When the European Union presents its plan to rebuild its economy after the coronavirus, it’s likely to include three kinds of funding: taxpayers’ money, borrowed money and theoretical money. Officials in Brussels have a tendency to pad out their flashy headline figures with the theoretical stuff. But investors trying to gauge the strength of the policy response would be advised to peer a little closer.
The last EU Commission’s flagship initiative aimed to spur 315 billion euros ($340 billion) of investment with 5 billion euros of public money from the European Investment Bank and a 16 billion-euro guarantee from the EU budget. The commission boasted that it beat that initial target by almost 50%. But its auditors weren’t convinced.
Now Commission President Ursula von der Leyen is trying to pull off the same trick with the virus recovery funds and that’s raising heckles among those who need to see real money.
On a videoconference with EU leaders last week, French President Emmanuel Macron railed against “fake” EU budget proposals, according to two officials familiar with the conversation.
The problem for von der Leyen and her team is that despite all the talk of European money, the EU’s budget is a paltry 1% of gross national income. And most of that is allocated to agricultural aid and subsidies to poorer members. The real fiscal muscle in Europe is still controlled by a handful of national governments — and the Germans above all. So when the commission wants to make a financial impact, it is used to getting creative.
This time around though — with the economy set to collapse by as much as 15% and public finances in some members stretched to the breaking point — papering over the cracks may not be good enough.
“The commission should not fall again into the financial-wizardry trap just to avoid having to ask member states for the necessary additional funding,” said Lucas Guttenberg, deputy director of the Jacques Delors Centre in Berlin. “If member states are not willing to either put in substantially higher contributions or to let the EU borrow massive amounts in the markets, all the financial alchemy in the world will not suffice to ensure a full recovery.”