Europe’s response to the pandemic
This article was published in the issue #857 of Revue Banque in June 2021
The Next Generation EU recovery plan is a remarkable innovation that enables the European Commission to pay €750 billion (divided between grants and loans) to the twenty-seven member countries, based not on their ‘relative weight’ but on the needs of each country and shared objectives. But it is also a major innovation because this recovery plan also allows Europe, for the first time, to raise a common, joint debt of the same amount.
The result of the historic agreement reached between France and Germany, this plan represents an important step forward in the necessary construction of a stronger, more effective and more united European Union. It was particularly appropriate that this plan was welcomed as major European progress. Without, however, going so far as to describe it as Europe’s ‘Hamiltonian moment’. In 1790, Alexander Hamilton, the first Secretary of the Treasury of the United States, organised the takeover by the federal government of the debts of the various US states, which had been considerably increased by the War of Independence. At the same time, he established import duties, a source of recurrent federal revenue. Hamilton, leader of the Federalist Party, thus enabled the United States to take a decisive step in its federal construction. Europe has not gone that far.
To begin with, this significant development itself is currently hampered by several types of dysfunction and obstacles. The disbursement of grants and loans appears slow and complex to implement. Now that the European Parliament has adopted the plan, it must be approved and ratified by all twenty-seven national parliaments before it can be implemented, and the twenty-seven countries will have to justify to the European Commission the use of their subsidies and the reforms necessary for their economy. This is no doubt an understandable requirement before committing to such an act of solidarity, but it is unfortunately slow and complex and incompatible with the immediate financing needs of the States, at a time when a slower recovery is being announced for the European Union, with growth forecasts for 2021 of +4.4% compared with +6.4% in the United States, which will also have slowed down much less in 2020 (-3.5%, compared with -6.8% for Europe).
Moreover, there is no guarantee that such a Community budget will be maintained in the future and that the accompanying common debt can be renewed. Many so-called “frugal” countries have already suggested that this is just a “one off” operation, linked only to the existence of the pandemic. Therefore, the timely implementation of these instruments will not necessarily lead to the construction of a more federal Europe.
Moreover, the pandemic is considerably accelerating many changes that were under way in all areas. Europe is obviously not immune to these changes, but it is not well placed in the new growth sectors of the economy. It must therefore quickly consider pooling more resources to increase and accelerate investment in these areas. This is what the Next Generation EU plan intends to do, but perhaps not commensurate with the challenges of global economic and technological competition. In order to participate in the renewed dynamism of the world economy and be a player in the new sectors driving growth, it is necessary for Europe, an old civilisation, not to lose its vitality, its taste for innovation and its capacity to take risks. The precautionary principle alone cannot serve as a guide to prepare for the future.
Furthermore, it is becoming urgent to resume the institutional construction of the Union and at least of the eurozone. If it is to defend its integrity and its social market model in the long term, it must be both economically efficient and united. The necessary structural policies must therefore be conducted on a country-by-country basis in order to reassure the ‘frugal’ countries that they will not have to pay for the ‘spendthrift’ countries ad infinitum, in exchange for the implementation of elements of a transfer union. A European investment policy to re-industrialise the regions with a deficit is also an additional and essential condition. Structural policies alone – assuming they are effectively implemented – will not be enough. Europe will also have to face the fact that the countries that make up Europe will emerge from the pandemic with even greater disparities than when they entered it.
Lastly, it must develop a common strategy to exist on the international scene between the two superpowers, the United States and China, if it wishes to carry weight in the future in the international arena, by defending its values as well as its political, diplomatic and economic weight.
If Europe’s leap forward in the face of the pandemic is clearly to be welcomed, European ambition must bounce back with a certain sense of urgency, by making the essential changes, particularly in terms of institutional regulation, if it is to meet the substantial challenges of the present time. The road will not be easy, but time is running out.
Directeur Général de la BRED et professeur de macroéconomie financière et de politique monétaire à HEC
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