A €750 Billion Virus Recovery Plan Thrusts Europe Into a New Frontier – The New York Times

Europe

BRUSSELS — For decades, even when the 2008 financial crisis threatened to blow the bloc apart, the European Union’s wealthier nations resisted the notion of collective debt. But the coronavirus has so fundamentally damaged the bloc’s economy that it is now forcing European leaders to consider the sort of unified and sweeping response once thought unworkable.

The European Commission, the bloc’s executive branch, on Wednesday proposed that it raise 750 billion euros, or $826 billion, on behalf of all members to finance their recovery from the economic collapse brought on by the virus, the worst crisis in the history of the European Union.

The plan, which still requires approval from the 27 national leaders and their parliaments, would be the first time that the bloc raised large amounts of common debt in capital markets, taking the E.U. one step closer to a shared budget, potentially paid for through common taxes.

For those reasons, the proposal had all the hallmarks of a historic moment for the E.U., vesting greater authority in Brussels in ways that more closely than ever resembled a central government.

“This is about all of us and it is way bigger than any one of us,” Ursula von der Leyen, the commission president, told European Parliament members in a speech in Brussels. “This is Europe’s moment.”

At another moment — one without a calamitous recession looming — the proposal would probably have been dead on arrival and antagonized the populists and nationalists who oppose the gathering power of Brussels. But the urgent need for a powerful response to the virus has muted much of the appeal of that message, at least for now.

There is little question that Europe’s recovery will be difficult and cost trillions, with some of its economies set to shrink by as much as 10 percent this year. The friction between China and the United States also poses a major challenge for a bloc that trades heavily with both.

Until now, the European Central Bank had been propping up the economy by sweeping up bonds by member states at low cost to ensure money keeps flowing in to finance stimulus efforts. But the economic crisis is so large that anything less than a bold response from European Union leaders risked inviting another kind of crisis — one of legitimacy.

With Britain gone, the calamity brought on by the virus forced Germany and France, the bloc’s two strongest countries that often find themselves at loggerheads, to step up in a rare display of joint leadership, paving the way for the commission’s proposal.

ImageChancellor Angela Merkel of Germany and President Emmanuel Macron of France this month proposed a $545 billion joint fund for European Union members hit hard by the coronavirus.
Credit…Pool photo by Kay Nietfeld

Even so, the plan is bound to be watered down in the weeks and months ahead. The proposal requires unanimous backing by member states, and a handful of the richer and less affected ones, such as the Netherlands and Denmark, consider joint borrowing and grant distribution to be unfair.

“We need to take everyone’s interests into account and there are very different interest groups: the southern countries, who fundamentally always want more; the East Europeans, who have an interest in preventing everything from flowing south; and, of course, those who have to pay for it all, the net payers,” Sebastian Kurz, the Austrian chancellor who opposes parts of the commission’s proposal, told Politico Wednesday.

But the countries hardest hit by the virus, namely Italy and Spain, are also too big and too central to the European Union’s ambitions to let fail. For now the plan not only suggested large-scale joint borrowing, but also that most of the money raised be distributed in the form of grants, or free cash.

The €750 billion raised would be split in two pots, the commission said. One would include €500 billion to be distributed as grants to all countries based on their recovery needs, with Italy getting the biggest slice and Spain the second biggest. This means the money would be free, with no repayment demanded and no strings attached, and would not count toward national debt levels.

Another pot of €250 billion would be made available in the form of loans to countries that apply for them, coming with more scrutiny and conditions, and would be added to a country’s debt load.

At the heart of the commission’s plan is the idea of using some of its own budget to issue bonds, a move it’s made only a handful of times for smaller amounts in the past. The institution, which has a Triple-A rating, the best possible, from ratings agencies, said it could levy its own taxes to repay those bonds, which will have a maximum 30-year maturity.

The European Commission itself will be greatly empowered if its proposal goes through, not only because it will be able to issue bonds in the markets, but also because any powers to raise taxes directly will give it more of the semblance of a federal government, which it currently lacks, as it depends almost entirely on member state contributions for its budget.

If members don’t grant the commission powers to raise its own taxes directly to repay the bonds, officials said they would need to pay bigger contributions into its budget, or see some of the programs it funds shrink or die to free up funds instead.

Some see this move as a great step forward in deepening the economic binds that tie European Union members and bringing them closer to a United States of Europe. But experts warned that, while important, this is not a leap into mutualized debt, like in the United States.

“We don’t become a federal Europe, however the proposal is a big deal in terms of the architecture of the European Union,” said Maria Demertzis of the Brussels-based think tank Bruegel. “If Europe is considering to issue common debt and to raise taxes to back this debt up, then we’re talking about a big deal.”

Credit…Alessandro Grassani for The New York Times

But real debt mutualization would see Germany guaranteeing Italy’s debt, for example, said Mujtaba Rahman, who heads the Europe practice at Eurasia Group, a political risk consultancy.

“Von der Leyen’s announcement today is a very important step, but only one on what will prove a long and windy road toward genuine debt mutualization in the European Union,” Mr. Rahman said.

“Berlin would demand a veto over Italian budgetary choices as the quid pro quo, and the European Union is nowhere near mature enough politically for such a system just yet,” he added.

The proposal pushed forward Wednesday sidesteps some of those stickier issues by making the European Commission the guarantor of any debt, rather than individual nations, something resisted in Germany and elsewhere and legally unacceptable under the current setup of the bloc.

But both Chancellor Angela Merkel of Germany and President Emmanuel Macron of France recognized that allowing some E.U. countries to recover faster and stronger would only deepen inequalities in the bloc, hampering the way it trades and operates internally.

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Ms. von der Leyen, too, stressed that it’s crucial for the recovery to be even across the bloc.

Most of the onus on financing the recovery is still falling on national governments, and will continue to, even if the commission proposal is endorsed. Germany and other wealthy countries have their own ample funds to draw from to quickly prop up their economies and don’t need European Union funding.

Germany has deployed more than a trillion euros to support its economy, even cutting checks to out-of-work freelancers and bailing out and renationalizing a share of its national flag carrier, Lufthansa.

But other nations, in particular those with fewer resources or still hobbling from the last crisis, need European Union funding more as they face depleted coffers and expensive borrowing in markets.

Credit…Felix Schmitt for The New York Times

The European Commission also made €540 billion available earlier in the crisis for members to finance unemployment benefits, small businesses and the rebuilding of their health care systems.

A new president, on the job for less than a year and confronted with the worst recession in the European Union’s history, Ms. von der Leyen has been under considerable pressure to propose an ambitious plan to support the bloc’s recovery.

The rare Franco-German proposal, floated last week, gave Ms. von der Leyen the top backing she needed, but a Dutch diplomat swiftly noted Wednesday that her plan would still meet resistance in the continent’s wealthy north, paving the road for fraught negotiations among leaders starting next month.

Charles Michel, the president of the European Council who presides over the 27 leaders’ meetings, said there should be a session on June 19 to tackle the proposal, urging the heads of government to support Ms. von der Leyen’s pitch and quickly deploy this money where it’s needed.

That sense of urgency may not be shared by all and the potential for a lengthy and messy approval process is a key problem with the Commission’s proposals, experts said.

“Its single biggest weakness is the fact that real money will only begin to flow where it’s needed most next year, raising a question about the economic picture in the second half of this year,” Mr. Rahman said.

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