(European Parliament, CC BY 2.0)
The first reaction came from the European Central Bank (ECB), which announced that it would resume the purchases of public and private sector bonds. The new program is worth EUR750bn and will be conducted until the end of 2020 (Pandemic Emergency Purchase Program, PEPP). The central banks of countries outside the Eurozone soon followed in a similar direction. Then came the time for the EC, which obtained the consent of the European Parliament to redirect the unused resources from the cohesion funds to the fight against the pandemic and its effects. The EU member states will be able to allocate these resources at their own discretion and they will not be required to provide their own contributions. The EC has also suspended the application of the rules establishing the upper limit for public debt at 60 per cent of GDP and the upper limit for the budget deficit at 3 per cent of GDP. In this way, EU member states will be able to expand their fiscal space and design appropriate anti-crisis measures without risking sanctions due violating the fiscal discipline of the Stability and Growth Pact.
However, the capabilities of the individual states differ drastically. According to data provided by Quartz, Germany has committed to spending a total of EUR800bn (20 per cent of GDP). Meanwhile, France has only allocated EUR45bn (1.8 per cent of GDP), Italy will spend EUR25bn (2.3 per cent of GDP) and Poland’s stimulus package is worth EUR22bn (3.6 per cent of the country’s GDP). Therefore, it will be necessary to issue bonds in order to provide the financial liquidity needed to boost the functioning of the economy. The yields of government bonds are already rising, as investors are getting ready for an unprecedented wave of government borrowing. This situation needs a mobilization on the part of the wealthy member states and a sharing of resources in the spirit of solidarity. Everyone is looking with hope towards Germany. Will it decide to take up this task – just like the United States did after World War II, when it extended a helping hand to Europe, including Germany – in spite of the obvious objections? Perhaps Germany has an additional opportunity to atone for its past sins and to cement European unity.
The main pillars of the recovery plan
The European Recovery Program – commonly referred to as the “Marshall Plan”, after the US Secretary of State George C. Marshall, was supposed to help rebuild Europe’s ruined economy after the WW2. At the same time, the plan was conceived as an attempt to halt the potential expansion of the Soviet Union beyond the spheres of influence previously established at the Yalta Conference. In the years 1948-1952, Europe received aid in the amount of USD13bn (in current prices this is equivalent to approximately USD142bn, as the value of the dollar has been greatly reduced due to the inflation occurring over the period of 70 years). This included the supplies of food, fuel and machinery, as well as industrial investments. As a result of Josef Stalin’s decision, the countries of the Eastern bloc refused to participate in the Marshall Plan. Meanwhile, among the countries that were covered by the assistance program, the case of the Federal Republic of Germany (West Germany) is the most interesting. The assistance provided to West Germany was twice as low as that supplied to the United Kingdom and France, relative to the population size, but it was utilized in an extremely efficient manner.
The Marshall Plan consisted of an “aid pillar” and a “savings pillar”: the countries receiving the aid established special European Recovery Program funds, which gathered resources to later repay the United States. The Americans ultimately cancelled the debts of all the beneficiary countries but Germany, which was required to pay back 70 per cent of the assistance received. It is particularly interesting and admirable that Germany was able to repay its debt to the United States without using the resources accumulated on the European Recovery Program fund. Instead, these resources were later used to capitalize the German state development bank KfW-Kreditanstalt für Wiederaufbau. Thanks to the interest from a fund established in parallel to the European Recovery Program fund, the KfW continues to support the German sector of small and medium-sized enterprises and has been contributing for 30 years to the economic convergence of the poorer, eastern federal states. In this way, the Marshall Plan continues to provide benefits and makes an important contribution to the development of the German economy.
The coronabonds fund
Two European Commissioners, Thierry Breton (internal market) and Paolo Gentiloni (economy), published an editorial in “Frankfurter Allgemeine Zeitung” calling for the creation of a pan-European fund (covering all 27 EU member states) supported with tax revenues and issuing long-term bonds. This proposal was widely discussed all across Europe. However, the debate concerning the so-called coronabonds is conducted among the 19 Eurozone member states, while the other EU members are only allowed to participate as observers. The idea of coronabonds, which is being promoted by the Southern European nations, has not been settled yet, despite the strong support of France and the pressure exerted by that country on Germany. However, the firm opposition of the German chancellor Angela Merkel (who was joined by the prime ministers of the Netherlands, Austria, and Finland) means that this idea most likely will not be implemented. The opponents of coronabonds insist that it is necessary to stick to the principle of each country’s individual responsibility for its debt. They point out that the mutualization of European debt would remove the incentive for individual countries to carry out structural reforms and keep their spending in check.
