Germany: on board for a United States of Europe?

Covid 19 has brought hardship and suffering to many. But, at the risk of sounding cliched; it’s an ill wind that blows no man any good. If a recent discussion with German Finance Minister, Olaf Scholz, is anything to go by, there are strong signs that the pandemic will prove a catalyst to the kinds of fundamental changes in the EU project that were previously unthinkable. Not only has corona provided strong impetus for further EU integration, it has apparently provided the excuse Germany was looking for to truly embrace the European project. With the issuance of mutualized debt, Germany has finally put its money where its mouth is, showing Europe and the rest of the world, it’s in it for the long haul. Now, the man touted to take over from Angela Merkel, is making it clear that fiscal union is his goal.

Olaf Scholz spoke last week at the Bruegel Institute’s Annual Meeting. As Vice-Chancellor under Merkel and the Social Democrats’ candidate for Chancellor, Scholz has been described as ‘the head fireman in the coronavirus inferno’. In Germany his approval ratings are high and have been that way for months. If, as Scholz claims, ‘Europe has shown a strong response to the crisis’,  Germany has played a key part in that response. However he admits that Europe’s initial response was not so convincing. He cites the relative speed and strength with which countries like Italy and Spain were hit by the virus, as reasons for this and acknowledges what he terms, ‘some nationalistic reflexes’ to the pandemic when borders were closed. Perhaps more significantly, Scholz points out that the pandemic raised questions about the ability of open, liberal, democratic societies to deal with a crisis such as this one.  

‘Solidarity is the cornerstone of the EU’ – Scholz

But Scholz states firmly, more than once, ‘Solidarity is the cornerstone of the EU.’ In order for recovery to be truly successful, ‘we must recover together and use it to reform our economy.’ The German Finance Minister, sees investment as key to recovery but insists that it be the right kind, namely ecological and digital. He also sees Germany’s current Council presidency as an opportunity to drive the Recovery Fund and the EU’s Next Generation programme forward. The mutualized debt that anchors the EU’s recovery programme, elevates Europe’s financial policy to ‘a whole new level’ Scholz insists and ‘moves us closer to fiscal union’. Fiscal union is something that fell on deaf ears during the financial crisis of 2007/8. For members of the Frugal Four (Netherlands, Denmark, Austria and Sweden) it is still a cause for concern.

But Herr Scholz is unwavering in his commitment to this newly accepted goal. ‘Achieving fiscal union will complete the economic and monetary union, and in this way we can ensure the financial independence of the world’s largest trading block, putting us at a similar level to the US.’ To this end, Scholz envisages the need for a minimum corporate and digital tax.  After the Euro, the issue of taxation is one of the last bulwarks of national sovereignty. Previous German finance ministers would no doubt have shuddered at the idea of tackling it at EU level. But this one is calmly resolute as he explains that current debates within the OECD on minimum taxation should be concluded by year end. He is hopeful that agreement at an international level will help provide the necessary impetus for agreement at EU level. A similar process is expected with digital taxes.

‘The recovery fund is a remarkable instrument that is pushing European integration in a whole new way’ – Scholz

Corona has provided not just a strong impetus for further European integration, it also comes with a sell-by date. Although Scholz agrees on the importance of maintaining the no bail-out clause, he is equally firm on the need for speed when it comes to releasing the recovery funds by the beginning of next year. He acknowledges that the debates that will take place in order to reach agreement on this, will not be easy. Specifically, those regarding the role of the European Parliament, with which discussions have just started.

The somewhat uninspiring pragmatism of which Scholz has previously been accused, now appears to be standing him in good stead. He points out that with the acceptance of mutualized debt, further EU integration has gained a momentum of its own. Describing the recovery fund as ‘a remarkable instrument that is pushing European integration in a whole new way’, Scholz appears almost sanguine at times. The inevitability of the structural changes set  in motion, will make his task significantly easier.

