European Union

The EU will launch its pandemic-recovery fund this year with an initial €10bn offer of joint European bonds, French EU affairs minister Clement Beaune told Les Echos Monday. "The market appetite should be very major and the interest rates very favourable," he said. The full €750bn recovery package, once created, would be an embryonic EU treasury, he added. France was also pushing for a minimum EU-wide corporate tax, Beaune said.

Relations improved between Greece and Turkey at a high-level meeting in Athens on Monday, but the EU remains wary of Ankara.

Czech police have recommended charging prime minister Andrej Babiš with fraud, after an investigation into whether he misused EU funds. Prosecutors now have to decide whether to file charges. The police recommended indictment two years ago, but then the prosecutor dropped the case. Babiš denies wrongdoing. The EU Commission recently published a report saying Babiš has conflicts of interest over EU subsidies involving his former business conglomerate.

The World Health Organization (WHO) faces reforms aimed at preventing potential future pandemics, Reuters reported. Health ministers from the WHO's 194 member states will meet in November to decide whether to launch negotiations on an international treaty aimed at improving preparedness against any future outbreak. The proposal, put forward by the EU, is supported by a majority of WHO members, an EU official said.

Like-minded "illiberals" in the European Parliament's far-right Independence & Democracy (ID), anti-federalist European Conservatives and Reformists (ECR), and centre-right European People's Party (EPP) groups should form a new alliance, Italy's populist former interior minister Matteo Salvini said Sunday. But Italian politician Antonio Tajani, a former EU parliament president from the EPP, immediately poured cold water on Salvini's idea, saying: "For the EPP, it's impossible to make an agreement with ID".

The far-right Israeli politician Naftali Bennett will be the country's next prime minister under a proposed power-sharing deal intended to oust Benjamin Netanyahu, the head of the opposition, Yair Lapid has confirmed, The Guardian writes. In his speech and for the first time, Lapid referred to Bennett, a far-right religious nationalist and strong advocate for the settler movement in the Palestinian territories, as the "intended prime minister".

On Wednesday 9 June at noon, the LUX European Audience Film Award 2021 winner will be announced in the European Parliament hemicycle in Strasbourg, France.

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AMENDMENTS 1 - 409 - Draft report The Arctic: opportunities, concerns and security challenges
Committee on Foreign Affairs
Anna Fotyga

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ERRATUM on a European Parliament recommendation to the Council on the 75th and 76th sessions of the United Nations General Assembly (2020/2128(INI))
Committee on Foreign Affairs
María Soraya Rodríguez Ramos

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Length of video : 119'

Disclaimer : The interpretation of debates serves to facilitate communication and does not constitute an authentic record of proceedings. Only the original speech or the revised written translation is authentic.
Source : © European Union, 2021 - EP

Length of video : 48'

Disclaimer : The interpretation of debates serves to facilitate communication and does not constitute an authentic record of proceedings. Only the original speech or the revised written translation is authentic.
Source : © European Union, 2021 - EP

On Monday, Budgets Committee will debate with US administration budget manager Young on the similarities and differences between the US and the EU recovery plans.
Committee on Budgets

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Join the call for the release of Roman Protasevich and Sofia Sapega, who are being held by Belarus authorities. Find out how you can help.

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Will Berlin finally acknowledge that economics is a social science and not theology?

Italian Prime Minister Mario Draghi and Wolfgang Schäuble, President of the Bundestag. Photos: Baris Seckin/Abaca/NTB & Gregor Fischer/DPA/NTB 

How to escape the pandemic?

For some – the Italians Mario Draghi and Paolo Gentiloni or the French Emmanuel Macron and Thierry Breton – the pandemic has called into question the previous economic policy equilibria and so they are asking for the promotion of a new fiscal governance model.

For others – the Germans Wolfgang Schäuble and Olaf Scholz or the Latvian Valdis Dombrovskis – the pandemic has produced a headlong (and necessary) rise in public debt which, nonetheless, must be brought back within the confines of the previous fiscal policy model as soon as possible.

The outcome of this stand-off will define the future of the European Union.

Future of the SGP

The pandemic has highlighted the inadequacy of the “Maastricht compromise”. This is based on the centralisation of monetary policy and the decentralisation of fiscal policies which are then subject to the restrictions of the Stability and Growth Pact (SGP). The limitations of this compromise were already clear in the euro crisis in the last decade, a crisis which led to an unprecedented division among the member states of the Eurozone.

The pandemic has necessitated the suspension of the SGP. To respond to its devastating impact, all the European states had to enact a sharp rise in public spending, with monetary cover guaranteed by the European Central Bank. Above all, the pandemic required the promotion of the Next Generation EU (NG-EU) program financed by European fiscal resources, with which to support recovery in those same states.

These changes inevitably provoked a debate on the future of the SGP. Speaking at question time in the Chamber of Deputies on 11 May, Mario Draghi stated:

I want to be very clear. There is no question that the SGP rules will have to change (…) my position is that the current rules are inadequate, they were already inadequate, and they are even more so as we come out of the pandemic. We will have to focus on strong growth to ensure the sustainability of the public accounts.

