The EU did not cover itself in glory when the scale of the COVID-19 crisis in Europe became clear by early March. The bloc’s problem was exemplified by Christine Lagarde, president of the European Central Bank, when she suggested it was not the bank’s job to aid Italy in the bond markets.
Her comments sparked the biggest single-day fall in Italian government bonds in a decade.
Such early missteps might explain the urgency with which EU leaders such as European Commission President Ursula von der Leyen are now acting. Following heavy criticism of the bloc’s failure to coordinate a financial response, von der Leyen last week made clear that the EU was ready to fund a huge financial rescue fund.
“We are not talking about billion, we are talking about trillion,” she told the media about the rescue fund after a meeting of EU leaders on Thursday.
€1 trillion. A vast, almost inconceivable figure. It’s worth spelling it out in numerical form: €1,000,000,000,000. But what exactly does this figure refer to? Is it real, as in has it been officially confirmed? Will it be in the form of loans, grants or something else entirely? Is it connected in any way to the ECB? And perhaps most importantly, who pays it and who receives it?
€1 trillion. Really?
In recent weeks, EU leaders have been arguing over the size and nature of a “recovery fund” which will aid the battered economies of Europe, bereft after several weeks of shutdowns that has led to some of the worst economic data seen since the post-World-War-II recovery 70 years ago.
The leaders have agreed to task the European Commission with creating the fund but beyond that, little else. The €1 trillion figure comes directly from von der Leyen’s remarks and is not an official number.
“This €1 trillion figure is rather misleading, if you ask me,” Ángel Talavera from Oxford Economics told DW. “There are also reports talking about €2 trillion. These numbers are going to involve a creative assumption on leverage it is assumed. So for example, there are some reports that the commission is talking about borrowing around €300 billion which they expect they can turn into €2 trillion.”
By that, he means there will likely be a much smaller number in terms of actual spending by the EU, with a large amount of the headline figure to ultimately be connected either to leveraging mechanisms or private sector investment.
“It is very optimistic,” says Talavera. “Even the situation to have these figures, if you expect the private sector to be involved in up to €1.7 trillion of investment…I think right now it doesn’t look like a particularly realistic assumption.”
No such thing as a free lunch. Or is there?
After last week’s meeting, von der Leyen said member states had agreed to place the recovery fund within the EU’s Multiannual Financial Framework (MFF), jargon for the EU’s seven-year collective budget. The 2021-27 MFF is yet to be finalized.
European Commission President Ursula von der Leyen has been talking up the strength of the EU response
However, in the same way that the actual figure of the fund has not been agreed upon, neither is the central question as to whether the rescue fund will comprise of grants (that don’t have to be paid back) or loans (which do).
In what feels like a rerun of the politicking that surrounded the eurozone crisis of 2011, the divide between loans and grants has a geographic/cultural element. Germany and the Netherlands favor loans while France, Italy and Spain — all especially hard-hit by COVID-19 — argue for grants and financial transfers.
Many say that loans will not work given the scale of the crisis, as it simply piles more debt on countries, such as Italy, where debt was an existential threat even before COVID-19.
“The problem with these countries according to many is that they already borrow too much,” says Talavera. “So giving them more is probably not a solution to the crisis. But the problem with permanent transfers is that it opens a huge can of worms politically.”
Trillions and trillions
In early April, von der Leyen said that the EU and member states had “put up €2.8 trillion to fight the crisis”. Yet this primarily referred to the value of state aid programs offered by individual country budgets. The EU had loosened its rules to allow more state aid but the money was not in any true sense EU money.
So it is certainly easy to get confused by the various figures bandied about.
One thing that is important to keep separate from talk of a recovery fund is the European Central Bank and its bond-buying program. The tool introduced by Mario Draghi in the middle of the eurozone crisis has been strengthened to aid EU countries borrowing on bond markets. Known as the Pandemic Emergency Purchase Programme (PEPP), it has an overall envelope of €750 billion for bond purchases until the end of 2020.
The EU has also confirmed other separate measures, including a short-time working support scheme (SURE) worth €100 billion, as well as extended credit lines from the European Stability Mechanism (ESM) and the European Investment Bank.
But the big question is the €1 trillion one and that is far from answered yet. The Commission is expected to have more concrete proposals by mid-May, with plans likely to be framed within the context of the new seven-year budget.
But despite the dizzying figures and the soaring rhetoric, uncertainty over what the recovery fund will actually look like is palpable. At a time of such profound crisis within Europe, in terms of health, economics and potentially, politics, that is a situation that can’t continue for long.
“We don’t really know, to be honest, and that’s one of the more disappointing and unnerving things about the whole negotiation,” says Talavera. “We really don’t know.”