The EU recovery funding plan - hopeful or ominous for the near future of the Union?

The European Union has come up with a recovery fund to deal with the immediate effects of the Covid-19 crisis and the resulting start of a recession that is likely to be very serious (Jim Brunsden et al, EU recovery fund: how the plan will work Financial Times 07/21/2020).

The final compromise is a scaled-down version of what Ursula von der Leyen, European Commission president, originally requested from leaders in May. The core grants component of the recovery effort was reduced to €390bn, considerably less than the €500bn recommended by the commission and pushed by Germany and France.

However, it is still a landmark agreement, against considerable odds, which will give Brussels the unprecedented power to borrow hundreds of billions on the markets and hand it out as budgetary support to member states.

EU leaders have made the routine optimistic predictions that typically go with such supposed breakthrough moments. But opinions are very much divided on its prospects.

Mark Schieritz provides an optimistic take in Das rechnet sich Die Zeit 23.07.2020, starting with a caution about predicting historic turning points (my translations from the German):

Was it clear to the French when they stormed the Bastille that they would trigger a revolution and overthrow the king? Did the men who threw tea boxes into the sea in the Port of Boston in December 1773 in protest against British tax policy suspected that three years later the United States would declare itself independent? Probably not. History doesn't come out and say, Hello, it's me, History! It hides behind the events and in between. You have to look for them if you want to find them.

But he chooses to take what for him is a positive view that the deal shows the EU moving more into the macroeconomic role that the member states need it to play:

One could say that by financing itself like a state, the EU itself becomes a little bit of a state. And just as the nation-state in yesterday's world was the condition of national self-determination, so in the world of tomorrow a united EU is the condition of European self-determination. Because that is the only way they can preserve themselves. The British will still experience this. And maybe they will even come back. You would be welcome.

Shahin Vallée is also looking at the bright side in With its recovery deal, is the EU finally starting to act like a unifying force? Guardian 07/22/2020:

It was a long time coming, but the coronavirus crisis seems to have allowed Europe to make a leap towards genuine integration. The global financial crisis in 2008 exposed the inherent fragilities and incompleteness of Europe’s monetary union, prompting a decade of agonising debate over fiscal union. Essentially, sharing a common currency without sharing a real budget was always going to be unstable and potentially dangerous.

But now European leaders seem to be finally facing up this profound architectural problem. Common debt, common expenditure and the possibility of common taxation – which all seemed out of reach over the last decade – were accepted this week unanimously after a marathon summit that lasted more than four days.

Yet despite his optimism, most of the article is taken up describing the shortcomings of the proposal and the political risks for the EU that it has dramatized.

More pessimsitic take come from two sources that were very prescient about the 2015 Greece crisis, Wolfgang Münchau and Yanis Varoufakis.

(Münchau's) Eurointelligence reports (Why we don’t think this deal is historic 07/22/2020):

So, this is a list of things we think stand in the way of this programme being ultimately seen as historic

• the programme might not succeed on its own terms, or it might not be seen to succeed;
• member states may fail to use the opportunity of the fiscal boost by addressing structurally low productivity;
• member states may fail to endow the EU with an increase in the own-resources tax base;
• member states may fail to change the treaties to make it possible for the EU to raise funds outside fiscal emergencies;
• the programme pitches member states against one another, and could foster euroscepticism in the north.

Yanis Varoufakis, The EU coronavirus fund will take Europe another step towards disintegration The Guardian 07/24/2020. His commentary is in part at reponse to Shahin Vallée.

Varoufakis reminds us that Herbert Hoover/Heinrich Brüning austerity economics is still alive and well among the European establishment:

[T]he recovery fund is a distraction from the elephant in the room: massive austerity. According to the International Monetary Fund, the eurozone’s total 2020 income will fall by 10%, causing an average budget deficit of more than 11%, with weaker countries such as Italy and Greece facing a much larger drop.

That would not be catastrophic per se, if it were not for the determination of Berlin and other governments to push member states to balance their books by 2021 (as witnessed by the 11 June Eurogroup communique). Even if the nascent recovery brings down, for example, Italy’s budget deficit to, say, 9%, to balance its books Rome must impose a cruel level of austerity equal to a new 9% of GDP in cuts and taxes. Similarly with Greece. Given that even Germany will have to practise austerity to balance its budget, the whole continent will be treated to an intensification of the doom loop between austerity and recession. [my emphasis]

He also notes that the amount of the European recovery fund is actually a small amount giving the like size of the recession facing the EU, especially in light of "the austerity tsunami down the line" he describes.

And he fears that the conditions of the program "are a Eurosceptic’s dream. ... It is almost as if the whole thing were designed by a cunning Eurosceptic." And one big part of it is that:

... our great and good leaders also decided that each national government will have the right to freeze payments, for up to three months, to any other government while it scrutinises how the money is to be spent. Endless recriminations are guaranteed, as the Dutch lambast the Italian government’s pension payments and Rome returns the favour with reports on the Netherlands’ famous tax loopholes. Imagine the mood in the room when such a challenge is made to, say, Spain, by a prime minister whose government the EU bribed, in the form of Thatcher-like rebates, to get the recovery fund across the line. [my emphasis]

In other words, this is another case of the EU collectively trying to do the least it can get away with in terms of a sound macroeconomic policy. All while operating with the time bombs embedded in the construction of the euro and the ludicrous borrowing and spending limits the 19 eurozone have imposed on themselves.