The European Union Council summit held yesterday was another disappointment, following a string of recent high-level meetings that have failed to deliver a sufficient economic response to the Covid-19 crisis.
Leaders of the 27 member states of the EU issued a “declaration of progress”, through which they made a vague commitment to establishing a Recovery Fund linked to a bigger long-term EU budget (the Multi-annual Financial Framework, MFF). At the same meeting, European Central Bank President Christine Lagarde warned that Eurozone GDP may shrink by up to 15% this year.
The Council could not agree on the precise size, structure or nature of either the Recovery Fund or future MFF. It did not reach agreement on how they will be funded, or whether the funds raised will be disbursed as grants or loans. The task of filling in the blanks is now with the European Commission, which will publish a proposal on May 6 or possibly even later. The option of ‘coronabonds’ appears to be off the table.
Media reports prior to the Council meeting showed that the Commission claimed it can “generate” €2 trillion through the Recovery Fund and new resources for the MFF, but no agreed-upon financial goal was announced following the summit. In her remarks, German Chancellor Angela Merkel spoke of measures worth just half that amount.
According to the pre-summit plan, the Commission said it aimed to raise €320 billion on the markets, then use that sum to “leverage” a much higher amount. The ‘leverage’ scheme has been favoured by the EU institutions since the global financial crisis, aiming – and always failing – to mobilise or ‘crowd-in’ private investment by providing a guarantee of a small amount of public money.
France, Italy, Spain and other member states have called for the funds raised to be disbursed through grants instead of loans, but Merkel said grants “do not belong in the category of what I can agree”. Politically, the EU is failing the test of solidarity both among and within member states.
Germany’s ‘Exorbitant Privilege’
The ‘exorbitant privilege’ Germany experiences within the EU has allowed it to respond to the coronavirus pandemic and economic losses far more powerfully than other states. An analysis of the budgetary measures taken so far within the EU shows that Germany has been able to provide around €150bn in expenditure based on immediate spending to respond to the health impact, grants to SMEs and self-employed people; social assistance. More than €1trn in liquidity and loan guarantees has also been provided, mainly through the state development bank.
While the German government’s coronavirus response is not perfect, its size and impact dwarfs those of other states. France by comparison has injected around €67mn in immediate spending, as well as €300bn of loan guarantees.
The differences between member states’ GDP size, public debt levels and ability to borrow cheaply on the market have all contributed to this divergent response. The institutional framework of the EU and the Eurozone has also provided advantages to Germany in each of these areas.
The average public debt to GDP ratio in the Eurozone was 65% in 2007. In late 2019 it stood at 86.1%. But for the countries affected by the sovereign debt crisis in 2010-2012, the debt level in 2019 was far higher – almost 180% for Greece, 137% for Italy, 120% for Portugal, 100% for France and 98% for Spain. Germany’s debt level for the same period was 62.6% of GDP.
The level of public debt in the EU was not caused by reckless government spending, but rather by the socialisation of private debt through the rescue of the financial sector, and dramatic increases in the costs of borrowing due to “market discipline” linked to the ECB’s failure to intervene. The pro-cyclical impact of the austerity programmes imposed by the Troika not only limited growth but devastated the public services, including healthcare.
In this way, the debt overhang from the Euro crisis has directly impacted on the ability of member states to respond to the pandemic effectively.
The Debt Weapon
Debt has been used as a weapon against the member states of the EU over the past decade in a similar way as it has been used by the IMF against the countries of the Global South for decades, demanding the imposition of structural adjustment programmes in all but name.
The EU has used debt as an instrument to transfer wealth from the public to private sector, and from the poor to the rich, while also using it to intervene in public policy areas it does not have legal authority over. For example, a report I commissioned earlier this year found that the Commission had used the Stability and Growth Pact to order member states to cut spending on, or privatise, healthcare services 63 times between 2011 and 2018. States were told to raise the pension age or cut funding to pensions 105 times over the same period.
The prospect of the massive spending required now and in the future being added to the balance sheets of member states’ public debt presents unique problems in the EU. While countries around the world are monetising their debt through their central banks, the EU has tied its own hands behind its back by enshrining monetarism and austerity into its Treaty. We remain stuck in the 1990s while the rest of the world has moved on.
Eurozone members cannot issue their own currency, but they do not have any control over the independent and entirely unaccountable ECB. Unlike during the 2008 crash and sovereign debt crisis, the ECB appears willing to act to support spending by member states, but cannot do so effectively due to Treaty constraints forbidding it from directly financing government spending or debt. Its mandate is solely to maintain price stability – to keep inflation low.
The design of the Eurozone contributes to debt crises, while the debt and deficit rules enshrined in the Stability and Growth Pact enforce anti-worker and anti-growth policies.
For members of the single market with an export-oriented economy, such as Germany and the Netherlands, the EU provides a major free-trade zone for its products. This set-up has allowed Germany to build up a massive trade surplus, under which it exports around €300bn more than it imports each year.
But for every surplus, there must be an equal deficit. Around two-thirds of Germany’s surplus is generated by intra-EU trade, sapping demand from the economies of other member states and forcing many of them to run significant trade deficits. If foreign direct investment is not forthcoming, these member states must borrow in order to finance this deficit.
Due to the harsh fiscal austerity applied after the recession, there is now not enough internal demand in the Eurozone to sustain German industry. Even before the coronavirus pandemic hit, a global slowdown was unfolding and the Eurozone was on the verge of another recession, exposing the dangers of this economic model.
Germany’s economic model is not only damaging for working people across the EU; the success of its export-led model is dependent on the impoverishment of German workers. The less a company has to pay its workers, the cheaper its exports can be. This long-term strategy was intensified in 2003 under the then social-democrat/Green coalition government, which carried out a radical and vicious reform of the labour and welfare systems entitled Agenda 2010 (also known as the Hartz reforms).
By 2015, more than 12.5 million Germans, out of a population of more than 80 million, were at risk of poverty. A significant proportion of this number is the working poor, employed in part-time, precarious or platform jobs, and those working full-time on the minimum wage. In 2018 the share of workers at risk of poverty in Germany had doubled to 9.1% from 2005, growing at a faster rate than all major EU economies.
There are many proposals on the table to deal with the massive economic contraction brought about by the coronavirus, including an important proposal from Spain for spending to be funded by perpetual debt. Our key priority must be ensuring that there is no return to the failed policies and models of the past – policies and models that harm us all.
The full power of the ECB must be used to finance government spending. The public spending required now cannot be added to the member states balance sheets, facilitating future decades of crushing austerity under the EU’s debt and deficit rules. We cannot nurse the corporate sector back to health with public money and then let it run wild again.
In the EU we need to fight not only for solidarity among member states, but above all, for international working-class solidarity among the people of Europe.