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Coming late to the story but I can’t be the ONLY one thinking the “Hamiltonian” “Game-Changing” [insert your superlative here] Franco-German #RecoveryFund proposal is in fact neither “a Hamilton moment” nor Game-Changing nor, in fact, even adequate ... “Much Ado About Not Much”
It only offers a modest (and temporary) increase in the spending ceiling of the European Commission budget 4 a limited period of time to borrow and and transfer an additional euro 500 billion over 3-4 years. As a % of EU GDP it’s less than 1% of GDP/ year so macro insignificant
There are limits to how asymmetric the grants can be with no country likely to get more than twice its share so 2% of GDP or so. Is that helpful to a country like Spain of Italy? Yes! Is that game changing? Not at all. In economies contracting by 10%-20% its a palliative at best
Adjusted for contributions to future eu budgets that will be used to repay the long-term “recovery fund” bonds issued to fund the grants the net transfers easily fall to 0.5% of recipient country GDP (or less) so the “solidarity” element of the Fund has BIG words sans substance
This Franco-German announcement was catalysed by the highly controversial decision of the German Constitutional Court saying both the @ecb and @EUCourtPress had acted illegally. This is part of the crisis-management response by other parts of the German government, but a big fail
The damage to market confidence, the constitutional order of the #EU, and the (real and perceived) limitations it puts on the @ecb as to the size and degree of asymmetric nature of its QE programs is far greater than any net positive #German contribution to the EU #RecoveryFund
It would, in other words, be better to turn back the clock to a few weeks back where neither the @BVerfG #GCC decision nor the #RecoveryFund agreement had been announced. The #EU and especially the #eurozone are in a worse place now than three weeks back
#Germany’s net contribution to aiding the #eurozone’s post-#covid recovery effort has been negative. The negative financial and political constraints imposed by the #GCC on the @ecb outweigh the positive financial and political impact and signalling from #Merkel’s #RecoveryFund
Even without the negative overhang of the #GCC decision, this is still not the “political breakthrough” it is being called. The #EC budget already does transfers to priority sectors, poorer members, and lagging regions. Some new criteria is being added in addition to the existing
By ignoring structurally higher “own resources” for the #EU and while avoiding genuine “joint and several” guarantees for borrowing, this is NOT a move towards a #FiscalUnion or #Eurobonds or even #Coronabonds or a #SafeAsset for the #eurozone. EC already borrows on similar terms
By choosing to borrow against future #eu #mff contributions and own resources, #Merkel and #Macron have simply postponed the most contentious part of the decision, which is not “who benefits”, but “who pays & how much” to future politicians who may be even worse than the current
It is, for example, easy to envisage a scenario, where future national governments refuse to increase #eu budget contributions or own #mff resources to repay the #RecoveryFund bonds when they come due and the #EU #EC is forced to cut all budget lines sharply to repay these bonds
In that case history may come to see the #RecoveryFund not as a “Hamilton moment” when there was a political and financial step change towards the #EU becoming a genuine #FiscalUnion but quite the opposite as the federal (EU level) budget is hollowed out not increased
And all my above comments stand on the assumption that the #FrancoGerman #RecoveryFund proposal is passed by the @EUCouncil in current form without being watered down in size or subsidy or with additional conditionality by the #FrugalFour or the troublemakers of Hungary or Poland
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