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The macroeconomic value of the EU’s €750bn Recovery Fund lies somewhere between modest and trivial. Part of it is reshuffling money that would have been spent anyway. The rest is spread thin over many years.
The significance is political. The fund is a profound change in the structure and character of the European Project. The Commission will have powers to raise large funds on the capital markets for the first time and to direct how the spending is allocated, turning this strange hybrid creature into an even more extraordinary institution.
Where else in the world does a single unelected body have the ‘right of initiative’ on legislation, and the executive powers of a proto-government, and the spending prerogatives of a parliament, all wrapped in one?
It is Caesaropapist, bordering on totalitarian in constitutional terms, mostly unchecked by meaningful parliamentary oversight. Montesquieu must be turning in his grave.
So yes, it matters. Emmanuel Macron was right to call the deal struck in the early hours of this morning an “historic” moment for Europe. But whether it is also an historic mistake - une fuite en avant, as the French say - remains to be seen.
The pure fiscal component has been whittled down from €500bn to €390bn, and even that figure is not quite what it seems. The money will be stretched out to the mid-2020s, amounting to less than 0.6pc of GDP annually.
A big chunk will go to Eastern Europe, lightly touched by the pandemic so far. Some money is going to regions in Germany or other states well able to finance their own needs.
If the aim is to prevent an asymmetric recovery that leaves Italy and Club Med marooned - and therefore renders monetary union unworkable - it is a blunt tool. There will be an ‘emergency brake’ if states are deemed to be dragging their feet on reforms (policed by the Commission, further increasing the power of Brussels), and a mechanism to cut funding to those breaching the ‘rule of law’. This will be a big source of coming friction. It is political nitroglycerine on a long fuse.
None of the grants will arrive until next year. The package is therefore useless as Covid disaster relief. In the meantime the European Central Bank is holding the eurozone together by soaking up Italian, Spanish, Portuguese, and Greek debt issuance, though with the German Constitutional Court breathing down its neck.
The Recovery Fund will kick in when the ECB’s pandemic QE runs out. That delicate handover will be the first big test of whether Europe has overcome the economic shock of Covid-19, or once again fallen short.
Had there been no deal after marathon talks and a promiscuous exchange of insults it would have a very rough day for the European Project. But what has emerged is not pretty either. There is a new line of emotional cleavage in EU affairs.
The Netherlands and the liberal, Atlanticist, free-market bloc used to hide behind Britain at EU summits, relying on the British Prime Minister of the day to fight their corner and suffer the opprobrium.
There was one consistent theme in the countless summits that I covered as Brussels correspondent. They always nudged forward the Monnet agenda by means of creepage, precedent, and the establishment of facts on the ground. The democratic consent for this erosion of sovereign national control was thinner than EU enthusiasts ever cared to admit.
The UK was invariably ambushed by the integrationist bloc. When the British put up reasonable objections they were accused of holding up progress by insiders whispering en coulisse, and vilified by the fanatical Brussels press corps. Over time this corrosive dynamic had consequences.
The EU ‘frugals’ now have to fight their own corner. They are learning what it is like to be cast as the villains - in this episode as penny-stinting moral reprobates, refusing to come to terms with the higher teleological destiny of Europe.
What is striking about this battle has been the sheer level of abuse hurled at Dutch premier Mark Rutte, the frugal-in-chief. His sin was to question why Dutch taxpayers should be bounced into funding pandemic give-aways that in reality have precious little to do with the virus. Some of the money is earmarked for countries that suffered less damage from Covid-19 than the Netherlands itself.
Mr Rutte has been traduced for asking why the Dutch people should pay for fiscal transfers to Club Med and the Kaczynski-Orban axis with no control by the Dutch parliament over how the money is spent or how recipients behave. The ‘big three’ beneficiaries in the Commission blueprint are Italy, Spain and Poland, and each of them is a red flag for The Hague.
