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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.

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May 21, 2020

Greek stimulus to help tourism sector

The Greek government has some practice in designing fiscal programmes. Over the last ten years these were mostly about austerity. The Covid-19 pandemic now changed everything. Forget the debate about a 3.5% primary surplus target. This looks quaint from today's perspective. Greece may be less affected by the health impact from the pandemic, but its economy relies heavily on the tourism sector. Getting tourists from other countries back for the summer season is key, and the government is making sure businesses can survive until then.

The finance ministry yesterday launched its third stimulus programme for the last stage of the transition from lockdown to normality. Amongst the fifteen policies there are some new provisions for seasonal workers and temporary VAT cuts on transport, coffee and other beverages, as well as tourism packages until October 30 this year. This is clearly aimed at jumpstarting the tourism season this summer. The programme also extends existing tax deferrals, cuts in rent payments and subsidies for primary residence borrowers until the end of October. The overall package is worth €14bn, or €20bn in value added. Together with European funds these add up to €25bn in support measures, according to Kathimerini.

The biggest challenge for the Greek economy is what happens after the government's measures run out on October 30 just as the tourism season tapers off again. Will the government risk a sharp drop? Or will some of these policies continue or only be gradually rolled back? The battle lines are already appearing. 

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May 21, 2020

Teleworking is catching on

The lockdown has changed how we work and study. Overnight, millions of people in education, medicine, finance, media, accounting etc. worked from home. Some of these virtual practices are there to stay and are likely to change labour markets and education fundamentally. 

An opinion poll for Les Échos suggests that 80% of those who worked from home in those last two months would like to continue teleworking at least partially after the lockdown. This is not only so for workers, but also for managers who used to prefer to keep their teams close. The poll suggests that 27% of active workers switched to teleworking, while another 35% continued working at their workplace, and 27% were either on partial unemployment or inactive. Of all active workers in this poll, 40% would like to telecommute in the future. This option is available only for 46% of white-collar workers in France, and not for the 18% of low-skilled jobs where physical presence is required.

For smaller organisation this could be an opportunity. The Institut Sapiens already decided to give up their offices this autumn, after the first experience of teleworking proved to increase productivity. Saving rents and time spent in transport was one important aspect in their decision. Working from home also avoids the comforting rituals where simply showing up at work is considered enough. Telework instead exposes unnecessary tasks and time wasted in redundant meetings. A remote organisation, however, relies on self-discipline and a proper work environment at home in order to be a successful model for the future. The lockdown experience sets the precedence for some fundamental shifts yet to come. 

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