What does the new European recovery fund really mean for Europe post-COVID-19?

3rd June 2020

The European Union (EU), in the form of a Franco-German partnership, is looking to bolster investment in other EU states struggling with the economic effects of the COVID-19 pandemic. Both the leaders of France and Germany have recently proposed a joint coronavirus recovery scheme to the European Commission of a €500 million borrowing fund from the financial markets.1 While on the face of it this seems like a substantial move forward, the way this money is to be lent underlies the true thinking of the different EU governments.

The more frugal northern nations do not want to end up shouldering the burden of the debt of other EU countries and there have been disputes between different factions of the EU, creating somewhat of a north-south divide.  This has been primarily: Austria, Sweden, Denmark and the Netherlands (known as the ‘frugal four’), but to some extent Finland and Germany, on the one side and France acting as a buffer to Italy and Spain on the other.2 Though there are other EU countries facing substantial economic issues, these countries provide the backbone of the EU and by showing a divide, in what had been a mostly harmonious relationship pre-COVID-19,  has led some to believe this pandemic may be the end of the EU.3 The countries most in need of financial help, such as Italy and Spain, have consistently emphasised the term ‘solidarity’ while the ‘frugals’, as they have been coined, have referred more to ‘conditionality’ and ‘sound economic policies’ when talking of recovery funds.4

The more economically secure nations do not want to simply give money to countries through grants and instead prefer the option of loans. However, the countries in need of the money have said that loans would cripple them through increased debt repayments.5 As a result, the EU commission, under the voice of Ursula von der Leyen, has now come up with a proposal aimed at appeasing all the nations concerned. Essentially the €500 billion instigated by the French and Germans would be made available as grants and another €250 million as loans, followed by a further €1.1 trillion added to the EU budget for the period of 2021-2027.6 A previous €540 million had already been made available through the European Stability Mechanism earlier in May to help as an emergency loan fund, providing quick cash to countries in need.7 This combination puts the total recovery plan at around €2.4 trillion. Though a very large figure on the face of it, it has to cover twenty-seven EU member states over six to seven years. Some EU member states are still dubious about whether they will take up the loans, not wanting to commit themselves to extra debt, but on the most part there has been positive responses from the leaders of countries with the greatest financial hardship.

The EU has a population somewhere in the region of 514 million people compared to the United States (US) with around 330 million people.8 The US had previously wanted to borrow a record $3 trillion just for the second quarter of this year, on top of what it had already borrowed to combat the COVID-19 pandemic, not including anything they may need for the second half of the year.9 While the fiscal policies of the two different blocs cannot be directly compared, it does give the impression that the EU stimulus package is somewhat on the small side. However, the figure proposed by the EU is not actually supposed to help out individual countries from their own debts, completely the opposite in fact, and does not include individual countries own amount of bailout input. This was the fractious ‘corona-bond’ idea, which mutualised all of the EU’s debt and caused a North-South disagreement, with countries that were struggling most from both the pandemic and also from its economic impacts angry at other countries more ‘fortunate’ not helping out more.10 The idea is that countries will still have to inject their own stimulus packages into the different parts of their economies as they see fit.

Countries that rely on tourism such as Greece, Italy and Spain have been and will continue to be hit hardest. That is why these countries have been so keen to reopen their tourism season in time for summer.11 Without this much-needed income the economic situation will only get worse. After years of austerity in Greece, they only emerged from EU bailouts two years ago caused by the financial crisis of 2008, something they still blame policymakers in Belgium or Germany for.12 Though Greece is handling the pandemic relatively well they will be loath to take on more conditional offers of help as their economy starts to feel the pinch of their lockdown for this reason.13

The crucial piece to draw out from the Franco-German announcement is the way in which they delivered it. They state that they will only give money to regions and industries deemed most affected by the crisis. Katja Leikert, the Deputy Chair of Angela Merkel’s German parliamentary group, has made some interesting remarks, one insinuating that investments will only be made in sustainable economies that support the business of the EU as a whole, by saying: “we have to make sure that increased public spending on the European level will create a European added value”.14

If the EU does not step in to help their nations then it is likely Russia or China will. Italy had to call upon Russia to help with its COVID-19 pandemic in its early stages, handing Russia a public relations coup.15 This has been amidst claims of Russian espionage, using the offer of help as cover for covert operations.16 Italy has also been the first developed economy to receive huge investment in infrastructure as part of China’s ‘Belt and Road’ initiative, after the financial crisis of 2008 left them with high levels of debt, but it may not be the last.17

With language coming out of the White House in the US determined to push the US-China trade war into a full-on financial breakdown between the two countries, the effects will be felt globally.18 American companies are pulling their factories out of China and now the EU has to determine where it stands in pushing back or publishing the narrative coming out of Beijing.19 As a ‘bloc’ the EU cannot now afford to break-up and so are trying to show they can afford to stick together. After initial bickering, they are beginning to show solidarity as a group though it is still far from guaranteed.20 Even Germany know they would be better off with a strong EU, with Britain also leaving, their ability to control trade within the Eurozone is of high importance. They rely heavily on high-value exports and need countries around them to be able to buy their goods, especially in light of reduced demand from China.21 Uncertainty over their future relationship with China will soon come from the international pressure put on ‘not being seen to deal’ with the country that ‘caused’ this pandemic. Guilt may force many countries to withdraw dealings with China under a more international responsibility push as a global backlash builds against the country.22

Many European countries are, however, currently heavily reliant on China for imports and becoming less so, especially for technological imports, would leave them less at risk from an increasingly Sinophobic market place. Many European nations have a complex dependence on China for technology equipment, telecoms and energy.23 Other European countries that are not members of the EU are also seeking aid from both Russia and China. Serbia, a contender for entry into the EU, has become of particular notice of the three-way entanglement, as they claim to have been abandoned by the EU in the midst of their virus pandemic and forced to rely on help from China and Russia instead. Currently, Chinese health officials are in charge of the country’s COVID-19 response.24

While it may on the face of it seem like the EU is trying to help its member nations, it appears more like political manoeuvring to appease member states, gain control of key business sectors but more importantly exhibit solidarity in the Eurozone, than actual altruistic motives. A show in confidence, amidst other world powers looking to expand their borders and exploiting weaknesses in other zones, could prove a more prudent long term strategy and worth the cost of a Euro-nation bailout.