Fiscal discipline, European solidarity and the ever elusive question of direction

Last Saturday, the group of countries commonly referred to as the Frugal Four, consisting of Austria, Denmark, the Netherlands and Sweden, presented their project for the European Union’s response to the Covid-19 economic fallout. Their proposal was put forward as a response to the recent Franco-German initiative which included fiscal transfers to the most damaged economies. The counter proposal focused on a loan-based emergency fund with favourable conditions, a time limit of two years and the requirement of a strong commitment to reforms and fiscal discipline by the recipients. The allocated money would be subject to control by the European Court of Auditors, the European Public Prosecutors Office and the European Anti-Fraud Office to guarantee transparent and adequate management. The main political priority for them is to present a plan that contributes to tackle the economic fallout, according to their understanding of European solidarity, without setting any precedent that could eventually lead to debt mutualisation.

Notably, the Frugal Four also share the condition of net contributors to the EU budget and have a common position in the Multiannual Financial Framework negotiations to keep the EU budget (2021-2027) at 1% of GDP. Their bet is on modernising the budget and re-prioritising on digitalisation, research and climate change, allocating 25% to environmental policies, while cutting funds for other expenditures, such as the Common Agricultural Policy, which they feel bring less added value. Broadly speaking, they want to apply their guiding principle of efficient and results-driven management of public expenditure, which they preach domestically, to the EU finances.

The gravity of the current situation is such that fiscal transfers, which had been taboo during the previous economic crisis, are being openly demanded by the most affected members and were somewhat included in the Macron-Merkel plan. Said plan has been described as a major milestone and a breakthrough moment of European solidarity in the path towards further integration.

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This has led to confrontation between different EU Member States. In general terms, the conflict lies between those against fiscal transfers and an increased EU budget and those in favour. The fear is that the Franco-German plan entails debt mutualisation and fiscal transfers since the “borrowing from the market in the name of the EU [would flow to the] worst hit sectors and regions [and] will not be repaid by the beneficiaries”, as President Emmanuel Macron said himself during the joint conference held with Chancellor Angela Merkel. This major turn of events, in both the direction and ambition of European integration, is indeed historical and much celebrated in Southern Europe. However, it remains a proposal amongst the two most powerful economies of the EU but bilaterally put forward while side-lining the preferences of other members.

The current European Commission, in order to address the future development of the EU and better define its direction in accordance to the expectations of all, launched the two-year process known as ‘Conference on the Future of Europe’ on May 9th. This initiative should provide the appropriate platform to discuss and negotiate what is to come. Regrettably, the economic consequences of the Covid-19 pandemic have caused a deep wound in many EU economies therefore requiring a rapid and strong response at the EU level before the future direction of the project could be laid out and agreed upon. After Brexit there were some who felt the departure of the United Kingdom would lead to more clear and defined positions of Member States on the subject of European integration. Brexit meant the loss of both the second biggest economy and net contributor to the EU’s budget but also the withdrawal of one of the most outspoken sceptics towards further integration. The U.K has left, the gloves are off and the masks have fallen.

A political Union of 27 different countries remains, nonetheless, a complex project which needs to accommodate different needs and sensibilities. However, if the current status quo, merely adhering to the existing norms, competences and mechanisms attributed to the EU by Member States, proves unsatisfactory, updating the legal tools at its disposal seems like the logical solution. Because fiscal policy is a competence that lies mainly within the Member States, related decisions require unanimity. Amending the EU Treaties, the closest equivalent available to national constitutions, requires unanimity as well. These are the rules that all Europeans have given to themselves and which all participating countries agreed upon.

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This means that the Franco-German proposal, even if ambitious in both content and symbolic importance, is unlikely to pass in its original form. With a proposal of their own, it does not seem likely that the Frugal Four will be able to endorse it, which would consequently hinder the needed unanimity to be approved. It must be noted however that the EU has already taken ambitious measures, within the available legal framework and toolset, to alleviate the pressure on its economies in face of Covid-19.

The dominant logic in Copenhagen, The Hague, Stockholm and Vienna is that fiscal discipline is essential to ensuring the proper functioning of the EU and the resilience of the EU economy. They feel that proper housekeeping entails running a budget surplus, or at least reducing deficit, during times of economic growth. Countries that had a lower debt to GDP ratio before the epidemic have now more fiscal margin to manoeuvre in times of crisis, without risking their ability to finance themselves autonomously in the financial markets. Reforms and fiscal discipline are considered key to guarantee that affected economies will be able to address future economic shocks with their own means without the need of economic assistance, as was already the case in the previous economic crisis. That is the rationale behind the decision to underline the 2-year temporality and one-off nature of the financial assistance on offer.

