Can the European Union learn from its budgetary mistakes?


A growing economic recovery shows that it can sometimes

“AMERICANS CAN we will always count on to do what is necessary ”, would have quipped Winston Churchill,“ after having exhausted all the other possibilities. There are two problems with the quote. First, there is no evidence that Churchill ever said so. Second, today the phrase applies better to European leaders than to their friends across the Atlantic.

Let us take the example of the European Union’s exit from the pandemic. For the first time since last spring, economic optimism is in the air. All over Europe, vaccines are coming into force, summer vacations are reserved and bars are opening. The European Commission has just raised its growth forecast for 2021 and 2022, citing the € 750 billion ($ 910 billion) stimulus fund as one of the reasons. This liquidity is expected to start showing up in European Treasuries later this year. Overall, the EUof GDP will be back to its pre-pandemic level by the end of 2021. This is slightly faster than expected and is only expected to happen a few months behind America, which has benefited from Donald’s successful stimulus packages. Trump and Joe Biden. In the ten-year gap between their initially clumsy response to the eurozone crisis and the pandemic, European leaders appear to have learned some lessons, even if they have not yet learned them enough.

Where the European Central Bank actively made matters worse a decade ago, it is now helping governments come out of their holes. In the spring of 2011, the bank raised its rates and worried about a brief wave of inflation rather than stagnant growth. It was not treated as a lender of last resort until a year later, when Mario Draghi finally pledged to do “whatever it takes” to save the euro. Then began Mr. Draghi’s long, slow crusade to make the BCE adopt unorthodox measures, such as quantitative easing. As a result, the bank is now able to print change, ignore (largely) inflation hawks, and keep interest rates at historically low levels. Its official mandate of price stability has been replaced by an unofficial credo of supporting economic growth, reducing unemployment and “doing whatever it takes.”

If technocrats have changed their tone, so have politicians to some extent. Long-standing political certainties have been revisited. During the previous crisis, the common debt had been suggested as a necessary step to secure the future of the euro, but was rejected by Angela Merkel, the German Chancellor. Ms Merkel reversed the trend last May. After a year of haggling, the commission will start issuing up to 750 billion euros, which will be distributed to countries in the form of cheap loans and grants. Certainly, at the continental level, the pattern is tiny. But for some of the countries that need it most, it’s important. In Germany, it is a piddling 1% of its GDP. For Italy, however, the figure is around 11% of GDP. Greece, meanwhile, owes 32 billion euros in loans and grants – a useful sum for an economy of around 170 billion euros.

For rich countries, EU the funds are a fiscal aperitif. It is up to national governments to boost their economies in the post-crisis period. Here again, attitudes have changed, but not yet enough. Unlike ten years ago, spending is now more likely to be seen as a solution than a sin. Countries like Greece have suffered an economic vivisection, forced to cut spending rather than stimulate their economy. This approach failed to reduce Greece’s debt or produce faster growth. These days, supporters of a return to austerity are thinner on the ground.

With any luck, the political circumstances could anchor this new attitude permanently. EUits own rules on public spending. Although temporarily suspended during the pandemic, EU countries are forced to keep deficits below 3% and national debt below 60% GDP. At a time when Italy’s national debt, third EU saving, represents about 160% of GDP, these rules may seem bizarre. Europe’s struggling southern economies have called for an overhaul since the previous crisis. Now they can make their wish come true. French President Emmanuel Macron has long advocated more lenient fiscal rules. The same goes for Mr Draghi, now Italian Prime Minister. Meanwhile, the rise of the Green Party means the next German government will likely be the most debauched in a generation. It is a rare alignment that could, very likely, lead to a more permanent change.

Here is the boom!

The boom mongers have not yet routed the doom mongers. There are lots of opportunities to mess things up. Inflation still haunts European politics. While the noises coming from the BCE suggest that a slight rise in inflation this year will be swept aside, that claim will only be properly tested when German politicians start screaming. (The upcoming elections will give many excuses for such hysterics.) An improving economic outlook could reduce the pressure on countries to EUthe spending rules of. Rather than turning the recovery fund into a permanent system, ready to issue more debt if needed, some governments will try to keep it temporary, creating unnecessary drama over its reconstruction in the next crisis. The tyranny of low expectations hangs over the EU. In the previous crisis, simple survival was enough, let alone prosperity. Now, to waddle slightly behind the US economy – let alone China’s – is seen as a success. For a bloc that wants to be a superpower, this is not enough.

Yet the EU is stronger than its critics allow. He can correct his mistakes, albeit slowly. It took a decade to eliminate the mistakes of the previous crisis. As long as the EU is not a state, it will not have the speed, power or flexibility of one. Across the Atlantic, Mr. Biden can launch a plan to spend trillions of dollars, knowing he has the power to do so. On the other hand, EU politics is kaleidoscopic. Consensus must be concocted between a rotating cast of ministers and the midst of ever-changing alliances. Reluctant countries must be slowly cajoled. A stronger, more consistent EU happens, but not for a moment. It might still take much longer to exhaust the other options.

This article appeared in the Europe section of the print edition under the headline “What did it take?”


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