EU summit fight
Europe’s high-stakes moment over the Recovery Fund leaves the Frugal Five ready to fight on Ambrose Evans- Pritchard
The macroeconomic value of the EU’s €750bn (£676bn) Recovery Fund lies somewhere between modest and trivial. Part of it is reshuffling money that would have been spent anyway. The rest is spread thin over many years.
The significance is political. The fund is a profound change in the structure and character of the European Project. The Commission will have powers to raise large funds on the capital markets for the first time and to direct how the spending is allocated, turning this strange hybrid creature into an even more extraordinary institution.
Where else in the world does a single unelected body have the “right of initiative” on legislation, and the executive powers of a protogovernment, and the spending prerogatives of a parliament, all wrapped in one?
It is Caesaropapist, bordering on totalitarian in constitutional terms, mostly unchecked by meaningful parliamentary oversight. Montesquieu must be turning in his grave.
So, yes, it matters. Emmanuel Macron was right to call the deal struck in the early hours of yesterday morning an “historic” moment for Europe. But whether it is also an historic mistake – une fuite en avant, as the French say – remains to be seen.
The pure fiscal component has been whittled down from €500bn to €390bn, and even that figure is not quite what it seems. The money will be stretched out to the mid-2020s, amounting to less than 0.6pc of GDP annually.
A big chunk will go to Eastern Europe, lightly touched by the pandemic so far. Some money is going to regions in Germany or other states well able to finance their own needs.
If the aim is to prevent an asymmetric recovery that leaves Italy and Club Med marooned – and therefore renders monetary union unworkable – it is a blunt tool. There will be an “emergency break” if states are deemed to be dragging their feet on reforms (policed by the Commission, further increasing the power of Brussels), and a mechanism to cut funding to those breaching the “rule of law”. This will be a big source of coming friction. It is political nitroglycerine on a long fuse.
None of the grants will arrive until next year. The package is therefore useless as Covid disaster relief.
Had there been no deal after marathon talks and a promiscuous exchange of insults it would have a very rough day for the European Project. But what has emerged is not pretty either. There is a new line of emotional cleavage in EU affairs.
The Netherlands and the liberal, Atlanticist, free-market bloc used to hide behind Britain at EU summits, relying on the British prime minister of the day to fight their corner and suffer the opprobrium.
The EU “frugals” now have to fight their own corner. They are learning what it is like to be cast as the villains – in this episode as penny-stinting moral reprobates, refusing to come to terms with the higher teleological destiny of Europe.
What is striking about this battle has been the sheer level of abuse hurled at Dutch premier Mark Rutte, the frugal-in-chief. His sin was to question why Dutch taxpayers should be bounced into funding pandemic giveaways that in reality have precious little to do with the virus. Some of the money is earmarked for countries that suffered less damage from Covid-19 than the Netherlands itself.
Seen from The Hague, or Stockholm, or Helsinki the recovery plan is a giant racket. Yet Mr Rutte’s demands for some sort of discipline were met with a revealing rebuke from France’s Emmanuel Macron. “You are taking
Cameron’s place at the table,” he snapped, demanding to know where that sort of diplomacy led Britain.
Well, Monsieur, it led by indirect steps to Brexit. And is it churlish to point out that David Cameron was right about the Fiscal Compact? Events have shown that it is a deflationary doomsday machine.
In short, the northern Hanseatic ring of the EU has been steamrollered, and demonised for good measure. This too will have long-tail consequences.
Personally, I have sympathy for the Club Med states as well, a paradox only if you fail to grasp the fatal design flaws of monetary union. They were forced by Brussels (in other words the German finance ministry) to implement austerity overkill and carry out internal devaluations to claw back lost competitiveness, leading to youth unemployment above 50pc in many regions. That is why the likes of Five Star, Podemos, and Izquierda Unida are today in power.
Such is the inevitable and tragic mess that ensues if you lock yourself into a currency bloc that is moving to a different macro-economic rhythm, and is controlled by somebody else. But that is scarcely the fault of the Dutch, Austrian, or Finnish people, and even less so the fault of the non-euro Swedes and Danes.
One can argue that this summit fight is all a storm in a teacup. The Recovery Fund is designed as a one-off episode that does not lead to fiscal union or change the EU’s constitutional structure. Everything reverts to the status quo after the pandemic, which is why it is tolerated by hardliners in the German Council of Economic Experts.
But that is not what French and Italian leaders tell their own political constituency. They advertise the fund as a crucial and defining step across the Rubicon. Paris calculates that this machinery will become irreversible once in place. The summit therefore becomes Europe’s Hamilton Moment in practice, if not in theory. Under that hypothesis the stakes are exorbitant.
The economic shock of the pandemic has been asymmetric in its effects, playing havoc with debt dynamics of those states already on the edge. It has brought forward the de facto insolvency of Italy and the eurozone’s southern half.
The Commission expects Italy’s debt ratio to jump from 133pc to near 160pc of GDP this year even in a benign post-Covid reopening, avoiding a truncated L-shaped trajectory, which is far from assured. The North-South gap has been stretched beyond viability.
If the Recovery Fund is a stalking horse for a European debt union – the mutualisation of €6 trillion of Club Med and French legacy liabilities – then it is a very big ask.
It is dangerous practice to push through transforming commitments by means of stealth, legerdemain, and fait accompli. We have not heard the last of the Frugal Five.
Dutch premier Mark Rutte, the frugal-in-chief, came under intense fire for his opposition to the EU’s Recovery Fund which was finally agreed early yesterday