Economic Affairs

Will Merkel and massive Covid-19 recovery fund produce an EU miracle?

As Germany takes the helm of the EU presidency next month, ground-breaking rescue packages are up for discussion that could also strengthen Brussels' power to keep wayward members in line

Next month, and in the midst of an unprecedented crisis, Germany will take over the presidency of the Council of the European Union.

With a United States in economic and political disarray, and an increasingly intolerant China, maintaining the unity of Europe is the first order of the day.

"Thank God it's Merkel," observers in Brussels are saying, hailing the virtues of the German Chancellor.

In normal times, steering the EU tanker of 27 members is a herculean task. Now, it requires even more of what Dr Angela Merkel is known for: stamina, staying power and resilience.

One year before stepping down as chancellor, it also will be her last chance to put her stamp on her international legacy.

Dr Merkel seems utterly determined to achieve this.

Among other things, the Chancellor wants to keep the centrifugal forces within the EU in check.

Europe's leading economy will hold the rotating presidency for six months from July 1, and under the presidency of Germany, the character of the union might dramatically change.

When Germany takes over from current incumbent Croatia, the community of European states, originally set up as an alliance mainly promoting free trade, and which then morphed into a supranational pseudo-state, could end up being rid of many of its flaws.

One is the lack of assertiveness of the quasi-government, the European Commission, currently led by Merkel confidante Ursula von der Leyen.

This might be dealt with by using heaps of money. "Never waste a good crisis", a well-known saying goes - and this is exactly what the German EU presidency could set out to do: Use many billions of euros to achieve a much deeper integration of the member states.

The Covid-19 crisis has laid open the fragile financial state of many member states, with Greece, Italy and Portugal all indebted well above 100 per cent of gross domestic product (GDP), and Belgium, France, Spain and Cyprus above 90 per cent.


ST ILLUSTRATION: MIEL

In 1992, in the Dutch city of Maastricht, the EU members agreed, among other things, to not exceed debt of 60 per cent.

But even Germany had a hard time meeting all the Maastricht criteria.

However, in March, amid the coronavirus crisis, the conditions were suspended, opening the doors to taking up new debt.

As the region faced its worst economic crisis since the 1930s, the EU last month announced plans to raise €750 billion (S$1.18 trillion) from the financial markets for a coronavirus recovery fund.

Disbursement is planned from next year to 2024, with the biggest share going to the ones who need it most, mainly Italy and Spain. Two-thirds of the money would be in the form of grants which do not have to be paid back.

The proposed rescue package, comprising loans as well as grants, will allow money to be transferred from the EU's richer members to the poorer ones. It will also allow member states to issue bonds in the name of the EU as a whole, which will help financially fragile states to benefit from the stellar credit rating of the better-off members.

Separately, Germany and France - the union's two biggest economies - have proposed that the EU borrow €500 billion on the financial markets to aid European economies worst hit by Covid-19.

 
 

Under the German-French proposal, the recipient states need not repay the cash. Rather, liability for the debt would be added to the EU budget, to which member states pay in varying amounts, depending on the size and state of their economies.

What's significant in these proposals is that Germany has abandoned two longstanding rules of its policy towards the EU: That there should be no common borrowing and no transfer union outside the existing EU budget.

Germany, long known for its frugality, changed course in favour of spending, to save the collective.

The euro zone economy is expected to shrink between 8 per cent and 12 per cent this year. As Dr Merkel noted recently, "because of the unusual nature of the crisis, we are choosing an unusual path".

The 27 European Council members are scheduled to hold a videoconference on June 19 to thrash out elements of the proposals. The negotiations are likely to be over issues such as the size of the transfers and what conditions will be attached to them.

Hungary and Poland are reportedly opposed to any attempt to make access to the funds contingent on keeping to certain standards of rule of law.

Both countries are run by populist governments which have drawn flak for measures that undermine press freedom and judicial independence.

Thorny implementation issues aside, there is the broader question of whether establishing a transfer union needs more democratic legitimacy. If the taxpayers of the richer countries have to step in should the poorer ones fail to meet their obligations, they should at least be asked.

VOTERS FACE LONG WAIT

This, at least for the time being, is not on the cards. With the next election of the EU Parliament four years away, voters will not have a say for a long time.

They will also painfully remember how the current European Commission chair, Dr von der Leyen, came into this position.

 
 
 

Previously Defence Minister in Dr Merkel's Cabinet, her name was not on the ballot, and she was promoted in a backdoor deal by powerful heads of state, in the process sidelining the leading contenders: the Netherlands' Frans Timmermans and fellow German politician Manfred Weber.

This horse-trading - which, in particular, French President Emmanuel Macron had a hand in - was a huge blow to the EU's democratic legitimacy.

However, despite the question marks over the coronavirus rescue proposals, the gigantic disbursements with strings attached might allow Brussels to emerge a winner in this crisis.

One of the birth defects of the EU has been the lack of instruments to discipline unruly members. The union, and even more, the euro zone, works only if all members subscribe to the common playbook, including the Maastricht Treaty.

So far, violations of the rules have had only minor consequences.

In the case of France, whose budget deficit has frequently exceeded the threshold of 3 per cent of GDP, fines were deferred or exemptions granted.

The same is true for other countries, including Portugal, Spain and Greece.

With rule-breakers unafraid of ramifications, the penalties carry little weight.

Mr Matteo Salvini, deputy prime minister of Italy in 2018 and last year, and a right-wing populist of the party Lega, openly flouted the treaties and basically said: "I take up debt as I see fit."

With the loans and grants handed out in the name of the EU, Brussels could now either stop payments if rules are violated, or even strip countries of voting rights.

If such a framework is worked out and agreed upon at an EU summit next month, Brussels, for the first time, would have a powerful toolbox at its disposal.

This could even pacify members who still struggle with the formation of a debt-and-transfer union, and hence a European superstate.

The so called "frugal four" - Denmark, the Netherlands, Austria and Sweden - believe that a joint and several liability situation is the wrong path. They have tabled a counterproposal advocating a one-off emergency fund, and are insisting that the recipients would have to display a "strong commitment to reforms and the fiscal framework".

 
 

Much tough bargaining lies ahead, and Dr Merkel will need to invest all her political capital to make the union change.

At the same time, she might be able to take advantage of the fact that one of the EU's key foot-draggers - the United Kingdom - is no longer part of it. London, always eager to rein in Brussels and limit the EU's power, is no longer an obstacle because of Brexit.

What the Chancellor also has going for her is the unprecedented nature of the Covid-19 situation that will help focus minds on the job of saving the EU from its most dire economic crisis yet, while coming to grips with some of its fundamental shortcomings as a regional grouping.

If in sync, Dr Merkel, Mr Macron and Dr von der Leyen can finally walk the talk on an ever closer union.

 
A version of this article appeared in the print edition of The Straits Times on June 10, 2020, with the headline 'Will Merkel and massive Covid-19 recovery fund produce an EU miracle?'. Print Edition | Subscribe