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EU budget won’t be corona-era Marshall Plan
Leaders’ comparison with post-war recovery program is
largely misplaced, experts and officials say.
By LILI
BAYER 4/6/20, 7:02 PM CET Updated 4/7/20, 9:34 AM CET
European Commission President Ursula von der Leyen has
repeatedly said Europe needs a new Marshall Plan to tackle the coronavirus
crisis
Don't count on a new Marshall Plan to save the EU.
In recent
days, European Commission President Ursula von der Leyen has repeatedly said
Europe needs a new Marshall Plan to tackle the coronavirus crisis, with the
EU's next long-term budget at its heart.
But while
invoking the massive U.S.-financed program to lift Europe from the ashes of
World War II may help von der Leyen convey the scale of the challenge she
believes the Continent now faces, comparisons between the Marshall Plan and the
EU budget are otherwise misplaced, according to experts and officials.
For one
thing, the cash for any new "Marshall Plan" would have to come from
European governments themselves. For another, the EU budget is much smaller as
a proportion of the European economy than the post-war aid provided by the
United States. And the bulk of EU budget funds are allocated to existing
programs, such as agricultural subsidies and regional development spending.
To turn the
EU's Multiannual Financial Framework into a true Marshall Plan 2.0, the
Commission would have to propose — and the EU's national leaders would have to
accept — a far bigger budget than anything previously suggested, along with a
radical reworking of how the money is shared out. So far, there is no
indication that anything that dramatic is being proposed or that it would be
accepted.
The
original Marshall Plan used grants to help revive production in Western
European economies after World War II.
It's clear
the EU budget will play some role in the economic strategy to tackle the
crisis. But it's also clear that the response will come above all from massive
spending by national governments and a €750 billion asset-buying program from
the European Central Bank, as well as other EU programs, possibly including the
eurozone's bailout fund and an unemployment reinsurance scheme proposed by the
Commission last week.
Still,
however, politicians can't resist reaching for the comparison with the European
Recovery Program — popularly known as the Marshall Plan, after U.S. Secretary
of State George C. Marshall.
European
Council President Charles Michel talked just a couple of weeks back about “what
I call a Marshall Plan-like stimulus strategy."
Question of
scale
The
original Marshall Plan used grants to help revive production in Western
European economies that had been devastated by World War II.
The
assistance was to be accomplished by "promoting industrial and
agricultural production," as well as "furthering the restoration or
maintenance of the soundness of European currencies, budgets, and
finances" and "facilitating and stimulating the growth of
international trade of participating countries with one another and with other
countries by appropriate measures including reduction of barriers which may
hamper such trade," according the 1948 U.S. Economic Cooperation Act.
The
Marshall Plan came with some strings attached. "European integration was a
primary requirement," said Benn Steil, a senior fellow and director of
international economics at the Council on Foreign Relations think tank, who
wrote a book on the Marshall Plan. A key condition was that Communist parties
could not take part in coalition governments in recipient countries. "The
U.S. made clear that they would cut Marshall aid if the Communists were ever
allowed back in power," Steil said.
That's one
difference between the Marshall Plan and any attempt to revive the European
economy via the EU budget. But there's also a significant difference between the
scope of the original Marshall Plan, which provided assistance to 16 countries
between 1948 and 1952, and the next long-term EU financial framework, which is
set to run between 2021 and 2027.
American
assistance in 1948-1952 amounted on average to 2.6 percent of the economic
output of recipient countries, according to Steil. In nominal terms, grants
totalled $13.2 billion — 1.1 percent of U.S. output at the time, he noted.
American
assistance in 1948-1952 amounted on average to 2.6 percent of the economic
output of recipient countries | Edward Miller/Keystone/Getty Images
The
European Commission's original proposal for the 2021-2027 EU budget, by
contrast, was the equivalent of merely 1.11 percent of the bloc's Gross
National Income (GNI), a measure of the size of the economy that includes
output and other elements. And when EU leaders failed to agree on the budget at
a summit in February, they were looking at a compromise of around 1.07 percent
of GNI.
"The
EU budget definitely is not big enough and won’t be big enough to be the main
tool to tackle the economic crisis," one national official, who spoke on
condition of anonymity, said in a text message. "National fiscal stimulus
(backed by actions from European Central Bank) is going to be key."
Politicians
in Brussels are also skeptical.
"Of
course, there is a need for a significant stronger EU response to the corona
pandemic and its economic fall out," Johan Van Overtveldt, chair of the
European Parliament's Committee on Budgets, wrote in a text message. "How
can you do that with a budget amounting to more or less 1% of GDP??"
Experts
agree that on its own, the EU budget won't be enough to address Europe's
economic challenges.
