(THIS ARTICLE IS MACHINE TRANSLATED by Google from Norwegian)
With the author François Sana
The Covid-19 pandemic and subsequent public health measures have plunged the global economy into the worst crisis since the mid-twentieth century. Europe is no exception, where the European Commission economic analyzes shows a fall of 6,4 percent in EU GDP in 2020.
A healthy economy is not the only thing at stake for the EU in crisis management. The EU is already weakened by Brexit and political forces hostile to the EU's liberal project of political integration. The EU must now show solidarity within and show that the Union can break away from the austerity policies used in previous crises, but without abandoning its most important political goals – such as the "European Green Deal".
A thorough examination of these points shows that despite clear progress, the EU's strategy will not lead to a radical transformation of the European project in the future, but will at best involve a few modifications while reopening important debates on the future of the Union.
A little Hamilton moment
Creating a common debt to finance investment is a federalist method effectively used to cement political integration projects. In 1790, the American Alexander Hamilton predicted that the creation of a federal debt would strengthen the ties between the American states and at the same time increase the authority and legitimacy of the federal power, which would thus become indispensable to the prosperity of all.
But will the agreement adopted by the European Council on 21 July 2020 lead the EU into a federal era characterized by supranationalism and resource sharing? Not necessarily.
The European Council has reached an agreement on the EU's budget framework for the next seven years and on the recovery plan of 750 billion euros. The latter, also called Next Generation EU, consists of 390 billion euros in grants and 360 billion euros in loans. It introduces a novelty in the European architecture: the EU will borrow the amounts required to finance national recovery plans on behalf of the 27 member states, and they will jointly repay these loans. This points towards a future with increased solidarity, as the member states will receive funds based on their own needs and repay the funds according to their financial ability.
We are talking about significant amounts: Bulgaria, for example, will receive almost a quarter of its GDP from the European budget (and the recovery plan) by 2026. Such a new arrangement of transfers of financial resources marks a historic moment.
The joint debt
The joint debt has revived the discussion about the Union's resources. There are broadly three possible ways for repayment of fundingthe arrangement: The member states dig deep into the treasury and increase their contribution to the EU budget; the resources to be made available for joint programs and initiatives are cut; or that new ways of obtaining financial resources are considered. Although the first two options cannot be ruled out, it is the latter that has been at the center following the agreement from July 2020 and the agreement on the use of own resources of the European Parliament and the Council of Europe from November 2020.
Pension reform, labor market reform, reduction of administrative and regulatory "bureaucracy" that inhibits companies' competitiveness, and lower labor taxation
The plans initially include a tax on single-use plastics, a solution for carbon emissions across borders, a digital tax and a tax on aviation and sea transport through a revision of the EU's quota emission system. Other proposals are a tax on financial transactions.
Any possible qualitative leap in political integration will depend on these proposals, whose negotiations can well be said to be ground-breaking given the efforts that have been made and the requirement for unanimity in tax legislation.
The federaliste imprint on the EU's strategy cannot, however, be taken for granted. The debate on the conditions of the rule of law is the most telling evidence that there are still major differences regarding the foundations and goals of the EU, at least within the European Council. [1]
The collective debt is limited in size and time: 750 billion euros must be repaid by 2058 at the latest. The member countries are united by a fixed-term loan, instead of having individual members with "perpetual debt" on which they are happy to pay interest and accept deferrals.
750 billion euros
The collective debt that underlies the European recovery plan is underpinned by a relative solidarityaction: Agreement was reached through long discussions, especially with the more "thrifty" member states (Austria, Denmark, the Netherlands, Sweden and Finland), who were skeptical.
The Council of Europe managed to reach a consensus by giving discounts on contributions to the EU coffers: the Netherlands 2 billion euros (despite having the second largest trade surplus in the EU after Germany), Sweden 1,069 billion euros, Austria received a discount of 565 million euros and Denmark 377 million euros. The key instrument at the heart of the strategy is the Recovery and Resilience Facility (RRF), which will make available €672,5 billion in loans (€360 billion) and grants (€312,5 billion) to support reforms and investment in EU member states.
The European plan for economic growth after the pandemic is believed to be green.
The member states must present RRF plans that give a detailed description of their reform and investment plans, a point we will return to. Here we only mention that of the 750 billion euros that have been borrowed, only 77,5 billion euros are earmarked for the EU budget.
