US, WASHINGTON (ORDO NEWS) — Last week, the European Commission unveiled a plan to help European countries cope with the shock of the Sovid-19 pandemic, the scale of which is comparable to the Great Depression. Based on a recent Franco-German proposal, the Commission called for the creation of an Economic Recovery Fund in the amount of 750 billion euros (of which 500 billion are supposed to be distributed in the form of grants, and 250 billion in the form of loans).
Under this plan, called the “New Generation of the EU”, money will be distributed through EU programs in order to achieve the goals set by the Commission, including its green and digital economic agenda. The commission will raise funds in the market by issuing long-term bonds; these efforts will be supported by a proposed increase in new taxes, such as greenhouse gas taxes, digital services, and other supranational business sectors.
Although we are among the very few commentators who predicted that the EU would offer a broader plan than expected by most market participants and experts, we would still advise the European authorities to maintain realism about what can be achieved at this time. It is premature to celebrate the long-awaited “Hamiltonian moment” of risk sharing between all countries for EU debt (the so-called mutualization).
Today, the European Union remains an incomplete transfer union, in which resources (human, physical and financial) move from the periphery to the center, that is, to Great Britain or Germany. It is somewhat ironic that Britain, one of these poles of attraction, decided to leave the EU, supposedly in order to end the influx of migrants into the country’s economy. After Brexit, which officially took place on January 31, disintegration literally began in the EU.
Optimists believe that without Britain, finally, there will be a more united European Union. However, such a forecast seems overly optimistic. The fact is that Britain was not so much a barrier to integration, as it served as an excuse for other dissenting EU countries that tried to avoid closer ties. For example, it was not Britain that blocked the European Deposit Insurance Scheme, which is necessary to complete the process of creating a banking union in the eurozone – this honor belongs to Germany.
With the rise of populist parties in Europe, it has long been clear that the next major crisis will turn into an existential threat to the EU. Today, the European Union is obliged to demonstrate that it is ready to accept this challenge and complete the integration process. Otherwise, he may run into the “Jefferson moment”, returning him to a form of confederation with limited general sovereignty.
Once on the edge of this abyss, France and Germany devised a plan to mitigate the terrifying economic impact of the pandemic. But although their proposal has its merits, Alexander Hamilton would have remained dissatisfied – and absolutely right. To begin with, the proposed bond issue will not be carried out with a “general and separate guarantee”, and therefore will not constitute genuine debt utilization.
The proposal of financier George Soros to issue eternal EU bonds, the so-called “consoles,” would help alleviate the severity of the problem, but would not solve it. In any case, if the money does not appear this summer, then it will probably be too late to help severely affected countries such as Italy, Greece and Spain, which, in addition to everything, face a dead tourist season.
More importantly, the distrust between the European “four economies” (Austria, Denmark, the Netherlands and Sweden) and the supposedly “wasteful” southern countries (including Italy, Spain and Greece) remains so deep that, frankly, it’s hard to imagine what kind of acceptance Any lasting solution. The recent ruling of the German constitutional court was a powerful signal for European institutions about what they should expect in the future. Although over time this decision will be overturned by the European Court of Justice and ignored by the European Central Bank, the ECB has nevertheless stumbled across the political limits for its actions.
Germany will either have to offer partial EU budget support at the expense of its own taxpayers, or allow EU institutions to provide sufficient mutual support (starting with the eurozone budget) for the entire monetary union. If the proposed EU Economic Recovery Fund is able to revive the idea of the eurozone budget (especially its so far, and not agreed upon stabilization functions), then this in itself will be a major achievement.
By subscribing to a joint plan with France, Germany, presumably, understands that it cannot simply say “cash” and monetary support, and budget (that is, an emerging budget and transfer union). Both need the euro to survive. But even if such support appears, critically important issues will remain unresolved, and last but not least the question of the sustainability of Italy’s rapidly growing public debt. This country will have to make incredible efforts to restore economic growth and competitiveness in a situation where its comparative advantage in the tourism sector has been so seriously undermined.
On the whole, any pan-European approach to the crisis of Sovid-19 is a step in the right direction (and this is definitely better than inaction). However, there is no particular reason to expect the EU to break with its long tradition of randomly dealing with current problems. If European leaders can prevent the immediate collapse of the EU and the eurozone, then at least they will be able to avoid the enormous economic, social and political costs that further rapid disintegration will bring.
Meanwhile, actions determined by old inertia will leave Europe unprepared for life in the world after Sovid-19, in which other economically large continental countries – the USA, China and India – will make the most important geostrategic and economic decisions.
Nouriel Roubini is a professor of economics at the Stern School of Business at New York University and chairman of the Roubini Macro Association. He was a senior economist on international affairs at the White House Council of Economic Advisers during the Clinton administration. He worked at the International Monetary Fund, the US Federal Reserve and the World Bank. His website: NourielRoubini.com
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