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They say good things come to those who wait. Almost a month after the inconclusive EU Council of April 23rd, Germany and France have published their joint view on the EU Recovery Fund initiative and – unlike too many times in the past – it was worth the wait.
Merkel and Macron are proposing a Recovery Fund as part of the EU Multiannual Financial Framework (MFF), entirely financed by borrowing of the European Commission on the market on behalf of the EU. It will provide EUR 500bn in EU budgetary expenditure – grant-like,akin in nature to the Structural Funds. Being financed by EU borrowing, it will also not be re-rooted onto Member States’ debt.
The proposal is explicit that the Fund will be targeted towards the “most affected sectors and regions”. This is key, because it means that countries will end up receiving according to some measure of their needs (say, the extent they suffered from the COVID shock), but will be liable for repayment according to a clear measure of their means (as for any MFF instrument, contribution is linked to each country’s share in the EU budget, which is GNI-based). The difference between what one will get and what one will be liable for is a pure transfer, redistributing resources explicitly across countries.
As far as repayment is concerned, the proposal speaks of a horizon “beyond the current MFF” – meaning at the very least longer than 7 years. While it is not yet clear how long, realistically maturity will hardly be less than 10 years – and a longer horizon makes it easier for the proponents to argue (as they do) that this operation is a “frontloaded MFF”. In 10 years, a lot of things can happen. One such thing could be the agreement on a Common Consolidated Corporate Tax Base (CCCTB), which is indeed mentioned in the proposal as a “priority”. If reached, such agreement would increase the own resources available for the EU and reduce countries’ repayment obligations over the long term.
Let’s look at it from the perspective of a country like Italy, to see if this can make a difference. How much could Italy get? As we don’t have details on the allocation key, I made an assumption that brings together the health and the economic effect of the COVID shock. If the share was based on COVID deaths, then according to ECDC data Italy would represent about 26% of the EU (excluding the UK). If the share was based on the economic shock, then according to the Commission’s Spring forecasts Italy would represent about 17% of the drop in EU-27 nominal GDP in 2020. Averaging the two, we get a share close to 22%, leading to an allocation of about EUR 110bn.
The Italian share in the EU budget (based on 2019 and excluding the UK) would be close to 13%, so Italy would be liable for repaying only EUR 65bn. This implies a net transfer to Italy of EUR 45bn which, as a comparison, is equivalent to 82% of the fiscal stimulus announced by the Italian government in May 2020. An instrument that allows off-loading the equivalent of a domestic budget law onto the EU budget, with no debt impact, is clearly meaningful. The result would be very similar for Spain – whose repayment share would be close to 9% against an average allocation share of 18%. Greece and Portugal, on the other hand, would end up being small net contributor to the Recovery Fund while being net beneficiary of the (regular) EU budget – an inconsistency that could possibly be adjusted by scrapping some of the rebates that have been in place for northern countries.
Some have argued that the overall size is disappointing, because 500bn is less than what the EC President Von der Leyen had been hinting at (1 trillion) and what the European Parliament had been pushing for (2 trillion). Critics however miss the fact that composition is key. Both Von der Leyen’s and the EP’s visions envisaged a mix of loans and grants (possibly with some leveraging in the style of the Juncker Fund) to get to the final figure. The clearly controversial point in all the proposals was always going to be the share of disbursement that would happen in the form of grants. Yesterday’s Franco/German proposal gives us a clear agreement on this politically sensitive issue. We know now that there is political will in Germany to support as much as EUR 500bn in re-distributive grants. Nothing prevents the European Commission to add a loan component on top of it in its proposal: that will be the easy part of the job, as loans were never controversial in the North to start with.
Everything will now have to be negotiated, and the politics of it is unlikely to be smooth. But this Franco-German statement is a major step forward not only for the current COVID crisis, but also for the broader discussion on solidarity versus risk sharing that initiated in Meseberg two years ago. Unlike Meseberg, this proposal is truly ambitious in principle – as it overcomes in one step the two biggest historical taboos of EU integration, namely common debt issuance and explicit fiscal transfers. Crucially – and thanks to last week’s unsettling judgement by the German Constitutional Court – it also empowered with a level of political commitment from Germany that the Meseberg Declaration never had, and this is the best chance this revolution has to succeed.
SILVIA MERLER – Head of Research Algebris Policy & Research ForumThe Algebris Policy & Research Forum (the "Forum") is a not-for-profit advisory forum, independent of the commercial activities of Algebris (UK) Limited. The Forum is designed to contribute to the promotion of a strong and a balanced European economy, underpinned by a sound financial system and supported by a transparent regulatory and fiscal environment, for the benefit of societies as a whole. The primary focus of the Forum is on publishing expert reports, recommendations on European economic policy issues and sharing expert knowledge and research with the public, governmental and non-governmental institutions.
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