Frank Eich
2. June 2020

How much is #500bn euros?

Not long ago EU leaders bickered over the third decimal place of the next EU 2021-2027 budget. Should it be 1.074% of EU Gross National Income as proposed by Charles Michel in his role as President of the European Council, 1.114% as suggested by the European Commission, a generous 1.3% as argued by the European Parliament or indeed not more than 1% as demanded by the “frugal four” (comprising Austria, Denmark, the Netherlands and Sweden) and Germany?

A focus on the third decimal place

The Corona crisis has ended this focus on third decimal places, with the latest European Commission proposal – encapsulated in the Next Generation EU initiative – suggesting rounding up to 2%. For a limited period only the EU Commission proposes to top up the EU budget to 2% of EU-27 Gross National Income, more precisely the EU Commission suggests to spend 500 bn euros in grants, particularly in the countries hardest hit by the crisis, and offer a further 250 bn euros in loans over the period 2021-24. The game-changing element here is the 500 bn euros in grants.

 

The Corona crisis has put a bomb under the EU’s budget negotiations

 

So why did the European Commission – building on a proposal by French President Macron and German Chancellor Merkel – suggest to change the game? EU leaders are increasingly aware that this is crunch time for the EU, with the breakup of the union now seen as a possibility if it cannot be seen to act decisively and with solidarity. The initial crisis response was non-existent, with member states instinctively looking after themselves – a fact not missed by Italy and Spain when their countries were overwhelmed by the pandemic. It is high time to make up for this negligence.

The German constitutional court’s decision to challenge the European Central Bank’s policies will have been a further impetus: Europe needs a joint fiscal response so that the ECB is no longer alone doing the heavy lifting in keeping the euro area  together. And the fact that half of all the fiscal measures announced to deal with the crisis in Europe apparently came from the German government to help German businesses must have also played a part: Germany’s competitiveness within the euro area has been a thorny issue for a long time creating all kinds of tensions; such uneven crisis response could have severely damaged the internal market post-Crisis, with no level playing field left.

 

Spending the money effectively might prove challenging

 

A joint European fiscal response to the Corona crisis thus makes sense for a number of reasons and might usher in a new phase in European integration. Agreeing on a big number is easy – even though upcoming negotiations are likely to lower that number to make it palatable to the “frugal four” – and funding it should not be a problem either. Many governments have issued long-term bonds – 30 years, 50 years or even “centenary” 100 year bonds (the average maturity on UK government debt, for example, is 15 years) – but spending this money effectively might be more challenging.

 

The number is big but in the scheme of things won’t achieve much

 

So what does 500 bn euros buy you? Surprisingly little is the answer. Spread over a four year period, this translates into 125 bn euros per year – less than one percent of the EU-27’s annual GDP of around 15 trn euros. As announced, the lion share of these grants should go to Italy and Spain – around 80 bn euros each, which would be around 20 bn euros per year. While useful and appreciated – Italy’s prime minister Conte called the proposal “an excellent signal from Brussels” – this is not a lot in the context of what is after all the eighth largest economy in the world and dwarfs in comparison to the projected government deficit in excess of 150 bn euros this year. It wouldn’t even compensate for the collapse in foreign tourism revenue this year- one of the country’s biggest export earners. The annual numbers might be somewhat different, but spending the money over three years (as some seem to imply) wouldn’t really make much difference either.

The picture will be similar in Spain. That said, the money could buy you something, for example it could more than double Italian government spending on research and development (R&D), an area where the country has to play catch up. The problem here is that to bear fruit in terms of innovation, patents and hopefully eventually increased competitiveness, R&D spending has to be sustained over many years, not over just a few years in which case the money would probably be wasted.

 

Will temporary turn permanent?

 

This leaves us with a conundrum: shall the rescue package be temporary and thus more symbolic or should it become more permanent, in which case it might actually make a material impact? Chances are that Europeans will start to appreciate the benefits of a slightly bigger EU budget. What is meant to be temporary now, could become a permanent feature in years to come.

 

Photo by Belinda Fewings on Unsplash

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