April 27, 2020
The EU’s trickery of a fake MFF
The battle lines have hardened since the European Council's procedural agreement on Thursday to kick the ball back to the European Commission. They will agree a fudge in the end. But this time it will become harder to sell the fudge as an achievement of European solidarity.
We have some more details on the initial proposal by the European Commission. One report put the amount to be raised on the financial markets at €320bn, with the proviso that this number is still preliminary and subject to the discussion on the overall EU budget. The plan is to leverage that money into a fund of a €2tn size.
This is not going to work. We criticised the Juncker investment programme many times, but at least it managed to raise the funds if only by usurping projects that would have been funded by other means. But the impact of the Juncker fund was only €315bn. Times are much worse today, and the amount to be raised is six to seven times larger. Back then, the problem was smoke and mirrors. Today, the problem is more basic. A battered and risk-averse private sector will not put up €1.7tr in co-financing. In other words, if you want to do smoke and mirrors, you will need some smoke to start with.
As Reuters reported, the so-called recovery instrument will be based on an initial borrowing to be repaid by EU governments over a long period after 2027, or alternatively through higher contributions to the EU budget or EU taxes. In addition, the Commission considers front-loading part of the 2021-2027 budget through a €200bn recovery and resilience facility, and a further €50bn in the form of re-directed cohesion funds.
Apart from the inadequacy of the proposal itself, we see no shift in the German and Dutch opposition to a large fund or to large redistributive grants. The package will struggle to reach macroeconomic impact. If, say, half of the €320bn were spent on grants over a period of three years, the total impact would be around 0.4% of eurozone GDP. It would be a bit more for Italy and a bit less for Germany. But this money is backed by national guarantees, that is, a portion of this is Italian guarantees funding Italian grants. So you would have to deduct that portion that is guaranteed by yourself to get the implicit net transfer, since not all of the money will go to the south. We think you will end up with a something that is macroeconomically close to zero.
We used to quip about EU budget negotiations: never before have so many senior politicians spent so much time haggling over so little. This is worse. But, despite the disagreements, we still think that a foul compromise is the most likely outcome. The process to which the European Council has now agreed has killed the coronabond. We hear Emmanuel Macron’s strong words from Thursday night. He warned against what he called a fake MFF solution. This is telling us that he is looking at the package with the same contempt as we do. But we doubt that he will have the courage to veto a fake solution and align with Italy and Spain in a coalition of the willing to go outside the EU’s framework. The French priority remains to be locked in with Germany in a monetary union, come what may.
A final thought: many people, us included, believed at one time that the monetary union would transform during crises. The eurozone crisis and the current episode are telling us that the original design of the monetary union is sticky. If EU member states were to reinvent a monetary union today, they would come up with a similar framework, without eurobonds. We at Eurointelligence have been supporting eurobonds forever, but have noted that a willingness by southern European member states to engage in fake compromises has ultimately frustrated that endeavour. So, we have to move on. As imbalances increase, our discussions will shift away from mutualised debt to debt restructuring. The eurozone is certainly not ready for that.