May 21, 2020
How to spend it - recovery fund edition
The EU would not be the EU if a plan for a fiscal recovery fund did not come with a huge pork barrel attached. They are already spending the money.
It is worth perusing in some detail the six-page Franco-German proposal for the recovery fund, especially the part on the spending priorities and some not-so-subtle quid-pro-quos. Most of the news coverage has focused only on the money and the grant-versus-credits question.
It is not hard to see massive political conflicts ahead on each one of the points raised in that paper. It includes some old warmed-up suggestions but, as FAZ pointed out in its coverage, also quite a bit of new stuff.
The first thing to notice is that the spending priorities have a distinct French flavour: a priority for large industrial projects. Berlin would normally have leaned against this, but the present grand coalition has departed from previous liberal positions. Especially since the arrival of Peter Altmaier as economics minister, industrial policy has become one of the areas of greatest convergence between Berlin and Paris right now. The paper demands investments in strategic projects, including for the production of computer chips and battery cells. There is now a particular emphasis on global industrial champions. One area where the emphasis on strategic independence will be particularly strong is healthcare. The recovery fund should finance joint research, and procure supplies to make Europe more independent from the rest of the world during a pandemic. There is also a hint of a joint procurement policy to produce a stronger position vis-a-vis the pharmaceutical industry. There is a lot of specific details regarding healthcare, including a stipulation that the EU should seek new global rules in the WTO for the trade of healthcare products. Governments are always fighting the last crisis. The pandemic exposed weaknesses in the EU, but the EU and the eurozone in particular are facing bigger long-term threats than another pandemic.
The paper also underlines French and German demands for greater protection against strategic investments from China. We expect this part to be particularly controversial. China is a big investor in Italy especially. Will Italy fall into the Franco-German industrial policy consensus for the sake of what will ultimately be only a marginal fiscal transfer? From the €500bn you will have to deduct anything that comes in form of loans, anything that is not spent in the first three years, and Italy's own long-term contribution to the fund. The latter would become an issue if the money is counter-financed through an increase in future contributions to the EU budget, which constitutes another liability of the Italian government. The net benefit is the purely distributive element of the fund, the portion Italy would get in the form of grants that it does not itself guarantee indirectly. We struggle to see that this segment is going to be very large. In any case it won't be large enough to persuade Italy to partake in the fight to erect roadblocks on China's modern-day silk road.
The paper also contains sections on investments in climate change and digitalisation: a minimum price for CO2 and a CO2 border tax; a digital tax; and an agreed tax base for corporate taxation. These are all subjects on which EU member states found it impossible to reach agreement previously.