There is nothing like shared debts to bring people and nations together. Europe’s shared responsibility for the debt generated by corona recovery, is providing impetus for important projects that have hitherto lacked the necessary political will for completion. The Capital Markets Union (CMU) and the Banking Union are vital to a vibrant yet stable, European economy. The finance minister agrees that a willingness to reform is key to real progress on the CMU project. It’s completion is essential for the growth that is needed to refinance debt and ensure future  prosperity. To this end, he is working hard on a variety of blueprints for successful integration of Europe’s capital markets. When asked about the issue of governance and supervisory powers at national or European level, he is expansive – ‘let’s do both!’

‘For me, a strong united Europe is Germany’s primary national interest’ – Scholz

For Olaf Scholz then, this is a decisive moment both for Germany and for Europe. ‘For me, a strong united Europe is Germany’s primary national interest’. Looking ahead to 2050 and beyond, Scholz sees a strong, more fully integrated Europe as the only way to ensuring its sovereignty. He is also unconvinced by narratives of a bi-polar future in which China and the US dominate. He points to the rising fortunes of a number of Asian countries including India and mentions countries like Nigeria and Brazil too. A far more fragmented global landscape is Scholz’s vision for the future. In such a landscape, a unified Europe will stand strong and enjoy continued prosperity. Let’s hope he’s right.    

EU budget

Will this EU budget finally bury North/South divides?

Europe’s post-corona recovery budget will include mutualized debt for the first time ever. That’s if Merkel and Macron get their way and remaining Member States agree to an ambitious new budget plan proposed by the EU Commission. The Next Generation financing tool will involve borrowing €750 billion on the financial markets, repaid over a 30 year period. Described by Director General of DG Budget, Gert Jan Koopman, as effectively ‘self-financing’, the Netherlands and Austria are nevertheless expected to oppose it. Such divisions continue to plague the EU project. Changing entrenched national narratives is no easy task and one which national politicians often ignore.  

The corona virus has hit all economies with unprecedented force. Optimistic estimates put contraction levels at approximately 7.5% to 8% for the eurozone economy in wake of the pandemic. Although the virus knows no borders, countries in Europe have been affected differently both in death rates and economic impact. Italy and Spain have been particularly badly hit, on both counts. These countries rely strongly on tourism which is one of the worst hit industries and both have less resilient economies than their northern counter-parts.

The management of the corona response, took place at national level and the asymmetric damage caused by the virus has reinforced notions of national responsibility. For those countries less affected, the temptation to view the problem from a national perspective is strong. Here in the Netherlands, solidarity with fellow Member States following the death of thousands across Europe, has been tempered by the belief that each country should use their own economic resources to counter the effects before looking to the EU for financial support. The simplistic attraction of the ‘keep your own house in order’ narrative, does not, unfortunately, take into account the complex relations inherent in a shared currency.

Germany and the Netherlands: once the ‘sick men of Europe’ – William Drozdiak.

The Euro has brought large increases in prosperity across Europe. It has powered economic growth in countries like the Netherlands and Germany who depend on large, stable European markets to sell their goods and services. Former editor and foreign correspondent for the Washington Post, William Drozdiak, recently recalled how different these countries were twenty years ago. When posted in Berlin as a foreign correspondent, he remembers how Germany and the Netherlands were described at the time as ‘the sick men of Europe’ with sluggish economies and bloated social services. The introduction of the Euro helped bring a surge in exports which turned them into the economic powerhouses they are today. Such things are conveniently forgotten, particularly, by national politicians who are quick to take credit for economic growth and low unemployment.

One cannot think of Europe simply as a market place, says French President, Emmanuel Macron. Yet for those who have enjoyed increasing economic prosperity as a result of the common market, it is perhaps difficult not to see it in this way. Markets are not entirely self-sustaining. History shows us that without a certain amount of intervention market forces can prove extreme with harsh consequences for society at large. In times of crisis, the eurozone market needs intervention on a pan-European level. For this, EU institutions like the European Central Bank, the European Commission and the European Investment Bank are well placed to take action. The problem comes when national governments view the EU market place as an external facility. One which they can make use of as and when it suits them but for which they have no fundamental responsibility.

