Europe After COVID-19: A New Role for German Leadership?

Forum DOI: 10.1007/s10272-021-0955-z Francesco Saraceno Europe After COVID-19: A New Role for German Leadership? A famous quote by Jean Monnet (1978) states that Europe will be “built through crises” and will be “the sum of their solutions” (417). Nevertheless, many agree that in recent years, the sovereign debt crisis has been “wasted” by European policymakers who have remained largely impervious to the discussion on the respective role of state and market in ensuring economic growth and convergence. Instead of learning from the “rethinking macroeconomics” debate triggered by the global financial crisis to build a less dysfunctional and more cohesive Europe, they locked the single currency in a vicious circle of deflationary policies and sluggish growth. Then came the reaction to the coronavirus pandemic, which was surprising both in size and in timeliness. It is as if the mistakes of previous years, somewhat metabolised, had prompted governments and European institutions to move without hesitation. This article traces the policy response to the COVID-19 crisis, highlighting the role of Germany in this change of perspective. It then investigates the reasons behind the end of the German “virtue” and analyses the implications for the current debate on eurozone reform. Building a dam against the COVID-19 tsunami In March 2020, EU governments were the first line in the fight against the pandemic. This was inevitable: the EU is a union of sovereign states and neither public health nor fiscal policies are among its competencies. For the latter, consistent with the no taxation without representation motto, spending and tax decisions can only be made at the national level, where accountability with the voters lies. Measures to support households and businesses fell into three broad categories: firstly, support for health systems under stress (among other things, because of the systematic underfunding of the past decades); secondly, measures to preserve employment and © The Author(s) 2021. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. Francesco Saraceno, OFCE – Sciences Po, Paris, France; and Luiss, Rome, Italy. ZBW – Leibniz Information Centre for Economics support workers’ incomes; and finally, measures to support the liquidity of companies, with tax deferrals and credit guarantees. Nearly everywhere, the measures were extended well into 2021 as the economic effects of the pandemic unfolded. The impact on public finances was immediate: In 2020, eurozone government deficit and debt increased to 8.4% and 98.1% of GDP respectively (IMF, 2021). The measures were fruitful, as everywhere income and employment have fallen significantly less than GDP. Germany was particularly proactive, with two large stimulus packages (in March and in June) that expanded the duration and scope of both short-time work schemes (kurzarbeit) and unemployment benefits, and provided loans and guarantees for liquidity strapped firms. The June package was aimed at boosting domestic demand through a temporary VAT decrease and incentives for investment in green technologies and digitalisation. While member states were in the front line, European authorities promptly moved to protect them from market pressure. The Commission activated the Stability and Growth Pact (SGP) suspension clause and softened state aid rules, thus allowing states to pump money into the economy and to support the sectors hit by the pandemic. Meanwhile, the ECB launched an extensive pandemic emergency purchase programme (PEPP), later extended in size and in duration (until spring 2022). Together with the mass of savings available worldwide, this has kept interest rates low, contributing to debt sustainability. Finally, European institutions made loans available to member states for their urgent expenditures. Whether through an existing mechanism (the European Stability Mechanism (ESM) for health-related expenditure), or a newly created mechanism (the temporary Support to mitigate Unemployment Risks in an Emergency (SURE) for labour markets), the principle was the same: Europe borrows at favourable rates and transfers the loans to countries that can thus save on interest expenditure. SURE was extremely successful and in autumn 2020 started lending €90 billion to 18 countries. On the contrary, no country applied for ESM lending: Despite a relaxation of access conditions (the “pandemic line”), it remains an instrument aimed at ensuring the stability of the euro area in the event of financial crises; as such, it allows the European institutions to interfere in member states’ budget processes. No country judged the limited gain in interest that the pandemic line would warrant to be worth this risk of interference. 65 Forum The medium-term challenges: A proactive EU, but not (yet) a Hamiltonian moment As we slowly emerge from the crisis, the EU is going from a mere supporting role to being a key player. The transition towards a sustainable growth path, the revamping of public investment, the rethinking of our welfare systems – these are challenges that not even the largest European countries can hope to meet efficiently on their own. Economies of scale and externalities militate in favour of policies implemented, or at least financed and coordinated, at the EU level. The need to provide these European public goods is what inspired the Next Generation EU programme, which combines the Recovery and Resilience Facility (RRF) and other mechanisms with the European multiannual budget, endowing member states with a total of €1,850 billion over seven years. The innovative aspects of the instrument have been thoroughly discussed. First, the issuance of common debt for significant amounts (€750 billion) to finance an extensive investment programme aimed at channelling the recovery within the EU’s long-term objectives (green growth, digitalisation, social cohesion); then, the allocation of resources to member states based on the needs that have emerged from the pandemic rather than from the usual allocation keys (which is why Italy, usually a net contributor to the EU budget, will be a net beneficiary of the RRF). The debt will be repaid from 2028 to 2058, hopefully thanks to an increase of own resources (the web tax, the carbon border tax, the plastic tax). If progress is not made on these, countries’ contributions to the Union budget will have to be increased. There is little doubt that Next Generation EU is a turning point: for the first time, the Union is making a joint effort to revive growth based on the idea of temporary mutualisation of debt. What makes the agreement even more significant is Germany’ position, which, from the outset, put all its weight behind the Commission’s initiative. Nevertheless, it is certainly not a Hamiltonian moment, a founding ac (...truncated)