A Shot in the Arm for Eurozone

The European Union (EU) has been first off the block in a bid to repair the economic carnage of COVID 19. With many EU members like Italy, Spain, Greece and Portugal already in the throes of extreme economic discomfort even before the pandemic struck, the recovery package could not have come any sooner. It is estimated that the EU may see its GDP contract by as much as by 8 percent this fiscal due to the combined effect of a slowing global economy and the aftershocks of the pandemic.

EUROPE LEADING THE CHARGE

The landmark Economic Recovery Deal was signed by all 27 member-countries after five days of intense negotiations and much political contention. Negotiated alongside the EU’s upcoming budget, or the MFF (multiannual financial framework), the deal allows for the infusion of funds into European economies over a seven-year period, helping to recover from the economic tailspin threatening the Eurozone.

First, the deal: it has three principal elements to it. A Euro 1.1 trillion EU budget for the next seven years, a Euro 360 billion meant for low-interest loans for the most severe victims of the CONVID-19 mayhem and a Euro billion grant to the worst affected economies. To get a perspective of the deal, it may be interesting to note that it is almost as large as 75% of India's GDP!

So what is so “Greenfield” about this deal? It may be recalled that after the financial collapse of 2008-09, there was a growing disinclination amongst member countries of the EU to share the financial burden of their poorer and worst hit co-members. Weaker economies like Greece were asked to improvise through austerity and higher taxes on its citizens. This led to what was called euro- scepticism and calls for the breakup of the union gained ground. In 2016 UK gave a definitive voice to these sentiments through its BREXIT move.

In what is seen as a move to perhaps save the political idea of the EU, the richer countries have now stepped forward to shoulder a greater burden. The fact that the deal was concluded despite huge differences is itself an achievement. A significant departure from austere policies of the past against debt mutualisation, Germany and France will shoulder the greatest financial burden, while the ‘Frugal Four’— Austria, Denmark, the Netherlands, and Sweden — have also managed to secure important concessions, such as rebates for their contributions to the EU budget. Member states will have to draw up national recovery plans while pledging to reform their economic and political systems to be able to gain access to their share of the funds.

Hailed as a major step towards fiscal integration, the recovery fund will allow Brussels to borrow €750 billion on capital markets and parcel it out in terms of budgetary support to countries on a need-basis. The core proposal Next Generation EU stipulates that about €390 billion will be distributed in the form of grants and €360 billion in low-interest loans as a core component of the EU’s Recovery and Resilience Facility. For countries such as Spain, Italy, and Greece, the hardest hit by the pandemic, this fund will provide much-needed economic relief.

THE DEVIL LIES IN THE DETAILS

The rules determining the distribution of funds, and the proposed oversight mechanism to ensure that countries enact the pledged reforms, were among the most contentious issues during negotiations. They were partially resolved by stipulations suggesting linking a country’s monetary allocation to the economic damage caused by the pandemic rather than pre-crisis data on metrics like growth and unemployment. A governance mechanism in the deal allows any member state to raise objections if it feels that another member is reneging on its reform promises.

The commission has requested an expansion of its ‘budget headroom’, which is the gap between actual spending and the maximum the EU can raise from member states. The European Parliament will now have to ratify the budget and decide the specifics behind the governance of the recovery fund.

While hailing the deal as a major step towards a unified EU, economists such as Yanis Varoufakis and Shahin Vallee had several misgivings over its implementation. They call attention to the drain on future EU Budgets given the high debt-servicing costs, the lack of commitment to common European taxation, repayment of funds borrowed, as well as massive austerity concerns and political divisiveness.

From a macroeconomic standpoint, the deal is purported to be too small to respond to the shock of the pandemic and consequent economic collapse, while a practical view sees the governance of the deal to be much too complex to be effective. Politically, however, according to Mujtaba Rahman, Managing Director, Europe, Eurasia Group, the deal has received major support as a joint political and economic effort against the resurgence of nationalism in the continent. “This agreement will set a precedent for how the EU responds to external shocks in the future. The Eurozone is now underpinned with a more robust fiscal and political architecture than before,” he wrote in the Politico.

There are some benefits for global commons too. 30 percent of the entire package has been allocated to enable the member countries to achieve the EU emission control norms, although a very large gap still remains in achieving global climate targets.