The European Union is a global heavyweight in trade and climate. But in political terms, it is puny. For all the Brexit conspiracy theories of a “United States of Europe”, the EU has no federal government. Brussels is not the continent’s capital, but home to its bureaucracy. The club’s power lies with member states that zealously guard their interests and scrupulously defend their sovereignty. They often recoil from shared burdens and a collective will.
The EU is not hiding plans of integration, it just has none of any note. Over the last three decades, the appetite for greater political and fiscal union has been shrinking, not growing. The EU’s budget in 1993-1999 was 1.25% of the club’s gross national income (GNI); for the next six years, beginning in 2021, the proposed budget of €1.07tn is just a shade over 1% of GNI. This seems too thin a sliver of European wealth for a continent that faces a possible ruinous recession caused by coronavirus.
Yet the cash agreed this week by leaders at one of the longest EU summits only tells half a story. As important is that the commission for the first time will be allowed, temporarily, to borrow in the markets to fund EU expenditure. At €750bn, over three years from 2021, the Next Generation EU fund is a bazooka, not a peashooter. Bonds will be issued, with the tab settled by 2058. It’s not all good news. The promises that handouts would not be going to countries which undermine the rule of law ring hollow.
It would be a mistake to think this is Europe’s “Hamiltonian moment”. As history buffs and fans of the hit musical know, this was when Alexander Hamilton, the first US treasury secretary, allowed the federal government to assume the war debts of the 13 former colonies. Hamilton’s new national bonds were backed by direct taxes. However, it is unlikely new EU taxation can be used to repay bondholders, as this would require unanimity among member states.
A financial transaction tax and a digital services tax have long been stalled, because Europe’s leaders disagree about the measures. States don’t seem keen to relinquish their national veto over taxation. It is also unrealistic, perhaps, to imagine the Netherlands accepting higher corporate taxes to pay for Italy’s stimulus. Levies on carbon-intensive goods coming into the EU are a good idea. But such duties are designed to damp down demand and won’t provide a steady cashflow. Besides a proposed plastic tax, Lucas Guttenberg of the Jacques Delors Centre notes, there is no new resource.
The scheme could work if the European Central Bank was allowed to purchase the bonds and cancel the debt, or hold them in perpetuity. The ECB has been running, in a roundabout way, bond-buying operations in the markets to support EU nations’ fiscal deficits. But the central bank won’t be permitted to hold Next Generation EU bonds. Emma Clancy, an economist with the Green/Left bloc in the European parliament, perceptively noted the persistent failure “to deal with the fundamental contradictions of the EU’s economic architecture”.
The main problem with the EU’s proposed bond issue is that there seems no realistic means of repayment other than future reductions in the union’s budget or higher contributions from financially constrained member states. There appear to be deep cuts earmarked for health, innovation and cohesion funds in the budget as a quid pro quo for the emergency measures. EU states that rely on such cash for investment may, without it, end up trapped in a permanent austerity spiral.
All this means that the European parliament took a fair stand against the budget this week. MEPs are worried that the EU’s long-term priorities are being sacrificed on the altar of the recovery. Parliamentarians are right to ask for more budget cash and to pin down the council on the new revenue streams to finance Covid-19 spending. More time is needed to ensure that the budget is a proper response to one of the sharpest economic contractions in recent history. The crisis has served as a catalyst for change. But that change must work to encourage open, constructive and democratic relations on the continent.