Analysis: a glass a quarter full, a quarter empty and half missing!

The video-conference meeting of the European Council ended without any major disagreement but also without any decisive breakthrough in structuring the elusive economic stimulus package. Among the positive outcomes was the anticipated approval of the proposals made by the Finance Ministers on the €540 billon facilities split between the Commission 100MM (SURE), the EIB 200MM and the ESM 240MM. Furthermore, a consensus seemed to form on the utilization of the EU budget as the conduit to finance the recovery program and a mandate was given to the Commission to integrate it by mid-May within the framework of the 2021-27 multiannual financial perspectives.

Deep divergences remain, however, concerning the size of the program, the nature of its interventions (grants or loans) or the changes to the Financial Regulations needed to ensure its implementation. As suggested by the Commission President, a combination of grants and loans seems to offer the required flexibility while remaining within existing rules (see my previous article). In order to give maximum clarity to the system, it would be helpful to dissociate the conditions attached to the disbursements on the one hand from those pertaining to the funding of resources on the other. The latter could be planned with the aim of managing their impact on the market by issuing, for example, monthly tranches of €12billion monthly over 7 years (= € 1 trillion).

What seems to be totally missing from the agenda is the feeling of urgency to finalize the agreement which is obviously vital for the survival of the Union. Coming to terms should override any ideological or political reticence aimed at appeasing the public opinions of Member States and catering to the “national” idiosyncrasies forged over their respective histories. Indeed, on the eve of the forthcoming economic crisis of a secular depth and whose economic, social, environmental and geopolitical consequences are particularly hard to measure, the necessity to forge a unified European response is the sine qua non condition to weigh decisively on the momentous changes that will condition our future way of life, our priorities and our values.

If it is appropriate to commend the speed and depth of the – mainly sanitary and financial – measures decided to date individually by the Member States in response to the pandemic, it is only at the level of the Union that one can achieve the necessary clout to defend the interests of its citizens and forge a future of hope, preferably in cooperation with the USA, China and the other G20 members but – if necessary – independently.

This assertion implies that, in addition to the urgency of agreeing the recovery program (within the framework of existing treaties), priority be given to extending EMU to the remaining 8 non-member States. The advantages of a total superposition of the EU and EMU far outweigh any drawbacks including – in order to facilitate their admission – to accept waiving some of the “Copenhagen criteria” (this was done involuntarily (?) for Greece, unless priority was being given to strengthening the southeast flank of NATO). Specifically, the underpinning of the Euro would, henceforth, be based on the combined resources of the EU27 (as the dollar relies on the wealth of its 50 States) establishing a base whose resilience would not be challenged each time Members faced problems; it is clear that the solidity of the whole far outweighs that of the sum of the parts. In so doing, the structural vulnerability of the € would disappear; it constitutes one of the Union’s major weaknesses in the power struggle, particularly relative to the US at a time where its excessive dependence on the $ is becoming an ever greater handicap which could turn out to be disastrous, should the crisis engulf international financial markets.

Once the political decision is made to broaden EMU (the 8 non-Members are committed by treaty to join), the negotiations surrounding the structure, the size and the funding of the budget would be greatly facilitated. Indeed, the foundations of a “transfer Union” would have been laid, with its own borrowing capacity, endowed with significant “own resources” and giving birth to the Union’s own mutualized “sovereign debt” totally independent of the Member States’ own respective liabilities. The servicing of the Union’s debt would follow the rules applying to the collection of Members’ contributions to which it would be incorporated.

(Note: within the scope of US federal budgetary assistance to the States it is interesting to dwell on the recent extraordinary controversy between Senator Mitch McConnell of Kentucky (Majority leader of the Republicans) and Governor Andrew Cuomo of New York State: the former is advocating allowing 4 major States (New York, California, Illinois, Michigan) – all headed by democrats – to declare bankruptcy following the consequences of the Covid19 pandemic, while the latter pointed to New York as a net contributor in excess of $400 billion to the federal budget as opposed to Kentucky which is a net beneficiary to the tune of $180 billion! Should such reckless proposals ever be considered, this blatant lack of solidarity would likely lead to the breakup of the United States, in similar fashion that the egoisms of some EU Member States could threaten the viability of the EU).          

 EU debt would rapidly become a market benchmark and constitute the liquid “safe asset” the € has been lacking, in particular if – as suggested in my previous paper – the securities were to be accepted in payment for fiscal liabilities owed Member States and to discharge the latter’s transfers to the EU budget. The EU would then enjoy its own deep liquid instrument, comparable to the US Treasury market, giving in turn a powerful tool to the ECB to regulate the transmission of its monetary policy.

It is therefor essential that during the short interval during which the Commission finalizes its budgetary proposals, a geopolitical dimension be included without which, the effectiveness of the proposals will remain problematical. The urgency created by the coronavirus pandemic creates a unique opportunity to overcome political and ideological differences that undermine relations between the EU27. This is the time to reaffirm the principles that underpin the European construction, to enforce their implementation on transgressors under the threat of sanctions (mainly budgetary) and thereby honour the time tested maxim expressed by Machiavelli: “never waste the opportunities offered by a good crisis”!