Germany, France and Italy signaled this week for the long-overdue implementation of the European Union’s plans to fix the coronavirus-hit European economy by announcing how they intend to spend their share of 750 billion euros in grants and loans. a year ago by EU leaders.
The European Commission – the EU’s executive body – will now review proposals to check whether they meet the criteria set last year as part of a package known as “NextGenerationEU”. Money must be spent on public investment, with a significant part devoted to green and digital priorities and education.
French and German finance ministers this week made points to present their two national plans together, after Prime Minister Mario Draghi did. served on Monday to the Italian Parliament, a package worth € 248 billion ($ 299.3 billion, or 15% of the country’s 2020 GDP), financed partly by EU funds, to improve the country’s economy.
The launch of the fiscal push that the EU has long anticipated raises three questions: What’s the point? Why late? And is that enough?
1. What’s the point?
European governments’ first reaction to the impact of last year’s Covid-19 pandemic was to deal with short-term emergencies – protecting jobs and businesses – with traditional fiscal tools as well as new emergency spending to cushion a recession. The combination of new spending and lost income (in the form of, for example, tax cuts) amounts to about 7% of gross domestic product in countries like France and Italy, or 11% in Germany. But that compares to 16% of GDP in the US, according to compiled numbers by the International Monetary Fund.
As many countries such as Italy and France are constrained by sizable levels of public debt, and in a bid to defuse the unequal impact of the pandemic on their respective economies, the EU seized the moment for the first time launching a co-funded stimulus plan, focused on public investment. long-term and economic reforms, to promote growth.
2. Why is it late?
The plan was agreed to in principle in July 2020, but was adopted by EU leaders in the fall, and only approved by the European Parliament in February. It still hasn’t cashed out its first penny. The reason, in short: the EU deliberative decision process, which requires all 27 national parliaments to ratify the agreement. Meanwhile, the government has to wait until the commission approves their spending plan, which can take up to three months.
It took US President Joe Biden 48 days after his inauguration to approve a $ 1.9 trillion stimulus package by Congress. It took nearly a year for the EU to start spending money on its own plans. But the comparisons are not entirely adequate: There is no urgency to start spending money on long-term projects than when faced with pressing economic losses. However, Biden’s stimulus package has added 9% of GDP to last year’s fiscal boost. The EU is far from that number, which explains why the IMF has recently suggested that it needs a fiscal “boost injection”.
3. Is the EU plan sufficient?
When all the € 750 billion, roughly divided between grants and loans, is spent, the EU plan will amount to less than 6% of EU GDP. In comparison, if Biden is new infrastructure plan, launched two weeks ago, passed as is (great considering the reaction in Congress), it would amount to 9.6% of the country’s GDP – even as the US recession hits much lighter than in Europe last year, and this year’s recovery will be stronger.
But Europeans could argue that, despite its lengthy bureaucratic processes, the EU in the end succeeded for the first time deciding on a serious fiscal plan to be financed by co-borrowing, and which to use for the country that needed it the most. The so-called risk mutualization is a first in history. Italy and Spain, for example, will each receive nearly € 70 billion in grants from the facility, compared to € 40 billion for France. And Germany (€ 26 billion) will barely earn more than Poland (€ 24 billion), whose economy is six times smaller.
What remains to be seen is whether the EU will treat this joint redistribution effort as a one-time event or a precedent that could bring it closer to the embryo of fiscal unification.
Write to Pierre Briançon at [email protected]