capacity, we are aware of its limitations. This is why we will keep fighting to make sure the ECB does its part to complement the EU’s response through deploying innovative and effective monetary policy instruments.