Biden’s massive stimulus plan prompts EU soul-searching
Macron floats idea of EU recovery fund boost amid fears of slower economic rebound
Europe’s vaccination travails and hardening lockdowns are forcing the debate over its budgetary response back up the agenda.
A little-noticed postscript to the EU summit last week was French president Emmanuel Macron’s suggestion that the bloc consider expanding its €750bn pandemic recovery plan — funds for which have yet to be disbursed.
The EU’s mid-2020 agreement that followed the first wave of the Covid-19 pandemic was up to the mark, Macron told a news conference after the summit. But after second and third waves of the virus, “we will probably have to add to this response”, he said.
The huge sums being spent under Joe Biden’s $1.9tn US stimulus package have only heightened the arguments for a bigger EU plan, Macron added, noting that the US economy was expected to recover to its pre-crisis level quicker than the EU’s, and the predicted US economic trajectory thereafter was also steeper.
For EU policymakers, the suggestion that the US has trumped Europe not only in the speed of its vaccine rollout but in the size of its fiscal response clearly rankles. But France is not alone in wondering whether a budgetary boost will be needed in Europe. Italy’s prime minister Mario Draghi shares Macron’s assessment that a bigger recovery fund may be needed, alongside co-ordinated national stimulus plans, said one Italian official over the weekend.
Macron didn’t offer any details, and the reality is that any attempt at enlarging the EU support package would face formidable obstacles — most obviously in northern Europe. The budget deal struck last year, which weighed in at €1.8tn over a seven-year timescale, was attained at punishing political cost. Many officials see the idea that it could be boosted any time soon as far-fetched.
The European Commission’s focus remains firmly on ensuring the existing Next Generation EU recovery package is successfully implemented. With Germany’s constitutional court throwing sand in the wheels of Berlin’s parliamentary ratification of the extra EU borrowing, this goal can by no means be taken for granted.
As such, finance ministries’ priorities will probably lie in four areas in the coming months.
Firstly, they need to ensure they secure the commission’s approval of their recovery and resilience plans, which will spell out how they will seek to spend their already agreed Next Generation EU bounty and what economic reforms they will propose.
Macron and his finance minister Bruno Le Maire have already expressed frustration with the process, calling for faster disbursement of the existing recovery fund to member states. “We are too slow and too complicated, we are too tied up in our own bureaucracies,” Macron said last week.
Secondly, and with equal urgency, politicians will look into whether their national fiscal support plans will need to be boosted in the coming months. This is something France is examining and Italy is likely to do in April.
Further out, while the eurogroup has committed to a “supportive stance” in the euro area this year and next, ministers will eventually have to tackle the perilous job of gradually paring back budgetary support without inadvertently crashing their economies.
And finally, after German elections this year, the EU will need to grapple with the politically poisonous question of how to reform its fiscal rules to reflect the prospect of vertiginous public debt and the long-lasting economic legacy of the Covid-19 disaster.
Speaking after the summit last week, Macron said that the gap between the US and EU recovery paths was worrying and “probably suggests the need for a more vigorous response” in Europe. But the French president faces an uphill battle to turn his words into pan-European action.
Slow vaccine rollouts in Europe are threatening the survival of businesses in the already battered tourism and travel sectors. That leaves the south of Europe, where tourism accounts for one in six jobs, at risk of further economic decoupling from the north.