A theory of moral hazard

On the other hand, Wolfgang Schäuble, the current President of the Bundestag and former minister for economy and finance, continues to be concerned only about stability. In an article published on 16 April in Project Syndicate (later published by Gavi and others), the German politician firmly stated that “maintaining competitiveness and a sustainable fiscal policy are the responsibility of member states”, adding “I have often spoken about that kind of moral hazard with Mario Draghi…and we always agree” on this point, “given the structure of the Economic and Monetary Union”.

So, the SGP can be temporarily suspended, but must then return to normal operation. Maybe with some addition, according to the Social Democratic Minister Olaf Scholz, such as the current program which helps states combat domestic unemployment.

The compass directing Wolfgang Schäuble’s approach (and that of much of the German traditional establishment) is the theory of “moral hazard”. According to this theory, monetary union among states which differ from each other (in terms of their economic and institutional capacity) will inevitably create negative incentives (if not properly regulated), since some states may spend more than they have available, thus transferring their debts to the other states.

Hamiltonian moment

For Wolfgang Schäuble, this theory even underpins American fiscal federalism. In his article, Schäuble returns to 1792, when the then US Treasury Secretary Alexander Hamilton set up a federal fund to take over the debt taken on by states (to support the war of independence against Great Britain) on specific conditions:

All 13 US states were required to deposit good collateral, practice budgetary discipline, and reduce their debts. Persistent deficit sinners were put into structured insolvency to prevent moral hazard at the expense of the more frugal states. That external constraint on fiscal policy – and not the mutualization of individual states’ debts, which is occasionally recommended for the EU – was the crux of the oft-cited “Hamiltonian moment”.

Note the use of terms such as “state sinners”, “moral hazard”, “frugal states” to describe the American debate in 1792.

In short, the SGP introduced in Europe at the end of the 20th century is nothing more than a copy of what was done in America at the end of the 18th century.

… or is it?

Unfortunately, that’s not quite right. The “Hamiltonian moment” did not result in the formation of a system of federal rules to bind the budget policies of federated states, but rather it saw the creation of fiscal power that was independent from the federal centre (as argued by Jonathan A. Rodden).

It could not have been otherwise, given that the Tenth Amendment to the US Constitution, which was introduced in 1791, prevents any federal interference in matters which are the responsibility of the states and are not delegated to the federal centre. This is seen also by the fact that the states continued to spend beyond their budgets, with the result that several of them went bankrupt in the 1830s and1840s.

This time, however, the American federal centre did not intervene to take responsibility for their debts but left it to the financial markets to regulate their budget policies. Consequently, many states introduced laws to keep their accounts in balance and therefore to reassure lenders. At the same time, however, the federal centre was driven to intervene indirectly in struggling states, through the federal budget. Starting from the 1930s, this model has been fully institutionalised.

The pandemic has shown that, in a union of states, fiscal policy cannot be an exclusive national responsibility.

Therefore, the American fiscal model is based on a division of responsibility between Washington D.C. and state capitals. The latter are responsible for the use of their fiscal resources (to the extent that they are free to fail), the federal centre has available autonomous fiscal resources to be used anti-cyclically or for support (in struggling states).

The “Hamiltonian moment” started the construction of the federal centre’s fiscal capacity, not some kind of SGP ahead of its time. America has never experienced the fiscal regulation system adopted by Europe. Looking for legitimatisation in Hamilton in order to offer up the SGP once again for post-pandemic Europe highlights German culture’s fixation for stability regardless of time, space and costs.

No saints or sinners

In short, the pandemic has shown that, in a union of states, fiscal policy cannot be an exclusive national responsibility, as claimed by Wolfgang Schäuble, Olaf Scholz and the German traditional establishment. The supranational centre must also have its own fiscal sovereignty to produce European public goods, as argued instead by Mario Draghi, Emmanuel Macron, and important European commissioners such as Paolo Gentiloni and Thierry Breton.

Indeed, NG-EU has the potential to create a limited fiscal capacity for Brussels, independent from financial transfers (with their related conditions) from member states. Through the NG-EU investments it is possible to create the conditions for growth of national economies – especially those economies hardest hit by the pandemic – a necessary condition to make national public debts sustainable in the medium term.

The post-pandemic EU would require a new fiscal governance for accommodating differences between member states, none of which is saint or sinner. Is there anyone in Berlin who is finally willing to acknowledge that economics is a social science and not theology?

The post After the pandemic: Still Draghi vs Schäuble? appeared first on Ideas on Europe.

Council’s lack of flexibility threatens security for EU farmers, Agriculture Committee Chair Norbert Lins warned, calling on Council to return to proper negotiations.
Committee on Agriculture and Rural Development

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Council’s lack of flexibility threatens security for EU farmers, Agriculture Committee Chair Norbert Lins warned, calling on Council to return to proper negotiations.
Committee on Agriculture and Rural Development

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An EU Biodiversity Law is needed to set the biodiversity governance framework until 2050, the Environment Committee agreed on Friday.
Committee on the Environment, Public Health and Food Safety

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An EU Biodiversity Law is needed to set the biodiversity governance framework until 2050, the Environment Committee agreed on Friday.
Committee on the Environment, Public Health and Food Safety

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Committee and political group meetings, Brussels

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DRAFT OPINION on the EU Gender Action Plan III
Committee on Foreign Affairs
Hannah Neumann

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