Posted by on July 27, 2020 10:58 am
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By Dr. Barbara Kolm, Austrian Economics Center

 

Unprecedented. This is quite possibly the best word to describe the recovery measures the European Union has come up with over the weekend to thwart the dramatic economic effects COVID-19 will have on the continent. As part of the Recovery Fund program, EU leaders have agreed to spend €750 billion over the next two years – on top of a budget, running from 2021 to 2027, that tops €1.1 trillion.

 

There are many worrisome developments involved in this that go beyond the EU simply spending money that it doesn’t have and that future generations will have to pay back – in an ironic twist to the EU’s designated name of the Recovery Fund, which it calls “Next Generation Europe,” as though it already anticipates who will end up paying for the good times. €390 billion of the Fund will also be distributed to especially affected member states – Italy and Spain in particular – as “grants,” meaning that they won’t have to pay the money back at all. Instead, other countries will do so, as the European Commission will issue its own bonds on financial markets, for the first time with the EU as a borrower itself.

 

Thus, debt collectivization is on the agenda officially. All of this doesn’t even mention yet the agreed-upon “own resources” the EU wants to introduce to finance its budget – from a plastic levy to a digital tax.

 

Nonetheless, the result could have been much worse if it wasn’t for a group of northern member states: the so-called “Frugal Five.” This alliance, which is comprised of the Netherlands, Denmark, Sweden, Finland, and Austria, did its best to play a counterforce in the EU summit that took place this weekend. Instead of debt collectivization and fiscal irresponsibility, they asserted, stability-oriented reforms would have to remain high on the agenda. In the end, they got some concessions: the grants were lowered from €500 billion to the aforementioned €390 billion and conditionality was stuck onto the funding, meaning that member states could monitor whether recipient countries actually implement much-needed reforms or else withdraw the Recovery Fund money.

 

This is by no means the first time that the “Frugals” have made a stance for a more fiscally healthy, pro-trade EU in recent months. Just two weeks ago, they led the charge to elect Paschal Donhoe, an Irishman, to the Presidency of the Eurogroup instead of the Spanish Finance Minister Nadia Calviño, who was favored by southern Europe.

 

Indeed, it was long expected that after the UK leaves the European Union, other member states would have to step up to prevent a dominance of Euro fanatics. The “frugal” countries were always more realistic in their vision of what Europe should be: a club of national governments coming together to cooperate particularly on economic issues while also clearly seeing the limits of an “ever closer union.” While these countries remained largely silent and let Britain do its job as the killjoy of Brussel’s pipedreams, without the UK they will have to become more assertive.

 

First signs of that happening occurred two years ago, as budget debates heated up and the Commission proposed to spend more money moving forward despite one of the largest contributors to the budget leaving the union. More skeptical countries loosely united under the name “Hanseatic League 2.0” – portraying themselves as the successors of the classical liberal, free-trading alliance that enabled economic prosperity in Europe from the 14th to 19th century. The Dutch Prime Minister Mark Rutte took the lead, effectively becoming a counterforce to French Emmanuel Macron’s grand visions.

 

The work of the loose group intensified earlier this year when calls for a “industrial policy” from France and Germany became louder. For the new “Hanseatics,” the plans to prop up domestic industries to create “European champions” while penalizing foreign companies through “trade defense” mechanisms seemed all too protectionist and not too different from the path that U.S. President Donald Trump was following. Instead, they argued, free trade would need to be defended – particularly with Europe’s transatlantic friends.

 

If there was still some unwillingness to truly build an actual alliance, not just an informal talking club, the COVID-19 and the European Commission’s plans on how to attain economic recovery changed that. In this crisis, they have been arguing that what this crisis needs is not more redistribution, more monetary gifts for bad policy-making in some countries, but more fiscal responsibility and real commitments to reform Europe’s economy to a pro-trade, pro-sustainability, and pro-innovation marketplace.

 

It can’t be expected that this group of five relatively small member states can change the way forward of the EU overall. This weekend’s summit only showed this once more as the “Frugals” were only able to push the brake on the most outrageous ideas. And yet, in a Europe that has become more isolationist, anti-market, and less fiscally responsible – – and is now missing the UK as the prime counter-force – – a “frugal” alliance is dearly needed. It can only be hoped that even more countries will join forces and will, thus, provide a true alternative to the vision of an “ever closer union” moving forward.

 

 


Barbara Kolm is President of the Friedrich A. v. Hayek Institute in Vienna, Austria and Director of the Austrian Economics Center. A worldwide networker, she uses these abilities to promote free market policies; in addition she is a frequent speaker on public policy related issues, especially on deregulation and competition topics, the Future of Europe and Austrian Economics. She is an Associate Professor of Austrian Economics at the University of Donja Gorica, Montenegro and a member of the Board of Business Consultants of the Austrian Federal Economic Chamber and a Member of the Mont Pélerin Society. She is President of the European Center for Economic Growth.