(Bloomberg Opinion) -- After a marathon four-day summit, Europe’s leaders finally reached agreement on their coronavirus recovery plan. The resulting package isn’t all it should’ve been, and things might yet go wrong as the plan is implemented. Their deal is nonetheless an important step forward.
The scheme strikes a compromise between the governments that wanted a bold new fiscal stimulus directed especially toward the European Union’s worst-hit economies, and others more concerned with maintaining fiscal discipline and avoiding the creation of a so-called transfer union. It allows the European Commission to borrow 750 billion euros and use the proceeds to help struggling economies over the next three years — allocating 390 billion euros in the form of non-refundable grants and the rest as loans.
An earlier proposal had called for 500 billion euros of grants. That was scaled back at the insistence of the so-called “Frugal Four” (Austria, Denmark, the Netherlands and Sweden). They got other accommodations as well, including new “rebates” against future contributions to the EU budget. Conditions will be attached to the planned support, but in time-honored EU fashion details were left to be sorted out later, allowing governments that want strict rules and those that want none to say they were satisfied for now.
Discord over conditionality and enforcement is one possible future pitfall, but there are others, too — including lack of clarity over how Europe’s new collective debt will be serviced, and the need at various points for national parliaments and the EU’s own parliament to sign up.
In quantitative terms, the plan is none too bold when compared with what the U.S. has already done — but it’s dramatic by EU standards. And it marks a deeper shift. Pre-coronavirus, German Chancellor Angela Merkel was usually among the EU’s fiscal conservatives. The pandemic convinced her to change sides and support a big fiscal package based on joint borrowing. The plan sets a precedent for future fiscal integration that might one day transform the union.
In due course, EU voters will need to decide whether that’s a transformation they actually want. In truth, whether they do or don’t, some form of transfer union is likely to be necessary. The monetary union Europe has already built can’t work well without some sort of fiscal union to operate alongside. The financial crash made this obvious, and the pandemic only underlines the point. The irresistible logic of monetary union followed by fiscal union is why EU visionaries were so eager to build a monetary union in the first place.
The EU has yet to grapple with this bigger question. The difficulty its governments encountered in agreeing to this initial step — even as an extraordinary public-health emergency demanded solidarity, open-handedness and speed — shows how great a challenge it will be. For now, though, Europe was tested and, thankfully, did what it had to.
Editorials are written by the Bloomberg Opinion editorial board.
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