Europe’s Frugal Four Are Right About Two Things

The European Commission’s plan for a 750 billion-euro ($842 billion) fund to deal with the economic consequences of the pandemic is a quantum leap in Europe’s crisis response. Yet, for all the good intentions, political leaders still have to agree on the details of the scheme.

The European Council — a gathering of prime ministers and presidents — will meet on Friday to discuss the plan, although most observers only expect a breakthrough to happen in July. The EU is still wrestling with the opposition of the so-called frugal four: Austria, the Netherlands, Sweden and Denmark. The countries’ leaders penned a letter to the Financial Times this week, expressing their doubts over several aspects of the proposal, including the fact that a chunk of the money will come as grants.

The four nations should be careful about the fights they pick. There’s a strong economic case for having a hefty instrument to support European countries most affected by the crisis. This would be a great show of solidarity by the continent.

However, it would be reasonable for Sweden and Denmark to ask whether such a mechanism should involve all 27 European Union countries — or just be limited to the 19-strong euro area, to which the Swedes and Danes don’t belong. And it would be entirely rational for the fiscally cautious Dutch and Austrians to insist on adequate checks and balances to make sure any emergency funds are well spent by recipient nations. It’s hard to be confident that they will be.

The decision to set up a recovery fund at the EU, rather than at the euro-zone level, makes practical sense. The Commission can use its existing powers to borrow the money on the financial markets, rather than setting up a new mechanism. For their part, euro-area countries have spent months haggling over the possibility of creating some form of joint budget, only to produce a minuscule pot of money that couldn’t even be used in the event of a shock.

By contrast, the EU already has a budget, used to fund pan-European projects and to support its more vulnerable regions. And yet, it isn’t clear why well-run EU countries such as Sweden or Denmark should sign up to a system of further fiscal transfers that would chiefly benefit ailing euro-zone nations. 

Europe’s fiscal problem is mostly to do with its single-currency union, which has a joint monetary policy but no system of transfers to support countries that face an isolated shock. The Covid-19 pandemic is a common threat, but it’s having asymmetric effects across the union, as some countries such as Spain and Italy suffer more than others. It seems right that some of these governments receive help in the form of grants, rather than loans, as the pandemic is no one’s fault and it would be dangerous to make financially strained countries even weaker. But this is essentially a question for the euro zone.

The other significant problem with the recovery fund relates to how the money will be spent. The biggest share of the 750 billion-euro pot will be disbursed to individual member states after they present their own post-crisis economic reform programs. In theory, the Commission should oversee the quality of these proposals and only hand out the money if a country sticks to its early commitments. But it’s far from certain whether the Commission will have the political strength — or even the legitimacy — to refuse the money to a country because it doesn’t like its proposal. Even worse, Brussels may choose to disburse later rounds of funding even if a country has reneged on its initial pledges.

In a recent panel discussion, Luis Garicano, a member of the European Parliament and an early proponent of a recovery fund, told me he’d like to see more of a role for MEPs in vetting the grants and unlocking the money. The Netherlands and Austria may want to pick up on his idea, or come up with more precise and stringent criteria for the Commission to allocate resources. Unfortunately, there’s a long history of countries mismanaging EU funds, so there’s a strong case for better supervision this time around.

The leaders of the frugal four may feel they have domestic support for their battle, but they risk becoming isolated at the European level. Instead of pushing back against a necessary upgrade to Europe’s economic infrastructure, they should seize their chance to improve its functioning.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

©2020 Bloomberg L.P.

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