Let’s not sulk the pleasure!

An historic agreement has been extracted at the end of four long days and nights by the 27 Heads of State and Government. The main achievement is not to be found in who came out on top in the haggling or in the – apparently – muscular exchanges between the protagonists, but rather in the preservation of the essential features of the proposal elaborated by the Commission. Of course, one cannot but regret the strengthening of the regime of individual national rebates and the evisceration of any substantive content of the conditionality linked to the respect of fundamental European values in accessing the Coronavirus Rescue Fund (“CRF”); nevertheless, it is undeniable that the EU has taken a decisive additional step on the long road to a shared “European sovereignty”.

If a crisis of exceptional gravity was once more the necessary backdrop for achieving unanimity among the EU 27, there can be no doubt that, potentially, their collective stature on the international scene has been reinforced. The demonstration of solidarity, clearly displayed by the acceptance of the issuance of “mutualized” debt, should strengthen the EU’s bargaining power in the Brexit negotiations over the coming weeks and, in the longer term, enhance its influence over world affairs. This coming together opens up an opportunity to chart a more independent course in relation to both the United States and China in the current very unstable geopolitical context. In addition the accord will contribute to sustain the stability of the € and enhance its role in support of a broadly-based European capital market serving all its Member States (“MS”); over time, it should offer world financial and commercial markets a credible alternative to the overwhelming domination of the US dollar and thus a shield against the threats of blackmail it provides.

Despite the emergence of conditions conducive to the deployment of “European power”, one should not forget the gravity of the current health and economic crises which are capable of upsetting the fragile worldwide geopolitical, economic and social equilibria, sweeping away the hopes arising from the CRF and compromising the very survival of the EU. Now that the “Excellences” can consider they have earned a well-deserved (masked) holiday, one must “convert the try” and put into place the mechanisms needed to collect and disburse the funds with the aim of being fully operational by January 1st, 2021. In the interval, the € 540 billion made available in the EU budget, the ESM and the EIB can bridge the gap.

One of the major consequences of the Summit is the considerable increase in the Commission’s effective powers resulting from being entrusted with the implementation of the CRF. In this regard, one should praise President Ursula von der Leyen for her great discretion during this turbulent summit, as she remained under the protective wing of her mentor, the German Chancellor; it is, indeed, beyond any doubt that the urgency of the situation was the sole reason for overcoming the opposition – whether or not expressed– to the considerable transfers of elements of “national sovereignty” implied in the accord.  

As already developed at length in a previous article, dated April 20th (http://www.paulgoldschmidt.eu/larticulation-de-la-sortie-de-crise-au-niveau-europeen/?lang=fr) there is every reason to deploy the CRF within the normal budgetary process by identifying its parts (for the purpose of monitoring) and integrating its execution (for the security of operations). In addition, whether the deployment takes the form of grants or loans, the distribution of the funds should be kept entirely separate from the fundraising process of the €750 billion of EU debt to be issued. It would, indeed, become infinitely more complex to manage the €360 billion of loans to MS if each operation had to be a back-to-back pass-through of a corresponding bond issue; attempting to do so would create a discriminatory treatment between MS which would passively bear the fluctuations of the market rather than be subject to the lending conditions attached to the specific budgetary line mobilized. Furthermore, such a back-to-back constraint would considerably reduce flexibility in managing the EU’s overall debt program and impair the vocation of its securities to become the “European safe asset” of choice. It would also hamper the use of these securities by the ECB as an additional mechanism to ensure the proper transmission of its monetary policy. 

The envisaged process of mutualization offers the advantage of not interfering with the stock of outstanding MSs’ sovereign debts for which they individually remain entirely responsible. EU debt embodies, by construction, a “joint and several guarantee” of all 27 MS as a consequence of their initial ratification of the treaty which carries the obligation to ensure the equilibrium of the EU budget, regardless of the circumstances. These are the provisions which justify the AAA rating of the EU and should contribute to align borrowing conditions with those of its strongest members (rather than on those of its weakest link), at least once there are  sufficient amounts of securities – with maturities of 3 to 30 years – outstanding to ensure a liquid secondary market.

A key aspect of the accord is the recognition of the need for significantly increasing the EU’s “own resources”; the aim is to cover the cost of debt amortization without having recourse to additional contributions to which the MS would be bound under their treaty obligation to maintain a balanced budget. This funding template – which is a choice rather than an obligation – is very tempting but creates a precedent likely to be repeated because of its superficially painless character. Having once put their fingers in the “cookie jar”, the MS will have to decide between limiting their direct contributions to the EU budget in order to spare their national budgets (impaired by the crisis), and keeping a tighter leash on the Commission whose management of “European sovereignty” will increase in parallel with its larger own resources.

If the CRF proves successful, having recourse to debt issuance should logically become a standard funding tool on the model of the USA where the federal debt currently stands at over $ 24 trillion, independently of the debt accumulated by the 50 federal States. Under such a scenario, a portion of the EU debt need never be repaid, being simply rolled over at maturity, as long as a suitable balance is maintained between the Union’s debts, its “own resources” and the contributions of MS so that the population and international investors maintain their trust in the Union’s currency.

An example of a self-reinforcing use of the Union’s borrowing capacity would be the funding of a “Special Convergence Fund” to accompany the extension of the Eurozone to all 27 MS (a treaty obligation) during the course of the 2021-27 MFF. The completion of the overlap between the EU and the Eurozone, in addition to the obvious structural simplification and the alignment of the 27 MS interests, would considerably strengthen the underpinning of the Single Currency in parallel with the EU’s independence and resilience.

Over time, one could consider the total or partial transfer of national budgets in the fields of foreign affairs, defence, immigration, health, justice, etc., yielding not only considerable economies of scale but equally substantial improvements in efficiencies.

Conclusion

The recent Summit has revived the hopes of the “federalists” – held at bay by the “national-populists” – by reinforcing the rational argument of further European integration as the most effective policy for defending the interests of the majority of its citizens; it alone is capable of marshalling the necessary resources for their security, development and prosperity. If such a perspective is eminently appealing, one should keep in mind that a collapse of the world political, economic and social order, resulting from the extraordinary depth of the current crisis, remains a high risk scenario leading in all likelihood to the dismantling of the EU.

On this 21st of July, Belgium’s National holiday, it is more than ever pertinent to adopt its motto: “Unity makes for strength!”

Les Crosets, 21st July 2020