‘The nation state along has no future.’ – Angela Merkel

Such notions are entrenched in the EU’s founding treaties in the form of the subsidiary principle. This essentially states that the EU will not take action unless it is more effective than action taken at national or regional level. This principle can thus work both ways but has frequently been used by Member States to question and limit EU powers. German Chancellor, Angela Merkel’s recent decision to side with Macron in the issuing of mutualised debt significantly empowers the EU as governing body. Her comment that ‘The nation state alone has no future’ is both insightful and deeply significant for the EU’s most powerful nation state.   

With the backing of both France and Germany, the EU Commission has come up with a greatly revised long term budget within the space of only a couple of months. Most significant is the Next Generation EU instrument which Director General of DG Budget, Mr Gert Jan Koopman, describes as ‘very ambitious and very novel’ but ‘absolutely necessary to preserve the internal market’. The plan is to borrow €750 billion on the capital markets. This will be done in the name of the EU for the first time ever. Although it would be a temporary tool, designed to help offset the effects of the corona induced economic crisis,  it clearly sets a precedent for similar actions in the future. Market response to the long-awaited  emergence of a more heavy-weight Euro was immediate and strongly positive.

‘Exceptional circumstances require exceptional measures.’ – Christine Lagarde

But there are those, particularly the Netherlands and Austria, who remained unconvinced. The fear of mutualized European debt has long proved a bulwark of national politics in many Northern European countries. Germany too was long opposed to taking on the debt burdens associated with the free-wheeling spending habits of their Southern counterparts. However, the pandemic is truly exceptional. As Christine Lagarde recently pointed out, ‘Exceptional circumstances, require exceptional measures’.  The EU enjoys a AAA credit rating, meaning low borrowing costs in a climate where interest rates are already very low. Member states will be required to increase donations from 1.29% of GNI to 1.4%. A further 0.6% will be required to guarantee the borrowing costs which will be repaid over a period of 30 years. This means that there is no need for separate guarantees from individual Member States.

Gert Jan Koopman describes the proposal as ‘a positive sum game, not a zero sum game’ as it is largely self-financing. He explains that because the package sits within the next EU budget, it will benefit from all the safe guards already in place for careful monitoring and distribution of funds. Koopman is also quick to point out that at closure of EU programmes, error rates are ‘non material’, meaning that procedures are ‘very robust’.  Distribution of these funds among Member States is based on three criteria: GDP per capita, structural unemployment and population size.

‘A positive-sum game, not a zero-sum game’ – Gert Jan Koopman

Koopman agrees that they are simple but given the complexity of distribution amongst 27 member states, simplicity is vital. Based on these criteria, Italy and Spain will get the largest share of this money in the form of grants. Approximately €63 billion for Spain and €65 billion for Italy. The greatest challenge is getting the money to those who need it most, quickly. Traditionally, EU budget agreement has taken up to two years as it needs to be ratified by all national parliaments. However Koopman is hopeful that this time, Member States will respond to the urgency of the situation so that money can start flowing within 6 months.

This is where countries like the Netherlands and Austria can make their reluctance felt. In the Netherlands, national elections will take place in March next year. Pressure is therefore on for national politicians who have spent years benefiting from a dual narrative. The first is one of economic prosperity apparently, solely the result of the hard work and thriftiness of their electorate. The second, their role as national guardians against the money-hungry EU. An institution dedicated to propping up all those who spend ‘my money on liqueurs and women’ in the now infamous words of former Dutch finance minister, Jeroen Dijsselbloem. Austria’s coalition government has also come out against the proposal, saying that it would simply put too big a burden on the Austrian taxpayer. A burden that may well be worth shouldering if it helps ensure the kind of economic growth and prosperity that the EU has thus far delivered.