The majority party of the Italian coalition is the Five Star Movement, a melange of techno-Utopian, anti-globalist radicals, who not so long ago were calling for the break-up of the euro and an Italian sovereign default. Every fibre of Five Star’s political body is hostile to the brisk, reformed, and austere Dutch model.
Premier Giuseppe Conte has been toying with tax cuts even as he demands Dutch money, which he does with a strikingly shrill sense of entitlement. Yet Italian state pensions soak up 16.2pc of GDP on OECD data. In the Netherlands the figure is 5.4pc. In effect, Dutch taxpayers are told they must cross-subsidise Italy’s luxurious old age.
The Spanish coalition includes two Corybnista parties: Podemos and Izquierda Unida. They joined forces with the Socialists this year after securing an agreement that would roll-back the free market reforms of the last decade and let rip on public spending, supposedly to be paid for with a Tobin tax and by soaking the rich. Pensions are 11pc of GDP and rising.
Izquierda Unida is Communist. This is the closest that hard-Left parties have come to real power in a major West European country since the Second World War. And yes, both also called for an end to the euro when it suited their interests.
Poland and Hungary have been in a running battle with the EU over control of the judiciary and for breach of the Copenhagen Criteria, the governance code for EU accession. Neither have been hit hard by Covid-19. Yet they will enjoy a windfall from the Recovery Fund - a bribe to buy them off. Pandemic aid has degenerated into an all-purpose slush fund.
Seen from The Hague, or Stockholm, or Helsinki the recovery plan is a giant racket. Yet Mr Rutte’s demands for some sort of discipline were met with a revealing rebuke from France’s Emmanuel Macron.
“You are taking Cameron’s place at the table,” he snapped, demanding to know where that sort of diplomacy led Britain.
Well, Monsieur, it led by indirect steps to Brexit. And is it churlish to point out that David Cameron was right about the Fiscal Compact? Events have shown that it is a deflationary doomsday machine.
In short, the northern Hanseatic ring of the EU has been steamrolled, and demonised for good measure. This too will have long-tail consequences.
Personally, I have sympathy for the Club Med states as well, a paradox only if you fail to grasp the fatal design flaws of monetary union. They were forced by Brussels (ie the German finance ministry) to implement austerity overkill and carry out internal devaluations to claw back lost competitiveness, leading to youth unemployment above 50pc in many regions. That is why the likes of Five Star, Podemos, and Izquierda Unida are today in power.
Such is the inevitable and tragic mess that ensues if you lock yourself into a currency bloc that is moving to a different macro-economic rhythm, and is controlled by somebody else. But that is scarcely the fault of the Dutch, Austrian, or Finnish people, and even less so the fault of the non-euro Swedes and Danes.
One can argue that this summit fight is all a storm in a teacup. The Recovery Fund is designed as a one-off episode that does not lead to fiscal union or change the EU’s constitutional structure. Everything reverts to the status quo ante, which is why it is tolerated by hardliners in the German Council of Economic Experts.
But that is not what French and Italian leaders tell their own political constituency. They advertise the fund as a crucial and defining step across the Rubicon. Paris calculates that this machinery will become irreversible once in place. The summit therefore becomes Europe’s Hamilton Moment in practice, if not in theory. Under that hypothesis the stakes are exorbitant.
The economic shock of the pandemic has been asymmetric in its effects, playing havoc with debt dynamics of those states already on the edge. It has brought forward the de facto insolvency of Italy and the eurozone’s southern half.
The Commission expects Italy’s debt ratio to jump from 133pc to near 160pc of GDP this year even in a benign post-Covid reopening, avoiding a truncated L-shaped trajectory, which is far from assured. The North-South gap has been stretched beyond viability.
If the Recovery Fund is a stalking horse for a European debt union - the mutualisation of €6 trillion of Club Med and French legacy liabilities - then it is a very big ask.
It is dangerous practice to push through transforming commitments by means of stealth, legerdemain, and fait accompli. We have not heard the end of the Frugal Five.