(Bloomberg Opinion) -- On July 17, European Union leaders will convene to discuss a 750 billion-euro ($853 billion) coronavirus recovery plan. If properly designed, the initiative would bring the EU’s member nations together in a form of temporary fiscal union. The plan carries potential risks — but the dangers of delay are far greater.
In May, the European Commission outlined plans for a stimulus program that includes both loans and grants to countries hit hardest by the coronavirus crisis. Germany, putting its customary fiscal caution aside, has voiced support for such a scheme. Governments of the so-called “Frugal Four” — Austria, Denmark, the Netherlands and Sweden — aren’t convinced. They favor a smaller plan with offsetting cuts to the EU budget and fewer outright grants, fearing that the commission’s proposal will put fiscally disciplined governments on the hook for the budget excesses of countries like Italy.
The skeptics have a point. Fiscal unions do involve this kind of moral hazard. Responsible governments manage their finances so that they have the fiscal space to stimulate their economies when the need arises. Chronic overborrowers find themselves without fiscal room for maneuver when they need it most. A fiscal union that provides net transfers to heavily indebted countries at times of stress does provide, in effect, a subsidy from the prudent to the profligate.
The problem is that in a monetary union such as the euro zone, countries are shackled to a single interest-rate policy and cannot depreciate their currencies with respect to their main trading partners. In difficult times, a one-size-fits-all monetary stimulus, courtesy of the European Central Bank, is unable to deliver sufficient extra demand to the worst-off countries. Leaving national governments to cope with Covid-19 on their own risks terrible consequences for some, despite the European Central Bank’s best efforts. The political fallout might then put the whole European project at risk. Some form of fiscal partnership is vital.
Europe’s leaders should therefore adopt a fiscal plan that is both temporary — meaning tightly focused on the coronavirus emergency — and sufficiently generous to cope with the pandemic’s economic consequences.
In truth, the commission’s proposal is at the low end of what’s needed. Proponents should resist pressure to pare it back. And any plan adopted by EU leaders should deliver the bulk of support in the form of grants, rather than loans, because the countries most constrained in their national budgets are already financially stressed. Europe can readily afford to mobilize 2 trillion euros of emergency support, financed jointly according to shares of population and gross domestic product, with grants given by a formula that weighs unemployment rates and pandemic-driven declines in output.
In the longer term, Europe will need a permanent fiscal union to make the most of its monetary union. Building support for such a scheme might take years. The union can’t wait for that bigger debate to be resolved. Right now, it has an economic emergency on its hands, and needs to meet it with solidarity and mutual support.
Editorials are written by the Bloomberg Opinion editorial board.
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