It is almost a year since French president Emmanuel Macron and German chancellor Angela Merkel threw their weight behind the idea of an EU recovery fund financed by commonly issued EU debt.
It was a landmark deal that paved the way for an agreement two months later among all 27 EU members to equip the bloc for the first time with an emergency deficit facility as a tool for macroeconomic management. It was a bold step forward in EU integration and taken with remarkable speed for an organisation known for kicking the can down the road in a crisis. It was a recognition of the seriousness of the economic shock from the pandemic and of its particularly damaging effects on southern European countries.
With Europe emerging tentatively from a third wave of infections and protracted lockdown restrictions, enthusiasm for an EU bonanza is giving way to frustration at its slow rollout. Several EU countries have yet to ratify the EU’s so-called “own resources” decision, which will allow for the common debt issuance underpinning the scheme. Several failed to hit the April 30 deadline for submitting spending plans with accompanying economic reform pledges. The European Commission will take two months to scrutinise 27 sets of proposals, and then national governments have one month to pass judgment on their peers. It will be late in the summer before the money starts to flow.
Bruno Le Maire, French finance minister, last week complained that the EU had lost too much time since its initial political agreement. It risked falling out of the race when the US economy was booming and China had already regained its pre-crisis output. Europe is certainly suffering by transatlantic comparison given the enormous fiscal stimulus the Biden administration has pushed through Congress in short order.
Europeans, though, understandably dispute comparisons by size, pointing out the meagre US social safety net and President Joe Biden’s intention to correct yawning inequality. Furthermore, it was always going to take the EU time to put in place an institutional innovation like this and to meet the inevitable conditions attached to a €750bn fund, much of which will be dished out in grants.
If national capitals are frustrated it is probably because they are chafing at the commission’s insistence that EU money is directed at productive digital and green investments. Brussels is also pushing them to adopt economic and administrative reforms to help raise potential growth and improve long-term fiscal sustainability, as they all agreed last summer. Some capitals contend these reforms are irrelevant to the recovery. But they sign up to these obligations every year under a toothless EU economic review process. They cannot complain they are now being held to their promises.
The commission needs to pin down as many of these spending and reform commitments as it can in advance, specify how payments would be suspended to governments that fail to comply, and ensure that national auditing bodies are robust. Brussels will lack the resources to micromanage this programme once the money starts to flow. It would be a disaster for the EU if it is misspent. Hungary’s plan, now dropped, to use the funds for its new university foundations, stuffed with government cronies, shows the risks.
Governments that need to stimulate their economies in the short term can borrow to spend now, using the fiscal space that the forthcoming recovery fund has afforded them. Spain and Italy are already doing so. It is better that Brussels takes time to get the fund right.