Europe’s finest hour or its swansong?

As Jacques Delors recently said, the European project faces a mortal danger. Pascal Lamy called it Europe’s “épreuve de vérité”. At this watershed time, when trustworthy cognoscenti anticipate a 30s-style depression, one would be well advised to look back at history, for, as George Santayana wrote, “Those who do not remember the past are doomed to repeat it.”

Franklin D. Roosevelt addressed the depression with the New Deal, helping extract America from massive unemployment. He thus avoided Europe’s anti-democratic backlash, which gave rise to Communism and Fascism and fed Hitler’s ascent to power. After that war, enlightened leaders such as Adenauer, De Gasperi, De Gaulle, Monnet and Truman faced this new reality with solidarity, feeding Western Europe’s recovery through massive financial means and new institutions. We must learn from their example, for a depression in Europe could very well decimate the middle class and thus destroy the Single Market, eventually undermining democracy and the European Union itself.

The world faces three crises: the temporary coronavirus health crisis, the conjunctural socio-economic crisis as economies have shut down, and finally – a crisis with deeper roots – a crisis of globalisation and economic transformation. The latter has been feeding climate change and income inequality and is rapidly leading to massive unemployment. As President Macron said, the coronavirus “will change the nature of globalisation, with which we have lived for the past 40 years.” He added, “it is clear that this kind of globalisation is reaching the end of its cycle.”

With Phil Hogan, the Commissioner for Trade, saying  “we need to think about how to ensure the EU’s strategic autonomy,” some have called the shift away from unfettered free markets and the reorientation of supply chains “slowbalisation”. EU leaders need to collectively understand that a depression caused by the fallout from coronavirus would take place concurrently with “the third great economic transformation”, a process whereby new forms of technology, and big advances in robotics, artificial intelligence and digital technology may lead to more colossal job displacements than ever before in history, particularly in services.

Failure of the EU and its members to collectively address and manage all three crises would sound the death knell of the Sozialmarktwirtschaft – the (German) socio-economic-liberal model – and involve a serious loss of sovereignty for all European states. The EU would enter a deadly political crisis, with the collapse of the Euro and of the Single Market, inhibiting its capacity to defend its interests in world affairs. The popular disillusionment that has fuelled anti-EU sentiment and anti-elite backlash would only bolster protest parties (which offer no solutions). Quite naturally, this leads to a process where national governments are tempted to divert internal criticism by blaming the EU.

As recently as 2018, in his State of the Union address “The Hour of European Sovereignty”, Juncker said that the Commission could not accept “the blame for every failure” and that “We cannot allow ourselves to become unwitting accomplices of our inability to cooperate”. Much depends of course on what the Commission proposes and what the Union accepts. But as the competences of the Union grow, the financial means necessary to exert them must follow. Which means that when the Commission proposes, say, a Green New Deal (GND) without identifying or obtaining the means necessary to reach its ambitious targets, it indirectly becomes an accomplice of the inability to cooperate.

If the Commission does not want to be ‘blamed’ for its failure to act, it needs to be bold like the Delors Commission, which helped revitalise European momentum after years of eurosclerosis. The new College must prove that this crisis can become its finest hour, with forward-looking proposals, reaching beyond the crisis, even if they risk rejection (as Delors’ proposal of a CO2 tax was). Its initiative must be both ambitious enough to respond to the unique challenges of the day, but also retain impartiality to build compromise. It must avoid any suspicion that it primarily caters to the will of the larger countries.

President Juncker once said that everyone knows what needs to be done, but not how to sell it to the people. Government leaders must be willing to advocate for decisions they know to be necessary, regardless of electoral risk, but it is often so much easier for governments to complain about the EU’s incapacity to do ‘the right thing’. Democracies require transparency, and politicians should be forthright about the challenges we face. Our citizens must be warned that the pandemic might cut between five and fifteen per cent of eurozone economic output, that it might take three to five years to recover from the economic crisis that follows, and that to overcome structural changes to the economy and tackle climate change will require enormous investments and a willingness to prioritise the collective good.

How have European institutions fared in dealing with these challenges in the midst of the coronavirus pandemic? So far, the European Central Bank (ECB) has come up with an impressive €750bn state bond-buying programme (the German Constitutional Court has just questioned a similar programme, in 2015, which the ECJ had, however, end 2018 judged to be in accordance with the Treaty), will make €200bn in extra credit available, and agreement has been reached on a €540bn package of financial support through the European Stability Mechanism (ESM), on a €100 billion ‘SURE’ plan to support temporary unemployment and on the principle of a “temporary recovery fund of undefined size, commensurate with the extraordinary costs of the crisis” (to be tabled by May 6). Hopefully, the latter will not fall victim of the necessary overhaul of the 2021-2027 Multiannual Financial Framework. The past failure of both the EU and its member states to use fiscal policy to become investors in the future, has transformed the ECB into a lender of last resort. Burdening it further for want of fiscal measures would be no strategy, for monetary easing can only give time to fiscal policy to play its part, it cannot replace it.

