Luis Garicano, Valérie Hayer and Guy Verhofstadt are MEPs with the Renew Europe group. They sit in the economic, budgets and constitutional affairs committees, respectively.
Germans judges clipped the wings of the European Central Bank this week. “Whatever it takes” no longer carries the same weight — right when we assumed it would help us escape the economic fallout of the coronavirus crisis.
If monetary policy can’t be a cure-all to this crisis, it will be up to politicians to act. And so the spotlight has fallen on the European Commission.
Two weeks ago, EU leaders asked the Commission to set up a fund to kickstart the economy post pandemic. The Commission now has a choice to make: resort to cheap trickery, or aim for real recovery.
So far, it looks as though it is choosing wrong: Instead of working toward a long-lasting solution, internal documents show the Commission is eyeing some its standard-practice magic tricks and hoping for a quick fix. Let’s pull back the curtain on the three tricks the Commission has in store.
What happens when people aren’t able to repay their debts? How will states invest in their economies when all the taxes they collect will be used to repay their creditors?
Magic trick No. 1: The optical illusion. This consists of picking an impressive headline figure, repackaging everything the EU is already doing in a given field, adding a dusting of fresh money, throwing in fanciful multipliers and selling it as a brand-new plan.
This is nothing new for the Commission: It’s the same sleight of hand that gave us former Commission President Jean-Claude Juncker’s €315 billion investment plan in 2014 and Commission President Ursula von der Leyen’s €1 trillion sustainable investment plan last year.
Now the Commission says it has a €2 trillion recovery plan. That is all well and good, but the number you see is not the actual money being spent, which is closer to €323 billion. This is politically canny, of course, but economically dubious.
Magic trick No. 2: Spoon-bending. This consists of twisting the EU budget so that most of the money planned to last seven years is actually spent during the first two or three. The goal? To be able to claim we are spending more now, when people are watching, while overall we will spend just the same.
The trouble is that once the spoon is bent, it’s difficult to use it properly. If you spend the money now, there won’t be much left after 2023. The EU will likely only be able to manage to pay its most basic bills — direct aid for farmers, EU staff salaries and money promised to poorer regions.
Magic trick No. 3: The coin behind the ear. This is a house special. Instead of handing out cash, the EU gives out loans. But that money they’re showing you, it’s going back into the magician’s pocket at the end of the show.
Take last month’s Eurogroup package deal. Finance ministers agreed to a €540 billion package to save the European economy. All of it is loans — for companies, states and workers — and all of it is to be repaid later. Liquidity problem solved, right?
But what about the looming solvency problem? What happens when people aren’t able to repay their debts? How will states invest in their economies when all the taxes they collect will be used to repay their creditors? The Commission’s plan does not answer these questions.
What the Commission’s plan does answer is how this money should reach countries. It suggests beefing up its new “cash-for-reforms” program, saying it will draw up a list of reforms countries will have to undergo in order to access EU cash. These recommendations will then be approved by diplomats, without the blessing of elected MEPs.
None of this will deliver the kind of support Europe needs to emerge from this crisis.
Instead of budgetary deception, the EU should be seeking to bring about real economic transformation. That means setting up a real fund pumping real money into strategic sectors, starting with a massive injection of cash into digital.
In parallel, we need to make sure we are financing the Green Deal to protect our planet and meet our climate goals. We already know what needs to be done — it’s simply a case of putting our money where our mouth is.
We also have to ensure Europe takes back control of strategic sectors through direct investments, in areas such as medical equipment. This would create new, green jobs and a new social contract between Europe and its citizens.
How do we pay for all of this? There is one solution that would not cost national treasuries a single euro and would free up trillions of hard cash for Europeans. Here’s how that would work.
Start by offering a grand bargain to the so-called frugals — the group of countries that refuse to pay more money into the EU budget.
The Commission should offer to freeze countries’ contributions to the EU budget at today’s levels and, in exchange, call on those governments to give up their ideological opposition to EU-wide revenue streams that reflect our modern economy — such as taxes on big tech and big polluters.
The coronavirus pandemic is as much a crisis as it is an opportunity to turn our economies around.
This extra revenue could, in turn, finance EU bonds with a very long maturity of more than 30 years — or even so-called consols, perpetual bonds whose principal is never repaid. In other words, you lend the EU €100 that you’ll never get back. But the EU will give you an annuity of €2 every year for the rest of its existence. And yes, that means we’d be betting on the future of the EU — this is the political signal citizens and markets both need and want.
Consols are not new; they pop up in dramatic times. The Brits first used them to finance their war efforts in the Napoleonic wars and later in World War I. Last month, Israel issued a 100-year “century bond” to fight COVID-19. If we think these are exceptional times, then this is an option we should explore.
The timing couldn’t be better. The EU is currently discussing its next long-term budget and ways to finance it. The basket of new EU-wide revenues the Commission has proposed amounts to at least €26 billion annually. At rates between 0.5 percent and 2.5 percent, that would be more than enough to finance consols for at least €1 trillion. That’s €1 trillion of hard money, not some fanciful multiplier.
To get access to recovery money, the projects and countries would have to pass three tests.
First, the rule-of-law test — no money for autocrats and their cronies and no money to tech companies who do not care about privacy. Second, the climate test — no money for projects that are not in line with the Paris Agreement and countries that do not commit to climate-neutrality objectives. And finally, the tax-fairness test — no money for those who encourage dodgy tax practices.
The coronavirus pandemic is as much a crisis as it is an opportunity to turn our economies around. The Commission can lead the transformation — if it chooses to do so.