"If
the budget remains at its current order of magnitude, at 1 percent of GNI — and
it is very hard to see how that would alter — and the traditional demands
continue to be imposed, particularly for agriculture and cohesion policy, the
margin for launching something massive is going to be pretty limited,"
Iain Begg, a professorial research fellow at the London School of Economics,
said in a phone interview.
National
priorities
Another
major obstacle to von der Leyen's ambition is the willingness — and ability —
of member countries to pay for a lot of new spending at EU level.
The bulk of
EU budget spending comes from contributions from national treasuries, based on
the size of their economies. French President Emmanuel Macron last month
floated the idea of a bigger EU budget to address the crisis — but did not
directly offer to pay more into the bloc's coffers. Other leaders have also
thus far tiptoed around the politically charged question of how much money
national capitals would have to transfer to the EU if the bloc opts for more
ambitious recovery spending.
Many
national leaders will also be wary of fueling anti-EU populism if they are
accused of spending too much at a EU level at a time of acute need at home.
Hélène Laporte, a member of the European Parliament from Marine Le Pen's
National Rally, described a possible increase in the French contributions to
the EU budget to help address the crisis as "madness."
Experts say
that what Europe needs in the age of coronavirus is a blueprint that would
ensure a Marshall Plan won't be needed in the future.
At the same
time, many EU governments are unlikely to agree to cuts to traditionally major
areas of EU spending that benefit them, like subsidies for farmers, in order to
pay for the recovery.
"Every
euro that is taken from a national finance ministry or a national tax base to give
to the European level, is a euro that's no longer available to be spent on
domestic recovery plans," said Begg. "And that's where I see a
considerable risk of saying, 'why bother with the European level, because we're
all dealing with our domestic levels.'"
The
European Commission says it will present a revised budget proposal soon. But
there's no sign it will include radical changes to the existing structure.
“There
won’t be a completely new draft that will be changed from A to Z. Rather, there
will be readjustments, especially in the area of investments," Michael
Hager, chief of cabinet for Commission Executive Vice President and economic
policy chief Valdis Dombrovskis, said last week.
New plan
Experts say
that what Europe needs in the age of coronavirus is not the equivalent of the
grants-based Marshall Plan, but rather a blueprint that would ensure a Marshall
Plan won't be needed in the future.
Leaders
today are "using the Marshall Plan really as shorthand for a lot of
government spending," Steil said. "A lot of government spending will
certainly be necessary, but the contours of that spending should be very
different, because the circumstances are entirely different."
"In my
view, the priority should be right now to stop a collapse in output capacity,
both in the United States and Europe. I think it's critical to keep companies
that are basically good and solvent alive ... so when the pandemic is finally
wound down, we can revive production quickly," Steil said.
"We
don't want to be in the position we were after World War II, when these
economies were destroyed and we had to rebuild them. We want to make sure that
these economies are not destroyed, that they are kept alive in the interim, and
in many cases that means lending, not grants," he added.
The EU
budget could play a role in generating some lending, following the model of its
proposed InvestEU program, which brings together public and private investment
by using cash from the budget as guarantees.
"Where
I think there is scope for something a bit more imaginative is in a variation
on the InvestEU," Begg said, adding that "you could see that there is
a way to mobilize the conjunction of further quantitative easing [from the
ECB], a new role for the European Stability Mechanism, the guarantees from the
EU budget, to provide quite a substantial amount of loan finance, as opposed to
grants."
That won't
amount to a new Marshall Plan but that may not stop EU officials using the
phrase.
One senior
diplomat said he does not expect the next long-term budget to be "radical
and revolutionary, but of course somebody can always label it 'Marshall.'"
Hans von
der Burchard contributed reporting.
Decision day
By Sam
Fleming, Mehreen Khan and Jim Brunsden
April 7,
2020
The
eurozone faces a momentous decision about how far it is willing to go to unite
in the economic battle against coronavirus.
Spain’s
prime minister Pedro Sánchez has warned that nothing less than the future of
the European project could be at stake in how that question is answered. EU
economy commissioner Paolo Gentiloni pleaded with member states yesterday to
forget their past fights and rally behind an ambitious plan.
Today’s
meeting of EU finance ministers marks the true test of whether they can. But
disagreement is rife and there is no simple way to paper over the cracks if the
meeting fails.
On the
table is a multipronged package of measures to support Europe’s economies in
lockdown. Those hit hardest by the pandemic, such as Italy and Spain, argue
that the proposals go nowhere near far enough.
Gentiloni,
France and others want ministers to make progress on more ambitious plans to
jointly issue debt, raising common funds for massive economic reconstruction.
