‘Frugal’ Countries Win in European Recovery Fund

July 23, 2020 Updated: July 26, 2020

Commentary

There is no solidarity without responsibility. The European Union Recovery Fund can’t be used as an excuse to perpetuate bloated political spending and create a transfer union where governments use taxpayers’ money to increase bureaucracy, because it would be the end of the European project.

A union based on excess spending, debt, and extractive policies would be destroyed in a few years. The strength of a unified group of countries comes from diversity and responsibility.

The leaders of the European Union have signed an agreement that shows that, despite criticism, Europe responds and does so responsibly.

The agreement reached will have conditionality, will be subject to structural reforms, has smaller amounts of subsidies than initially announced, and also incorporates a control clause (veto) by the member states.

It isn’t only positive for its amount and for being subject to reforms and conditions, but because it’s a containment wall that avoids the counter-reforms of the radical left, thanks to the so-called “emergency brake.”

The 750 billion euro ($869 billion) deal is important, but we shouldn’t believe that the recovery of the European Union will rely on this program. We already have the experiences of the 2009 Growth and Jobs Plan and the Juncker Plan. Both had a very low positive effect on GDP. It helps to get out of the crisis, but it doesn’t guarantee it.

The subsidies have been reduced to 390 billion euros ($452 billion) from the 500 billion euros ($579 billion) initially announced, while the loan portion increases by 110 billion euros ($127 billion) to 360 billion euros ($417 billion). These cheap loans will be repaid over a long period, between 2027 and 2058. In reality, it’s like a perpetual debt issue, and the cost will be low because it’s supported by the European Commission.

The plan must be approved by the European Parliament and the parliaments of the member states, but it’s considered a diplomatic step that will have few obstacles.

To receive the money, countries will have to present serious and profitable projects that strengthen competitiveness. These are not blank checks for anything. This means that reforms and adjustments are unavoidable. The European Council will monitor the aid and its use. The funds will have to be approved by a qualified majority. Payments will be approved by a majority in the Economic and Financial Committee, and may be rejected and sent back for review by one or more member states if the appropriate use of funds is in doubt.

No one denies the challenges created by the COVID-19 crisis, but there are countries that have used the excuse of the pandemic to inflate political spending and now demand free money.

Spain

The Spanish government has doubled the cost of government, maintained all the spending it increased during the growth period, and increased the number of ministerial seats and advisers despite the crisis. Additionally, the government has approved a basic income plan that had no budget or fiscal space. There has been no management of costs whatsoever to allow budget room for automatic stabilizers, health, and unemployment costs.

A government that increased the deficit in 2019 by 24 percent in a year of 2 percent GDP growth and record tax revenues has doubled the cost of government in the crisis and now demands no conditions or scrutiny from other member states.

Why would a serious government oppose a detailed scrutiny of the funds received? It should welcome it. Why would a government that calls itself reformist and states its commitment to budget stability reject any structural reform proposed by other member states? They should be implementing them now. Furthermore, why would a government that talks about an unprecedented emergency prefer to receive less funds than to accept the member states’ monitoring of grants? One could suspect that they are not aiming to use the funds in the most effective way.

This crisis cannot be solved if governments use the money of a recovery fund to perpetuate imbalances and squander resources for political purposes. If we want the EU to survive, it can only be based on competitiveness, trust, and, most of all, credit responsibility.

If we want a united Europe, we must listen more to the most dynamic countries and stop using the bureaucratic steamroller to turn all the member states into interventionist satellites.

The European Union faces a deep crisis. It can’t trigger a depression by using important funds that should boost competitiveness and strengthen the recovery to finance massive political transfer plans that serve as a political tool to keep bloated administration and political budgets.

Mistakes

The Spanish government has made serious mistakes in its objective of getting massive grants without conditionality.

The first one was not giving serious estimates of a spending ceiling, deficit, and debt for 2020 and not providing any for 2021 when Spain had already tested the patience of the European Commission in 2019 by missing an already revised deficit target in a period of record tax revenues.

The second mistake was assuming that Spain’s European partners were going to accept things that the Spanish government itself would not have accepted in different circumstances. Everyone knows that the government of Spain would have refused an unconditional fund if it had been only for another country, since it would mean a greater contribution to the EU budget, and a greater deficit for Spain. We know this because it was exactly the Spanish government’s position in the Greek crisis, when Prime Minister Rodríguez Zapatero stated that the Greek opposition parties should agree to the agenda of reforms in order to receive bailout funds (June 24, 2011, La Vanguardia). It is easy to demand solidarity when you are the recipient of it.

Third mistake: It’s not convenient to demand from the most responsible countries free money when the government goes to the negotiation table having missed the 2019 deficit target in a year of record tax revenues, with the largest deficit in the eurozone in 2020, being the only country that has not reduced nonessential expenses to accommodate the increase in health spending, and with the most expensive government, with more ministers and higher officials in four decades.

The fourth error: It’s also not easy to convince others to provide tens of billions of euros, unconditionally and with greater weight of subsidies, when Spain has in the government coalition a party that has voted in Europe in favor of breaking the euro and whose leaders, including a vice president and two ministers, defended a massive default on the debt.

Podemos and Izquierda Unida voted on Dec. 14, 2015, for an amendment proposing “facilitating withdrawal mechanisms” from the monetary union and “an alternative plan for an orderly break-up of the euro area” and have never withdrawn or modified it.

The final and fifth mistake: The Spanish government constantly repeats that the economy is recovering in a V-shape and that they will not cut any spending under any circumstance, just implement massive tax hikes that will erode competitiveness, growth, job creation, tax revenues, and increase future deficit and debt. At the same time, they demand donations with no conditions.

Commitment to Reforms

Many Spanish and European citizens like me are more than happy to commit to a strong set of reforms to improve competitiveness and boost economic growth and jobs. We don’t want funds to be squandered in political spending.

The failure to approve a no-condition all-grant recovery fund is not a European failure. It’s the confirmation that the European project will only be strengthened if it becomes a union where solidarity is given with responsibility, and where strength comes from the prudent management of so-called “frugal”—or rather, responsible—leaders.

The Recovery Fund is important. It has strong conditions, and this may prevent the feared malinvestment binge. However, the Recovery Fund isn’t the solution for many European states’ structural problems. Structural reforms must be adopted to solve the long-term imbalances of European economies, and conditionality should be viewed as a positive, not a negative. If countries want to show the world they’re reliable partners committed to budgetary stability, reforms must be embraced, not rejected.

The European Union Recovery Plan is not going to be a miracle or increase potential growth. It has many diffuse elements. What’s important is that it dispels the risk of radical-left counter-reforms and that it outlines a union between member countries focused on credit responsibility and prudence.

Now the Commission must ensure that it’s not a tool to spend on white elephants and useless projects.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.