The European Commission will have to choose between the Franco / German plan and the proposal of “frugal four”. The choice will shape the trajectory of Europe for the years to come
Wednesday May 27, the European Commission will propose its plan to support and revive European activity. Its president, Ursula Van der Leyen, will have to decide between the Franco / German proposal and those of the “frugal four” countries.
In the Franco / German proposal that I detailed here (in French), the backbone of the plan was the possibility for the European Commission to borrow up to Eur 500 billion, to subsidize regions and industries that are really affected by the health crisis and making repay this loan by the 27 up to the weight of each in the Union.
For the “frugal four” (Netherlands, Denmark, Sweden and Austria), there can in no case be any subsidies but loans which will be reimbursed by the beneficiary countries. Lending countries will also need to commit to reforms in a tight fiscal framework to promote growth.
Two propositions, two different philosophies about what Europe is.
The first remark is that the “frugal four” countries are small countries. They don’t have the diversity of big countries. The flexicurity of the labor market, which is very popular in Sweden and Denmark, is the result of a long-standing consensus. It has greatly benefited from the homogeneity conferred by the small size of these two countries. For a large country, consensus management is more complex. Diversity is much more important both in terms of population and sectors of activity. We cannot think in the same way between the small countries of the north and the large countries of the south.
The second remark is that the link between budgetary discipline and growth is still awaiting confirmation. It may be intellectually pleasing but it rarely goes beyond that.
The most budgetary tightest country in Europe is Italy. Its primary fiscal balance has had the most virtuous appearance in European countries since 1995 (the Italian budgetary problem comes from the fact that the interest rate on the debt is systematically higher than the nominal growth rate causing a snowball effect on the debt (the public debt to GDP ratio cannot be reduced if the debt increases with the interest rate and GDP with the nominal growth rate)). However, we see its great difficulties in the face of the health crisis. It is not the budget that is the problem but the capacity of this country to grow and there is no causal link between the two. It is by facilitating the return of growth in Italy that Italian fiscal sustainability will improve, not by strongly restricting the country of Dante.
The third remark raises the question of the European engagement of the “frugal four”. In Mario Draghi’s famous speech in London on July 26, 2012, we only retained the “whatever it takes” which is essential but the former ECB boss has a more complex message. Draghi then indicated that European construction was, above all, a political construction of people who wanted to live together. The euro was then only an instrument at the service of this political construction. The role of the ECB is then to manage this instrument so that political construction can continue. The ECB will do whatever it takes to make it work. European solidarity cannot be expressed only on the currency, it is wider than that because of its political dimension.
In view of the current discussion, one can have the feeling that this political dimension has faded among the “frugal four”. Two points to emphasize here
Fiscal restraint is not the best strategy when the economy is weak. Furthermore, it is far too early to raise this issue. The fiscal austerity in 2011 and after came much too early in the cycle, causing the very long recession in the Eurozone, especially in Italy and Spain.
The second under remark comes from the words of Wolfgang Schäuble who considers that in the context of the health crisis, solidarity must be the key word, explicitly supporting the Franco / German plan.
The last remark is that of the vision of Europe on which we have to think about. In 2001, the late Alberto Alesina and his co-authors compared social systems between the United States and Europe (see here). They stated that ” In Europe, the poor are generally thought to be unfortunate, but not personally responsible for their own condition [……] However, 70 percent of Americans in response to the same question said that people are poor because of laziness . “The European system of solidarity reflected these words in opposition to what is observed in the USA.
Do we want to get out of the European solidarity system? No, it would be necessary in this complex period to assert this solidarity, no longer simply on the scale of individuals within the same country, but on the scale of countries so as not to take the risk that a fragile country could upset the political construction that Mario Draghi evoked simply because the other countries of the Union did not want to pool risks at a particular moment in History.