July 22, 2020
Why we don’t think this deal is historic
After yet another long EU summit we find ourselves once again at odds with the overwhelming majority of commentators. We are among a very small group who yesterday failed to use the word "historic". We don’t want to downplay the significance of the EU’s first real eurobond. But the truly historic decision has yet to be made: an expansion of the EU’s own-resources tax base that would allow it to act as a sovereign debt issuer on its own accord. On the contrary, we believe that yesterday’s deal may have taken us one step away from this goal.
When people declare an event to be historic, by definition they map out a future history in their heads. Their narrative is subject to the usual cognitive biases, like wishful thinking or confirmation bias. When we call the deal historic, we do so from the perspective of a hypothetical future in which this bond will be seen as the first of many. The summit was the moment when the EU overcame its resistance to a shared future. This is indeed a possible and plausible trajectory. But it is not the only one, and we don’t think it is the most likely one either.
When the Berlin Wall came down, commentators also talked about a historic event. It was based on the judgement, correct as it turned out, that this marked the end of communism. But history is littered with examples of historic events that future generations struggle to remember. When the 1919 Paris conference agreed the League of Nations, many at the time though it was a historic decision that would end global conflict. And then there are also many truly historic events that were not recognised at the time, like the outbreak of the first world war itself which unleashed 30 years of horror.
As commentators who struggle to make sense of the world that surrounds us, we happily leave these types of judgments to future historians. Instead we find it more fruitful to focus on the thing itself. Erik Jones, who is more optimistic than we are, offers a number of useful warnings. National governments will end up monitoring each other's spending habits. We will now find Mark Rutte making comments on how efficiently Italy spends its money. People will uncover things about each other that they will not like. Journalists from northern countries will descend on the capitals of the south to investigate fraud and misappropriation of funds. The Dutch will compare their retirement age to that of the Italians. And, in five years or so, they will ask themselves whether this facility has really succeeded. As Jones puts it, spending the money is really hard. It can all too easy wind up in the hands of the wrong people and the wrong projects.
Gerald Braunberger of FAZ, meanwhile, is quite a bit more pessimistic than we are. He makes the point that the net recipients of the funds are very close to a position of insolvency, and that this programme constitutes a hidden solvency support. We think that this problem could be addressed by economic reforms to boost productivity, perhaps with some form of debt restructuring. That combination could be quite powerful, but we see no signs of that happening.
So, this is a list of things we think stand in the way of this programme being ultimately seen as historic:
- the programme might not succeed on its own terms, or it might not be seen to succeed;
- member states may fail to use the opportunity of the fiscal boost by addressing structurally low productivity;
- member states may fail to endow the EU with an increase in the own-resources tax base;
- member states may fail to change the treaties to make it possible for the EU to raise funds outside fiscal emergencies;
- the programme pitches member states against one another, and could foster euroscepticism in the north.
As always in politics, there are more ways in which something can go wrong than ways in which it can succeed. The compromise become possible because those who supported the recovery fund were ready to compensate the losers through rebates and to give them a role in monitoring the programmes. The programme will succeed if it manages to bring Europe closer together. We are really struggling to see this.
And, finally, one interesting thing we observe is the almost gushing commentary in some English-language newspapers. It is probably best to view all English commentary right now under the light of Brexit remorse. People want the EU to succeed if only to highlight their contempt for the Brexit project. They see Rutte as another David Cameron.
The Dutch will probably not leave the EU, but there are many ways in which the EU can disintegrate. What happened over the weekend is consistent with many versions of future history.