EU sum­mit fight

Europe’s high-stakes mo­ment over the Re­cov­ery Fund leaves the Fru­gal Five ready to fight on Am­brose Evans- Pritchard

The Daily Telegraph - Business - - Front Page - AM­BROSE EVANSPRITC­HARD

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

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