As suggested by the Council and Commission Presidents, the answer lies in the 2021-2027financial perspectives.

In the same way as the de-confinement rules envisaged for exiting the pandemic can only rely on the voluntary coordination between the EU Member States – which have each imposed unilateral measures in line with their own specific situation –  it is equally important to implement a centralized response at EU level to deal with the pending recession, if the Single Market, the Single Currency and the Union itself are to survive the major economic, social and political chocks that will follow the pandemic.

The EU 27 Members will be confronted with the financing of a joint recovery program, the success or failure of which will reflect on each of them separately. It becomes therefore imperative to mobilize EU-wide instruments, whose deployment and financing are “mutualized”.  To that effect, the EU budget is clearly the instrument of choice. It has the significant advantage that the principles that underpin its operation are embedded in the existing treaties, and do not require agreeing on the creation of new instruments. Indeed the EU27 are jointly and severally responsible for the equilibrium of the Union’s financial commitments, ensuring through the provisions of the treaties themselves, the mutualization of the budgetary risks involved.

The novelty of the accord between the Member States (MS) described hereunder will cover two main aspects: the design of the recovery program specifying its aims and the modalities of its implementation on the one hand, and its financing on the other.

Deployment

There are many advantages to focus the European intervention in the recovery program on “investment expenditures” while leaving with each MS the responsibility for their ongoing recurring operating costs. In this respect, close cooperation with the EIB would mobilize the expertise of the institution to assist the Commission who would be responsible for implementing the program; its execution would be broadly decentralized at MS or at a MS transnational partnership level, in light of the specific projects involved.

The process for deploying the program’s resources is strictly “budgetary”: having raised the necessary funds, the Commission would “invest” in projects through the MS or partnerships of MS as it already does in other areas (research programs). Depending on the nature of the project (their eventual profitability or their “public good” characterization), the disbursement would be in the shape of subsidies, equity stakes or loans or a combination thereof. The contribution could cover either the entire project or only a share in partnership with other public or private entities. An appropriate “regulation” would accompany a dedicated “budgetary line” which should be included in the plurennial and annual budgets.

Financing

The mutualizing of the financing, which has been a perennial stumbling block, would be strictly limited to the obligations already undertaken by the MS as signatories of the treaty, consisting in their joint and several obligation to ensure the equilibrium of the Union’s budget. Its articulation would be as follows:

The agreement on the Multiannual Financial Perspectives (2021-27) would include a budget line authorizing borrowings up to the equivalent of the total recovery plan (€ 1 trillion to start with). The securities to be issued by the “European Community” within this authorization would have specific conditions of amount and maturity linked to the projects they were meant to finance, the other terms and conditions being identical to all issues.

In particular, the rate of interest and redemption clauses would be structured in such a way as to make the “mutualization” of the risk through the budget, acceptable to all 27 MS:

Starting from the observation that the long term interest rates for the securities issued by the strongest members of the Eurozone (which are also among the guarantors of the new bonds) hover around zero, the interest rate on the new issues should be similarly around 0%. However, in order to ensure the long term stability of the value of these securities, whatever the fluctuations of market interest rates (except in de case the dismemberment of EMU), all MS would undertake to accept these securities at face value (in €) as payment for any national fiscal debt that the holder might be liable for. In parallel, cash calls made by the EU budget to the MS could be discharged by presenting at face value, the securities that the MS might hold. Securities received by the budget would be cancelled (reducing the EU debt) and, in case of need, a new series of securities could be issued in substitution.

Such a circular system would require establishing an “Office of debt management” either within DG budget or as an independent special purpose body. This would also require amending the “financial regulations” covering budgetary operations to accommodate the system. This is no doubt a complex and highly politically charged undertaking but far less burdensome than a treaty change; in light of the urgency created by the pandemic, the necessary “political will” should overcome any reticence.

This procedure avoids any mutualization of existing or future debts contracted directly by MS and remains within the obligations that each has accepted under the treaty.

Additional advantages

Due to the special characteristics of the bonds conferring on them the right to be used to discharge fiscal liabilities to the MS and meet the latter’s cash calls by the Union, which should stabilize their value around par, once a sufficient amount of securities have been issued, a deep liquid secondary market should develop.

Trading these securities would be an ideal tool for the ECB to regulate the € monetary market, positioning itself either as buyer or seller whenever it wanted to provide or withdraw liquidity. The ECB would benefit from a tool similar to the FED that regulates the key American Treasury market. In turn this would be a key factor, contributing to the stability of the €, compensating in part for the loss of autonomy in terms of exchange rate flexibility that the Eurozone MS have given up (in the same way as the 50 US federated States are tributary to the $). Such an instrument would also enhance the competitiveness of the € on the international financial markets and lend weight to the Union on the geopolitical stage at the precise time when its domination by the USA and China tends to marginalize Europe.

Though it would appear prudent to limit initially this financing scheme to the recovery program in the aftermath of the Covid19 pandemic, nothing should prevent, in case of success, the scheme to be extended to the funding of the EU budget in general and increase progressively the flexibility and solidarity between the 27 Members of the Union.

In the event the Union would be issuing its own “sovereign debt” based on the combined resources of its members. This would imply reinforcing considerably the Union’s dismally small “own resources” (reducing also MS contributions) as well as enforce the obligation of the 8 remaining MS to join the EMU.

The enhanced solidarity, that implementing such a program implies, is probably the main aspect that will raise the strongest opposition. It would indeed be a major victory for the proponents of a more integrated EU and be a decisive blow to the hopes of national-populist parties that have been betting on the pandemic to promote the virtues of a thoroughly outdated and ineffective “national sovereignty”. It is therefore NOW – for each Member State – both the occasion and the obligation to position itself with respect to the future of the EU project. The agenda outlined here above should become central to the forthcoming “Conference on the future of Europe”.