Toward a European Reconstruction Fund
Following a recent agreement by the Eurogroup of eurozone finance ministers on a COVID-19 rescue package, Europe is well positioned to maintain liquidity for the time being. But if it wants to avoid political infighting and set the stage for a post-pandemic recovery, it will need to go further.
BRUSSELS – Last week, the Eurogroup of eurozone finance ministers, having acknowledged that nobody is to blame for the COVID-19 crisis, agreed to a deal to mitigate its economic fallout. The agreement includes €25 billion ($27.2 billion) in fresh funding for the European Investment Bank, €250 billion ($272 billion) for the European Stability Mechanism (ESM), and €100 billion ($109 billion) for the creation of a new instrument through which the European Commission can help member states manage their looming unemployment crises. All told, the package amounts to a substantial sum: around €500 billion in loans (when accounting for the leverage of the EIB’s programs).
Politically, any agreement on a eurozone-wide deal is a success in itself, considering the deep divisions of just a few weeks ago. And, economically, the deal means that Europe is now supported by a combination of safety nets that will make another euro crisis highly unlikely.
As a result of the new agreement, if a eurozone member state faces difficulties financing the enormous outlays needed to support its economy during the COVID-19 lockdown period, it will have a number of options. It could tap into the European Central Bank’s large new Pandemic Emergency Purchase Program (PEPP), or it could request a loan from the ESM, which is now constrained by fewer conditions. Crucially, the new ESM program opens the door for the ECB to expend near-unlimited firepower through its Outright Monetary Transactions (OMT) program.
Nonetheless, while these options provide for substantial liquidity support to member states, they do not address the issue of mounting debt, which already threatens to hamper growth for decades to come in many countries, not least Italy and Spain. In our view, this critical issue should be addressed not through the mutualization of past or future debts, but with a common instrument that allows the European Union itself to incur the debt required to finance a massive investment and recovery program.
So far, the Eurogroup has offered only lip service to this idea. “Subject to guidance from Leaders,” its recent communiqué states, “discussions on the legal and practical aspects of such a fund, including its relation to the EU budget, its sources of financing and on innovative financial instruments, consistent with EU Treaties, will prepare the ground for a decision.”
Let’s get a few things straight. For starters, EU debt already exists. There is around €800 billion of it in the form of bonds issued by the European Commission, the EIB, and the ESM. But this debt is used only to make more debt. Because member states’ governments are responsible for their own spending, the EU is expected to help merely by pushing down interest rates.
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But to ensure an economic recovery after the pandemic, we must abandon the idea that European loans should be used only to make more loans. The time has come for genuine European spending financed through European borrowing. The European Commission should issue consolidated annuities (or “EU Consols”) to finance a €1 trillion economic reconstruction package. These instruments would constitute a safe investment in the future of the EU as a whole, which is exactly the message Europe needs to be sending right now.
Crucially, with EU Consols, no one would be investing in a package of mutualized European debt; rather, they would be investing in the future of the Union. And, owing to the implicit support of the ECB and the Commission’s AAA rating, the annuities should have no problem attracting market interest.
In political terms, an EU annuity could play a critical role in a post-pandemic grand bargain. Because it would not entail the mutualization of existing debt, it would operate wholly at the EU level, and thus would not affect any one country’s debt or spending levels. Northern Europeans would not be assuming responsibility for southern Europeans’ debt. Financing from the annuity would go toward a strictly European plan that is designed to serve all Europeans’ interests.
EU Consols also would not cost EU member states a penny. To avoid using any of the funds that countries currently pay into the EU budget, the interest on the annuities would be paid with new EU-level levies on big polluters and tax evaders. With taxes on digital services and non-recycled plastics, along with the current revenues from the carbon market (the European Emissions Trading System), the EU could raise around €26 billion per year. Assuming a conservative interest rate of 2.5%, that would allow it to borrow more than €1 trillion for a recovery package. And as a result, national contributions to the EU budget could be frozen at current levels, averting years of haggling over the collective budget.
The new European Reconstruction Fund would be fully owned and operated by the Commission, which in turn would be accountable only to the European Parliament. The fund would focus on advancing the shared priorities of all European citizens. After supporting the countries hit hardest by the COVID-19 crisis, it would then go on to facilitate the private sector’s return to competitiveness, as well as investments in decarbonization, new transportation infrastructure, and research and innovation.
The pandemic has left Europe no choice. Only by moving beyond the age-old fights over national budget contributions and debt can Europeans start investing in recovery.