To jumpstart the recovery, as Internal Market Commissioner Thierry Breton said, we first “need to save all companies, so a radical paradigm shift in our approach will be necessary”. One will notably need an aggiornamento with an anti-trust policy adapted to the digital age, a new state aid policy in conformity with the Green New Deal, and an industrial policy. The latter should respect private sector priorities, but help defend strategic companies from foreign takeovers and favour the creation of European champions to compete with those of other key WTO members. Of course, the recovery will depend on a suitable EU financial framework and on a real European financial market. Breton’s ‘paradigm shift’ comments referred to the recovery from the current crisis, but the need extends to the EU’s overall policy challenges.

Having worked previously with the EU budget and eco-fin affairs, my primary focus here will be on the financing of the EU budget and the creation of a European financial sector to serve the real economy beyond the coronavirus crisis. The Commission may propose doubling a reshuffled 2021-2027 Multiannual Financial Framework (MFF) to 2% of (an at-first diminishing) GNI with a mixture of grants, credits and lending capacity (a definition Financial Times commentator Wolfgang Münchau called “illiterate”). This would as yet largely consist in GDP-based national contributions and compare very poorly with the public budgets of the member states (roughly half of GNI). As Macron said, the EU risks offering “fake” solutions that amount to little more than “window dressing”. Despite the other financial means identified so far, the overall support would still fall short of the needs to meet the immense three aforementioned challenges of our time.

It has now become imperative to apply the Lisbon Treaty’s provision regarding the EU’s own resources. Relying more and more on national contributions is in stark contradiction with treaty objectives and traps member states into mistaking policy measures in the common interest with national budget payments to the EU budget. Focus on net contributions has little to do with the net benefits from EU membership. If member states continue to fret about budgets and overlook financial prerequisites for common actions, their common challenges cannot be met. EU solidarity cannot count primarily on revenues with direct impact on national budget costs. Without adequate resources, there is no way to deal with the coronavirus health and economic shocks, let alone address the long term social and political fractures of Europe. Actions like the €100bn for temporary unemployment are but a band-aid compared to a European unemployment insurance scheme, and/or a minimum income system.

Here is a list of what needs to be done to meet the triple challenge: review the Maastricht criteria to deal with the contradiction between austerity policy, economic growth and social cohesion; complete the banking union with a common deposit insurance (net of investment banking); enhance surveillance of national budgets; ensure that both deficit and surplus countries make the necessary policy adjustments to keep intra-EU current-account imbalances within reasonable bounds; create a true European financial market with the introduction of mutualised Eurobonds; transform the euro into a true reserve currency and a Euro international payment system competing with the USD (pre-empting American extra-territorial sanctions); and develop tax coordination (of which later). President Macron, currently the savviest of EU leaders has made a pitch to reinforce the European Monetary Union (EMU) with a Minister of Finance, a European Monetary Fund and a common budget for the Eurozone which would include the ESM (at present managed by the members states) for macro-economic stabilisation, social convergence and structural reform.

This list may sound shocking to more than one, but each item is in the common interest and only common sense. For instance, a common deposit insurance would satisfy both the northern countries, who want to reduce financial risk, and the southern countries who seek to share it; it would also avoid a bank run in a financial crisis, and would discipline the exposure of banks to state bonds (the sovereignty risk run by the Landesbanken and the Italian banks); it would also grant all European savers equal treatment and the freedom to choose their bank. Similarly, mutualised Eurobonds guaranteed by the European budget would increase bank security, create a true European financial market (which cannot work without risk-free securities) and help obtain a trillion euros from the market at triple AAA rates without extra cost to the Members States, limiting the (inevitable) increase in national indebtedness.

We know of course about the fears of the surplus (‘stingy’) countries having to pay for the debts of the deficit (‘profligate’) countries, and about occasional complaints that the Commission favours the former or the latter. The moral hazard aspect of additional financing of the most indebted countries can be dealt with, notably by excluding guarantees for pre-coronavirus indebtedness and through appropriate surveillance. It is of the essence to provide non-repayable grants to deal with the depression as well as soft loans (Eurobonds – even without the initial participation of Germany) to help finance the recovery.

Without soft money, the most affected and indebted member states would be more reluctant to resubmit their national budgets to EU scrutiny, and their debts would tend to grow more and be less likely to be repaid (as seen with the IMF, in the case of Greece). On top of everything, the Treaty stipulates that each member state must act with common concern in order to avoid that any action involve risks for the Eurozone as a whole (this holds incidentally for both deficit and surplus countries). In this connection, the strengthening of the EMU would not only help balance member state economies, but also boost a sustainable growth of the EU economy as a whole.

Since Thatcher’s “give me my money back” ultimatum, common EU policies and operations are discussed by officials with a calculator in order to assess the net benefit/cost of the relevant countries. The assessment of a country’s benefit from the EU is simply calculated as a difference between EU budget payments and national contributions to that budget. This doesn’t account for the enormous advantages the member states derive from a common anti-trust policy, a common commercial policy, common standards (which have practically become world standards for any trading partner), a common currency (which has stopped competitive devaluations within the single market), close cooperation on energy, climate and other policies.