Northern member states led by Germany are deeply sceptical. While Italy still
wants more, frugals like the Dutch think it is too much, too soon.
The
eurogroup meeting will be considered a success if ministers can sign off on a
report for EU leaders that backs a cluster of crisis-fighting measures while
leaving the door open to more controversial joint fiscal efforts down the road.
It will be
no easy feat as Mário Centeno, eurogroup president, seeks common ground among
countries deeply divided over a recovery strategy. Here are the key flashpoints
that could lead to a long night ahead:
European
Stability Mechanism
Ministers
want to unlock the lending power of the European Stability Mechanism, the
bloc’s bailout fund, with a credit line of as much as €240bn that’s open to all
countries.
Capitals
have made some progress agreeing to more limited conditions attached to the
cash. The loans will not include Greek-style Troika visits or “pre-legislation”
to qualify for money. But Italy is still unconvinced by the merits of using an
instrument that has become political poison at home over fears (denied by
ministers) that the loans will come with draconian conditions attached.
Rome wants
“light” or no conditions at all. Standing in the way are the Dutch, who want
promises for future economic reforms once the emergency phase is over. For
Italy, the bigger concern is that they will be fobbed off with the ESM and more
ambitious debt mutualisation ideas are brushed aside.
Speaking at
a press conference last night, Italian prime minister Giuseppe Conte said the
ESM was an “absolutely inadequate” response. “ESM no, eurobonds absolutely
yes,” he said.
Commission’s
Sure fund
This will
be the second contentious debate of the night. Last week, the European
Commission put out its contribution to the emergency effort. Brussels wants to
set up a fund — known as “Sure” — that provides loans to countries grappling
with a sudden surge in spending on short-time working schemes. Brussels wants
the power to tap markets to raise around €100bn, with governments pledging
€25bn in guarantees.
Germany’s
finance minister Olaf Scholz has given it his blessing, but the Dutch are
proving harder to win over. The Hague is determined to prevent Sure becoming a
precursor to a permanent EU unemployment scheme that has been mooted and shot
down plenty of times before.
The
Netherlands wants guarantees that the spending will be temporary and the fund
will disappear along with the pandemic. The Dutch parliament has its first
debate on the plans today. The tenor of the discussion will help determine how
much wriggle room finance minister Wopke Hoekstra has to play with later.
Other
corona-fighting tools
The
Luxembourg-based European Investment Bank has already proposed a plan to
mobilise as much as €40bn of financing. But states want to go further and are
discussing a pan-European guarantee fund of €25bn that would leverage support
of up to €200bn for small and medium-sized enterprises facing cash crunches
because of the lockdowns.
Separately,
by scraping the barrel of the EU budget, the European Commission has mustered
around €2.7bn of funding for national healthcare systems. The money could be
used for buying equipment, transporting supplies and constructing field
hospitals.
One
suggestion on the table is to merge this plan with a separate Dutch proposal to
provide billions of euros in grants to countries that are hardest-hit by the
health crisis. This would be achieved by inviting countries to voluntarily top
up what is left in the EU budget.
Post-pandemic
bazooka fund
Here is
where the debate will be most intense and least conclusive. Italy, Spain,
France and their “No Limits Nine” allies want ministers to open the door to
common debt issuance aimed at sparking a strong recovery once the lockdown
phase is over. Bruno Le Maire, French finance minister, thinks his version of
the instrument can unleash around 3 per cent of the bloc’s gross domestic
product — upwards of €350bn.
As
Gentiloni put it in a live-stream Bruegel and the Financial Times yesterday,
this joint response is crucial in helping prevent a two-stream European economy
from emerging after the crisis: a stagnant south dragged down by debt and a
fast-growing north that has the capacity to spend and save.
Italy’s
Conte on Monday said eurobonds “are the solution, a serious, effective,
adequate response to the emergency . . . The truth is that when you are
defending your country you do not need to do sums.”
But for
countries such as Germany, crisis-fighting proposals outlined above (ESM, Sure,
etc) are enough to address the immediate challenge facing the continent. Berlin
and its allies will resist anything that smacks of a step towards debt
mutualisation for the time being. “Some countries want to add debt on to debt
and use guarantees for even more debt,” said one sceptical EU diplomat.
At best,
Centeno will be hoping to get a reference to the post-crisis plans in his
planned report for EU27 leaders. It may be the key to unlocking Italy’s
resistance over the ESM. But the path to a deal is narrowing. As the last weeks
have shown, it may be up to Europe’s leaders, and not their finance minister
deputies, to hammer it out.
With
reporting from Guy Chazan in Berlin and Victor Mallet in Paris
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