A Hamiltonian glimpse in Europe

Thorsten Beck 27 July 2020

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First posted on: 

"Finance: Research, Policy and Anecdotes", 21 July 2020

The European Council has come to a compromise on the European recovery support, after four days of negotiations. The main pillars as proposed by Macron and Merkel some time ago still stand – joint financing and an important grant element. But the grant amounts have gone down and several forward-looking programmes, including support for climate change, have been reduced. So, is this a glass half empty or a glass half full?  Taking the viewpoint that a year ago none of this would have been even imaginable is a valid point if one takes the long-term view towards a slow move towards European fiscal policy integration. As my good friend Sony Kapoor points out, however, this does not take into account that the COVID-19 crisis constitutes an enormous risk to the whole European project, starting with the euro, if there is asymmetric recovery and divergence across the EU (and again, especially the euro area). Many economists, including yours truly, have therefore called early on for a joint recovery effort on the European level, on economic, political and social grounds. And as ten years ago with the banking union, when these calls were first dismissed as unrealistic, it ultimately did happen. Angela Merkel and Emmanuel Macron have stepped up to the challenge.

But the same economists (and other observers) would have preferred a bigger and more courageous deal; the GDP drop is too large for a minor effort. And though a 1.75% GDP stimulus per year over the next three years sounds large, it pales in comparison to a GDP drop of up to 10% this year and a potentially sluggish recovery. So, economically it might indeed not be sufficient and thus might not achieve the objective by itself.

In addition, there was the rather unpleasant picture of 27 heads of governments haggling over little details (a million here, some rebates there) and fighting tooth and nail for their national interests. This did not really inspire any positive feelings for the European project, when they are needed most. However, this is not necessarily that surprising; positive cross-border externalities of a big joint COVID-response are not taken into account by governments responsible to national electorates. And the fact that this was ultimately a political compromise among 27 governments (and to be ratified by 27 national and the European parliaments) clearly puts to the rest the accusation (often heard on this side of the English Channel) that the EU is already some kind of super-state that imposes its will on individual countries.  Rather, this compromise ensures that there is ownership for this common recovery effort across the 27 countries of the EU!

What about the political repercussions? Yes, a failure would have strengthened populists in the South further and enabled them to openly campaign against the ‘useless EU’ (which they might do anyway). However, one should not forget the populists in the North (EU-sceptics in the Netherlands, Finland and other countries). Having this deal be owned by 27 democratically elected governments can certainly help; seeing their head of government fight for their supposed national interest counters populist accusations of a sell-out. One may call this dirty politics, but politics has never known to be the cleanest of all professions!

Then there is the kicking the can down the road (often an outcome of EU/euro summits) – how will the joint effort be funded (to be more precise: how will the borrowing be repaid)? There is talk of ‘own resources’, new taxes, but no firm agreement.  More haggling and more compromises ahead, but also more possibilities for a common fiscal policy. It is clear that this was a first step and nothing else; a very small step indeed, but looking back in the future it might have been a very big step, indeed!

So, at the end, I am coming down on the glass half full side – no, this is not the big f*** deal (to quote Vice-President Biden), it is not enough to overcome the COVID-19 challenges in the EU and even less so in the euro area.  There will have to more.  BUT, it is an important first step!  It clearly shows that fiscal policymakers are willing to step up and not leave the ECB alone. It might not have been the Hamiltonian moment, but at least it is a Hamiltonian glimpse behind the curtain, at new fiscal policy possibilities.

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Topics:  Covid-19 EU institutions EU policies

Tags:  COVID-19, EU, Next Generation EU, EU Recovery effort

Professor of Banking and Finance, Cass Business School; Research Fellow, CEPR

CEPR Policy Research