Most of the money on loans is earmarked for national plans, which will have to meet certain EU-wide requirements (see below), but which to a large extent also constitute national priorities. [2]
The alternative could have been to dedicate a larger share of the 750 billion to financing European programs and projects. However, the opposite has happened: In order to seal the RRF agreement and the EU budget, major cuts had to be made in the European Commission's proposal for joint EU program allocation, for example the programs that finance research or support workers affected by restructuring.
The reduced amounts allocated to the current EU budget compared to previous periods (excluding transfers to the UK) also confirm that a sharing of financial resources may not be as popular in Europe as the plan suggests.
Depending on the reform decision
EU economic recovery plan also has a touch of Keynes, as its aim is to get out of the crisis through investment and debt rather than cuts in public spending, pressure on wages and increased labor market flexibility – a big change from the methods used to get out of the 2008-2009 financial crisis. This change in direction has been largely illustrated by the activation of the Stability and Growth Pact's general "escape clause", which allows member states to break with austerity-led, cyclical budget rules, which were previously implemented in a draconian manner. [3]
The European Central Bank has also played a decisive role through its Pandemic Emergency Purchase Program (PEPP), which helps to maintain the banks' credit capacity and keeps interest rates at very low levels.
To cushion the impact of the crisis on the labor market, the SURE (Support to Reduce Unemployment Risks in an Emergency) mechanism lends €100 billion to furlough schemes, which have also been raised on EU capital markets. These measures reflect a desire to facilitate public spending and prevent the paralysis of key economic players while protecting workers from excessive loss of income – a stark contrast to the Troika.
But the European recovery plan is written on something more like a palimpsest than a blank sheet of paper. Its Keynesian-inspired measures are grafted onto a macroeconomic management framework whose foundations remain largely unchanged. The various drafts of the European strategy emphasize the need to make the member states' recovery plans dependent on reform decisions.
Eligibility criteria that exclude technologies with a significant environmental impact.
The guidance document for the member states gives several indications regarding a possible interpretation of the generic term "reform": pension reform, labor market reform, reduction of administrative and regulatory "bureaucracy" that inhibits the company's competitiveness, and lower labor taxation.
While some of the proposed reforms appear to be "functional", others are "political", suggesting that austerity has not completely disappeared. The dominant macroeconomic frame of reference is still largely based on the goals of reducing public expenditure and increasing the flexibility of the labor market.
RRF provisions also enable the implementation of measures linking the recovery plans to "sound economic governance" (Article 9) which allows the Council of Europe, on the proposal of the European Commission, to suspend its support programmes. Controls will also be implemented to ensure that the sums made available to the individual member states do not result in excessive expenditure or fraud.
Spania
The provisions also require national plans to be in line with the recommendations and reform plans developed as part of the European Semester, one of the key instruments of EU macroeconomic management. The requirement for compliance with these country-specific recommendations, combined with the impact on growth and job creation, are some of the most important criteria the European Commission has for assessing the plans. Spania is an example of this.
As one of the hardest hit EU states, with a fall of almost 11 percent in GDP in 2020, Spain is marked as one of the plan's main beneficiaries with around 140 billion euros. The Spanish plan includes many projects, most of which fall within the digital and renewable energy sphere.
Two reforms are still being discussed: labor marketa and pensionis. Both involve repealing legislation introduced by Spain's conservative government in 2012, which would reduce the labor market divide and tackle the lack of predictability that characterizes a significant proportion of the population. Despite being key components of the centre-left government's programme, these reforms are currently on hold, much to the chagrin of unions and to the delight of employer organisations, which is primarily concerned with the public economy. [The proposed Spanish labor reform was adopted in February 2022. red note.]
The recommendations for Spain in the EU's 2020 semester do not specifically mention these two reforms: although it would be wrong to reduce the European semester to a managed dictate, especially considering its ability to identify social imbalances, the case of Spain clearly shows how a breach on austerity cannot be taken for granted. The content of the various reform plans will be decisive, and it is essential that a balance of power enables progressive social and political forces that prevent the austerity policy from sneaking in through the reform's back door.
The macroeconomic matrix of "what's next" is at stake. Many questions remain unresolved, including the difficult question of whether the state's economy was burdened long-term by a colossal debt and its consequences: the future of the European Stability and Growth Pact, and the mandate of the European Central Bank. The strategy has not yet resulted in any alternative economic paradigm. The basis for the EU's framework for macroeconomic management is still in place, even if its application has changed temporarily.
