The Eurogroup’s decisions taken on 9 April were a necessary and overdue collective EU response, as well as a welcome but flawed and incomplete compromise. If European leaders are to save the EU economy when they meet on 23 April, they need to think outside the box, write Carlos Closa, George Papaconstantinou, and Miguel Poiares Maduro.
The authors are professors at the European University Institute.
The Eurogroup decisions relate to financing the crisis management and response, not financing the recovery. While the Eurogroup agreed to work on establishing a Recovery Fund, details are still missing and Eurobonds seem excluded.
In this phase, it is crucial to identify what more needs to be done, the resources necessary to do it and what justifies the EU doing it. We argue that the European Council should consider new own resources for the EU to overcome the current stalemate.
First of all, the problem EU countries are facing because of the COVID-19 pandemic is unprecedented. To mitigate the crisis impact, EU countries have spent 3% of EU GDP. Meanwhile, GDP is expected to drop by double-digits, and with significant uncertainty over the timescale and pace of the recovery.
For several highly indebted and vulnerable EU countries, this translates into unsustainable debt levels, and thereby puts at risk the common currency. In this context, how many Eurozone governments will choose to use the European Stability Mechanism credit lines with their varying conditionality and stigma attached?
Second, bold action is required as a matter of solidarity and fairness.
The principle of solidarity as enshrined in the Treaty applies particularly well in a situation of an exogenous and symmetric shock. Many EU countries are heavily affected by COVID-19 and not because of their economic behaviour.
Hence, no moral hazard can truly be invoked. At the same time, the crisis has large asymmetric effects given different vulnerabilities in countries. In addition, there are sound economic arguments for externalities involved in one or multiple states unable to service their debt burdens in an environment of higher interest rates.
Fairness is important too, as the relaxation of single market rules may produce unequal results. The crisis has a particularly negative impact on economic sectors that depend on free movement, and it is justified to intervene to protect and correct that.
But if this support is left only to member states, this will result in a distortion of competition. Member states’ support to their companies will vary greatly, simply as a consequence of their different financial and budgetary capacity. Fairness, thus, serves the purpose of protecting the integrity of the internal market and avoid distortion of competition within it.
If one peers through this lens of solidarity and fairness at the unsustainable debt levels faced by EU countries, as well as at the risks for the internal market, the solution is clear to see. European leaders should aim at some type of centralised fiscal support to any country requiring it.
Crucially, it should represent at least partly EU grants or transfers rather than loans to states, thereby not adding one-to-one to debt levels and correcting distortions of competition.
That leads us to the instruments that could be used. Bonds issued by the EU itself are legally possible. In fact, the Commission has proposed this as the instrument to finance SURE, the temporary assistance programme in support of preserving current jobs.
Given the current constraints of the EU budget, it needs, however, to ask for a partial guarantee by States for these bonds to be issued.
But there is an alternative. European leaders can use this opportunity to agree on new own resources for the EU, if necessary by enhanced cooperation.
Currently, there are two obvious sources, both with widespread support in the public opinions of all EU member states, as suggested by recent surveys. The first is a tax on digital, one of the few sectors benefitting from the crisis.
The second is a carbon emissions tax. In an environment of plummeting oil prices, this would ensure relative prices do not skew economic choices in favour of preserving carbon-based production systems and consumption patterns.
This would be very much in line with keeping the Green Deal central for a resilient recovery after COVID-19. These new own resources could then be used to guarantee and leverage the new EU debt necessary to finance the Recovery Fund.
This proposal is both ambitious and feasible, as it delivers on multiple fronts. It does not require any fiscal transfers between member states but limits the impact of the current crisis on debt-loaded states, allowing for solidarity among EU countries and fairness in the internal market.
With a stronger EU budget, the recovery fund can be financed without increased national budgetary contributions. And it does all this while promoting the three core items on the EU agenda beyond COVID-19: regulating the digital economy, promoting the Green Deal and protecting the rule of law.