Covid-19: can debt pooling save Europe?

The European Union united in the face of the coronavirus crisis? Emmanuel Macron and Angela Merkel proposed, Monday, May 18, a plan of 500 billion euros, allocated to the regions most affected without them having "ready to repay".

This plan would be added to the investment of the same amount, set up in April by the finance ministers of the Euro zone to support employment and businesses. The European Parliament, for its part, is calling for the global recovery plan to reach 2,000 billion euros.

European authorities therefore agree that the need for joint and united action is paramount. However, the old economic cleavages between southern and northern states are still present and several points are problematic.

A European plan… for what purpose?

Hard hit by the coronavirus crisis, European states are forced to launch emergency plans to save their economies. After announcing measures for tourism and catering, the French government is working on a plan to help the automotive and aeronautical sectors, believing that more than a billion euros is needed. For its part, Germany has announced a business assistance plan of 1.1 trillion euros.

With these massive investments, countries are deepening their national debts. To help them, the European Commission suspended, on March 20, 2020, the rules of budgetary discipline, allowing them to spend as much as necessary to fight the pandemic.

>> Read: Covid-19: perpetual debt as an economic weapon against the virus?

But then, what role should the recovery plan play? The French Ministry of the Economy said in mid-April that a European response is necessary because it is more effective to "allow the rapid recovery of the economy". The idea is to set up a European-wide fund based on borrowing to guarantee liquidity to the states that need it and thus prevent the most fragile economies from sinking into the crisis. Each country keeps its own debt, but the effort against the coronavirus is pooled for more efficiency and coordination.

These measures must be financed by loans made on the financial markets from lending organizations such as banks, insurance companies or even pension funds. If the European Union is indebted for this debt, its repayment is not immediately. The maturities will be spread over the long term to encourage recovery. Integrated into the EU budget, this recovery plan should be presented by the European Commission at the end of May.

Direct funds or loans

Two options are preferred: allocate direct funds (in other words, grants) to the countries most affected or loans to repay.

The first proposal, favored by the French and German heads of state, aims to borrow to invest in a targeted manner in the sectors and regions most in difficulty. It would not be "loans to reimburse" by the beneficiaries, according to Emmanuel Macron, but "budgetary allocations on the basis of common debt". On paper, this option seems more favorable to countries hard hit by the Covid-19, such as Spain or Italy.

But Emmanuel Macron suggests that this investment be reimbursed by the States "according to their weight in the budget". A method of calculation that could prove counterproductive according to Fréderic Farah, economist and researcher teaching at the University of Paris 1 Panthéon-Sorbonne, interviewed by France 24: "Italy represents 9% of the European budget while the Netherlands weigh only 2.4%. Italy, the most affected will therefore have to pay more, we would have to find another calculation method. "

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The second option, that of loans, is that used by the finance ministers of the euro zone for a 500 billion plan intended in particular for businesses.

States in difficulty will have to pay interest. But they will be lower than usual because they will benefit from rates obtained on a European scale and guaranteed by the EU. If this option is much less advantageous than direct funds, it remains relevant according to Fréderic Farah: "If we take the example of Italy, its economy works but it is weighed down by the interest on the debt which weighs on its shoulders. To reduce its deficit, it had to make drastic cuts on public services and in particular the hospital. With the Covid-19 crisis, it now needs to be able to invest massively, in health in particular, in the best possible conditions " .

The possibility of obtaining preferential rates represents a boost for countries hit hard by the crisis. However, this maneuver is not unanimous within the European Union. "The most rigorous states in budgetary matters like Germany or the Netherlands fear that more indebted countries like Spain or Italy will use this borrowing facility to plug the holes in their deficit", explains Fréderic Farah.  

It must be said that at this stage, the outline of the expenditure authorized under the European fund remains to be defined. According to the European Parliament, the stimulus fund must "be oriented towards investments for the future" including "the European Green Pact and the digital transition".

"The EU was founded on competitiveness, much more than solidarity"

The figures given seem enormous. But is the 500 billion plan presented by the German chancellor as a "colossal effort", up to the Covid-19 crisis? Indisputably not for Remi Bourgeot, economist and researcher associated with IRIS contacted by France 24: "An economic recovery based on solidarity is the path to follow today, it still has to correspond to the challenges. This envelope could agree on a smaller, localized crisis, but certainly not to put the European Union back on the economic rails. "

According to Emmanuel Macron, this budget of 500 billion would "complement the European budget" over the period 2021-2027. Excluding, for comparison, the recovery plan approved by the Italian government to support its own economy already amounts to 750 billion.

Despite the announcements, chilliness therefore still seems to be the order of the day. "There must be solidarity, of course, vis-à-vis the countries hardest hit by Covid-19, but we must also be responsible. Throwing money out the window is never a solution" argued the president of the budget committee of the European Parliament Johan Van Overtveldt, on May 12th.

But for Fréderic Farah, the debates around the recovery plans are, above all, a smokescreen: "Europe does not have the means to federate. Its budget represents 1% of the overall wealth of the Union. it would have to be 20% to be able to act as a federal state. The Union was founded on competitiveness much more than on solidarity. Unless to rethink its foundations, it is condemned to tinker forever to continue moving forward. "

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