This does not mean that costs and benefits are equally shared. For instance, a common currency has allowed the Germans to be more competitive than if they had kept the DM (whose exchange value would have been much higher) as compared to the southern members, whose currencies would have been weaker than the Euro. The structural funds are supposed to take care of income and structural differentials between and within countries. But solidarity cannot rely only on subsidies. It needs also taxes for income distribution and funding.

The current economic crisis and the looming ‘third great economic transformation’ can no more be addressed without abolishing the unanimity rule as regards European borrowing and European taxation systems. As both require Treaty change, if no agreement can be reached among all Member States, the Treaty offers the opportunity of ‘permanent structured cooperation’ among a minimum number of member states with an open door to all others to join. Pascal Lamy has, for instance, proposed that Eurobonds be created even without German or Dutch participation. Any EU tax could also be created by a minimum number of member states provided they act with common concern and without risks for the Eurozone.

In the past, the European Commission has proposed a common consolidated corporate tax more than once, because it would reduce fiscal inter-state competition and a share of its revenues could finance EU ‘own resources’. Instead, the idea of taxing the big five American tech companies – Facebook, Amazon, Netflix, and Alphabet (FAANG) – sales is new, but unanimity should be achievable, as all EU members already supported it within the OECD (blocked by US). A financial transactions tax (FTT) would seem to be acceptable at least to 11 members of the Euro Group and could therefore be introduced under “enhanced cooperation. As we know, the Commission has proposed an EU plastic tax, but even more necessary for sustainable consumer behaviour would be a CO2 tax (possibly through the ETS), as it looks essential to meet the ambitious zero-carbon target by 2050 and thus comply with SDGs and COP21 objectives that will otherwise be out of reach. Small shares of one or more of these taxes could be transferred to the EU budget so as to eventually eliminate all national contributions.

Clearly, such taxes could be designed to be fiscally neutral and/or redistributive. For instance, as Delors proposed, low incomes could be exempted from the CO2 tax, whose revenues could recoup labour tax reductions to stimulate employment; FTT and FAANG taxes could help reverse the serious deterioration in income inequality by taxing the rich. The FTT hits high-frequency traders, short-term speculators and shadow banking, whereas the FAANG tax hits tax-avoiding monopolist companies. Even before any of these became a true EU tax, there would be no Treaty impediment for any member state to replace its national contributions to the EU budget with a share of the revenues from one or the other of the above potential taxes. Eventually, the MFFs would be fully funded by tax-based own resources. Citizens would understand how much the EU costs them (less than most imagine), and get more interested in its functions. Not to worry, the EU budget would remain an expenditure budget; the final word on its overall size would still remain with the Council (as a sort of second chamber).

In order to break the EU ‘magic spell’ against taxation President Ursula von der Leyen should say, “read my lips: the coronavirus economic crisis, the structural ‘third great economic transformation’, the European Green New Deal. and the security needs of our citizens, demand that EU responsibilities and cooperation be upgraded and expanded. We must optimise budgetary and fiscal policy, boost governmental efficiency and enhance our sovereignty in a globalised world. It is my duty to say publicly that all this cannot be done without proper ‘own resources’ for the EU budget, without the creation of Eurobonds to promote domestic investment and without the establishment of an effective and more unified European financial market. Failing which, each member state will be left to fend for itself and carry the costs.”

If the Commission President and Budget Commissioner Johannes Hahn cannot depart from their countries’ financial ideology, the European Parliament, which threatened its veto to the last MFF unless it relied in full on EU “own resources” as stipulated in the Lisbon Treaty, must actually veto the next MFF.

The coronavirus crisis and the immediate actions that have been taken in response should not blind us to the looming structural problems mentioned above. As European citizens sense that their leaders are more involved in inter-party and cross-country disputes than in preparing for the future, populist leaders seize the opportunity to harp on public worries regarding basic human needs like employment or security and to turn the people against national governments and the EU.

As the number of issues of the greatest interest to European people can only be dealt with together, European and national leaders must stop kicking the can down the road, leaving the hot potato to their successors. The biggest impediment to action is economic and political ideology. Obama’s Treasury Secretary Tim Geithner said, “Mistrust those with deep convictions, and do not expect them to behave rationally”. This opens the way to the populists, who rationally understand popular frustrations for lack of discerning government directions. “The whole problem with the world”, Bertrand Russell wrote, “is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.”

This time, no help can be expected from outside the EU. Trump is no Truman, and America is not the bulwark of democracy it once was. Faced with the biggest and presumably longest socio-economic crisis in EU’s history, only leaders showing a common resolve and acting with novel ideas and appropriate means can boost popular trust in European integration as an instrument of citizens protection and progression. Whether this is Europe’s finest hour or its swansong depends on that. Never waste a great crisis!