According to Eurostat, the Frugal Four closed 2019 with a debt to GDP ratio which lists as follows: Austria 70.4%, Denmark 33.2%, the Netherlands 48.6% and Sweden 35.1%. On the other hand, the fiscal reality of Mediterranean countries was slightly different, namely: France 98.4%, Greece 176.6%, Italy 134.8%, Portugal 117.7% and Spain 95.5%. In order to put this contrast in context we have to keep in mind that the debt to GDP average ratio of the EU 27 as a whole was 77.8% in 2019. Of particular interest for Spain however, is the fact that while all Frugal Four countries run a budget surplus in 2019, Spain increased its deficit from 2.5% to 2.8%. While Spain had been running a budget deficit for years, the period of 2013-2018 had been one of steady reduction. Additionally, Spain’s GDP had been growing since 2014.

A few months within 2020 and Covid-19 has hit the EU hard. The European Commission released its European Economic Forecast on May 6th and it predicts a 9.4% collapse of GDP and an increase of up to 10.1% of public deficit in Spain. Meanwhile, the Bank of Spain has recently updated its own economic forecast and expects public debt to reach 115.5% of GDP in 2020. Italy, which has also been gravely affected by the pandemic, is expected to run a deficit of 11.1% and a total debt amounting to 155.7% of its GDP.

This health crisis is undoubtedly a natural catastrophe of symmetrical nature that has hit the EU as a whole. However, the magnitude of the negative economic impact varies enormously and is not just the result of the “[…] severity of the pandemic and the stringency of their containment measures, but also on their specific economic exposures and initial conditions, and the discretionary policy responses that their levels of policy space allowed them to afford” (Spring 2020 Economic Forecast – Overview, European Commission).

The generalised perception in Southern Europe is that the ‘Frugal Four’ are undermining the European spirit of solidarity in times of crisis and lack a long-term vision. On the other hand, the frugals feel blackmailed to accept debt mutualisation, even when their position on the matter remains unchanged, due to the economic interdependence resulting from the single market. An interdependence from which they have indeed largely profited but that has also linked them to countries that, they feel, lack fiscal responsibility and the incentives to properly reform. From their point of view, they are fulfilling the promise of solidarity by facilitating financing at favourable rates, instead of allocating that money to boost their own economies which, in the end, is paid by their national tax-payers. Their populations are generally against fiscal transfers and debt mutualisation and, like all democracies, their governments are accountable to their respective societies alone.

The argument could indeed be made that their position is short-sighted since export-oriented economies, like their own, will prosper more if Southern Europe does not come out of this crisis further impoverished. However, it is perfectly legitimate for them, from both a democratic and legal perspective, to prioritise coherence with their populations preferences over the long-term socio-economic cohesion of the EU or a reduction of exports to Southern Europe due to a regional decline in purchasing power.

In the end, the underlying question is one of direction. The simple truth is that, currently, there is no consensus on what the EU should become. Defining a common long-term aspiration and the expected degree of integration should become a priority, even if an uncomfortable one, in order to slash the current toxic ambiguity. The status quo allows for too much interpretation and leads to conflict, frictions and disappointments. Let’s hope that the Conference on the Future of the EU sheds some light on the matter for everybody’s sake.

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Contra la pandemia, información y análisis de calidad
Colabora con una aportación económica

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  1. Manuel Fernández Vílchez
    Manuel Fernández Vílchez 05-27-2020

    Habría que cambiar de dimensión en la Globalización. Desaparecido el estado-nación-soberano de acumulación de capital nacional, por la internacionalización de la producción y el trabajo, la mundialización de las relaciones sociales de distribución e intercambio por la Libre Circulación de Capitales (libres de Fiscalidades estatales) y las Areas Comerciales (libres de Aranceles). Si no existen unos estados-unidos-europeos, pues lo que queda son fantasmas de los antiguos Estados, si la Economía Política no es periodismo de Movimiento de Opinión de partidos parlamentarios («periodismo de distracción ideológica»), lo que se observa son posicionamientos en la Globalización. Y es completamente lógico que el Capital Financiero avance entre diversos intereses y distintos ejes de la Economía Especulativa (M3) y la Economía Real (M1), donde median cada vez menos los partidos electoreros parlamentarios, ahora reducidos a movimientos sociales de coyuntura (populismos sin plan estratégico ni capacidad organizativa). borrador pdf La formación social actual en la Globalización, en librería virtual y academia.edu

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