It is also unclear who would issue these bonds: an entirely new body, as proposed by the commissioners, or the European Stability Mechanism, which has existed since the 2008 financial crisis (its purpose is to alleviate macroeconomic instability in the Eurozone by providing long-term loans with preferential interest rates to the member states that are unable to pay off their creditors in the financial markets), or maybe some other entity. The inclusion of countries that still retain their national currencies, such as Poland, would further complicate the matter, because it would increase the pool of debt, for which Germany does not want to assume responsibility. In addition to the risk of burdening the wealthier countries with the debts of the poorer ones, coronabonds could in future undermine the stability of the banking system in the same way as during the debt crisis 8 years ago (it is no secret, that the rescue plan for Greece was in fact a rescue plan for Greece’s creditors – French banks that were facing bankruptcy).
A pan-European rescue package
Ursula von der Leyen, who is promoting the idea of a multiannual budgetary framework, which could be described as “a new Marshall Plan”, also opposes the sharing of risk associated with debt. The measures agreed so far include a pan-European assistance package worth EUR540bn, which consists of three components: EUR240bn (2 per cent of the Eurozone’s member states’ GDP) from the European Stability Mechanism in the form of lines of credit aimed at covering the extra cost of health care and COVID-19 prevention; EUR200bn from the European Investment Bank for loans to companies from the SME sector; and EUR100bn from the European Commission for job protection, under the newly created SURE program.
Besides the recovery package, there is also a plan to establish an investment fund to further boost the economy. According to statements made by Ursula von der Leyen, its value is expected to reach EUR1 trillion. In this case the main difficulty lies in the tendency to regulate in minute detail any actions which involve the spending of budget funds, which characterizes the EU bureaucracy in Brussels. Meanwhile, the current situation requires swift action. There is simply no time to adapt to the imposed rules.
Therefore, so far, we have the already agreed loans on preferential terms, which utilize the EU’s strong credit rating. But that won’t be enough. What we need is genuine solidarity, expressed through non-refundable redistribution of financial resources. Cheap loans are certainly better than nothing, but we have to minimize the risk of uncontrolled build-up of public debt among the less affluent member states. They already have a hard time servicing their debt today, and what could happen in a few years?
There is also one other problem associated with debt. The EU institutions have priority in the repayment over other lenders — with the exception of the IMF. Such preference may have an undesirable effect on the government bond markets: by imposing a greater risk on private creditors, it could discourage them. Because of that, it would be worth applying longer maturities, and thus push back the repayment of liabilities towards preferential creditors. This would also provide the borrowers with more room for maneuver and enable them to create proper debt-financing strategies.
Germany isn’t willing to assume responsibility
However, even if Germany gets its way with regards to coronabonds, it will still need to be ready for some other kind of tangible gestures of financial solidarity with the Southern European member states, but also with the countries remaining outside the Eurozone. It is necessary to remember that the latter group (which, of course, also includes Poland) will only be able to take advantage of two components of the discussed aid package (the SURE program and the EIB loans). The third component, i.e. the financial instrument established within the European Stability Mechanism for the additional costs of health care associated with the pandemic, only applies only to the members states of the euro area. Similarly, it should be assumed (but due to the low chances of implementation of that idea, the negotiations never reached this point) that coronabonds would be a solution unfavorable towards nations with sovereign currencies, such as Poland, as they wouldn’t be able to make any use of it. The economic recovery investment fund will be an assistance tool based to a much greater extent on the principle solidarity and will strengthen the cohesion of the European Union in its present form, in which not all members states use the single currency.
However, the real challenge in the coming weeks will not be in determining the areas and channels of support, but in finding the right balance between grants and loans. Although no one is saying this out loud, many EU member states would expect Germany to mobilize resources on a scale similar to the funds provided by the United States 70 years ago. The only problem is that Germany isn’t willing to do that.