Technological green acceleration
The European plan for economic growth after the pandemic is believed to be green. It should gain momentum on the European one Green Deal, which sets big goals, especially when it comes to reducing emissions of greenhouse gases by 55 percent by 2030 in order to reach climate neutrality by 2050. 30 percent of available funds (from the European budget and the RRF), including 37 percent of the RRF, have been set aside to combat climate change. Provided they are used correctly, these funds can be an economic "turbo engine" for the European Green Deal. But it will not be enough to meet the emission reduction targets in 2030, which, according to the European Commission, require an additional 438 billion euros annually.
RRF-funded projects must not cause significant environmental damage. The quantified expenditure targets and assessment procedures that are in place must ensure consistency between the European recovery plan and the EU's climate and environmental targets. There are grounds for dampening the enthusiasm some have shown.
First, there are questions about whether the procedures for analyzing all the projects financed by the recovery plan are good enough, including the projects financed by the RRF alone. The amounts to be used are so large, and this must take place over such a relatively short period that some observers fear significant problems with the absorption capacity of many countries already struggling to use their allocated "standard funds". In this context, a systematic and thorough assessment of the climate and environmental impact of the funded projects can present certain practical challenges.
Another risk – especially for larger member states that have adopted their own national plan independently of European funds – is the temptation to use European funds for green projects that would have been initiated anyway, and keep less ethical projects in the gray zone of national funding. This challenges the "additionality principle" that governs the allocation of European funds that can be used to replace existing national funding. Double accounting is another risk, especially for co-financed projects.
Although the assessment procedures set out eligibility criteria that exclude technologies with a significant environmental impact, they still leave some wiggle room: the use of fossil fuels to produce electricity is indeed considered incompatible with the principle of not causing significant damage to the environment, nevertheless it is made some exceptions, especially for coal-dependent regions.
The member states' national plans have not yet been examined in detail. While many of the published national plans emphasize activities such as energy-efficient renovation of buildings, use of renewable energy sources, electric transport and development of the clean hydrogen sector, they also contain several projects with unclear – or clearly negative – consequences.
So far, the limitation of electrification as a decarbonisation strategy has not been properly grasped. Certain problems are still unresolved: that European power production is significantly carbon-based [5], and that an unexpected increase in demand for electricity can lead to extended operation or even the establishment of polluting production facilities.
It is therefore crucial for the European Green Deal to create the conditions for economic growth that is compatible with climate measures that accelerate decarbonisation and slow down energy consumption. If not, we will chase an illusion of green growth that is unattainable in the long term.
digitization
The plan's green legitimacy must also be seen in relation to other goals, such as digitization of the economy. Around 20 per cent of the RRF funds are to be used for digitalisation, without any questions being raised about synergies and possible contradictions between this target and the environmental targets.
Europe as a political project.
The terms "digital" and "digitalization" do not even appear in the commission document that states how the environmental impact of projects must be assessed. However, this is a crucial question. IN a recent report the French climate council pointed to the 5G rollout's effect on imported emissions and increased electricity consumption. Uncontrolled digitization can put climate neutrality goals out of reach and at the same time create other environmental problems: waste that is difficult to recycle, and an excessive consumption of materials.
The European plan is not just an instrument designed to solve an economic crisis. It also paints a picture of Europe as a political project. Despite the scale of the resources the plan encompasses, it does not constitute a break with the past in terms of the nature of the European political project. The plan makes the member states indebted for the repayment of a common loan, but does not herald a new federal era for Europe.
The plan puts a temporary damper on the neoliberal lines of the macroeconomic management framework and accelerates certain technological changes that are requested to reduce greenhouse gas emissions. But it does not lay the foundation for an economic model that is radically redefined with social and ecological sustainability at the centre. Significant breaks with the past remain difficult.
[1] See Nicolas de Sadeleer, Leave condition 1Rule of Law', un coup d'État institutional au niveau européen?, L'Écho, 30.12.2020/XNUMX/XNUMX.
[2] However, this does not exclude potential funding of joint projects selected through the national plans.
[3] The European Commission recently proposed continued activation of the safeguard clause of the Stability and Growth Pact until 2022; see 'Commission Presents Updated Approach to Fiscal Policy Response to Coronavirus Pandemic', European Commission, 3.3.2021, https://cutt.ly/0zn7zhH.
[4] The accelerated roll-out of renewable energy may, for example, require regulatory adjustments to the operation of the transport and electricity distribution networks.
[5] According to Eurostat, fossil fuels accounted for 40 percent of the electricity produced by the EU 27 in 2018. See EU Energy in Figures 2020, Statistical Pocketbook 2020, p. 94.
