The design of the eurozone is often criticised as only half finished. To be both prosperous and stable, the eurozone currency area needs a unified fiscal policy with both tax and debt raising powers.
On this basis the recently agreed €750bn Next Generation EU (NGEU), which amounts to nearly 5% of EU GDP and involves substantial debt issuance at the EU level, is clearly on the right track. The move is a big step forward in EU integration and, even though it is supposed to be a one-off, there is little doubt that a line has been crossed and future funding of this type will be forthcoming. In effect, the EU does now have a common fiscal mechanism.
By providing a new source of highly rated euro-denominated securities, the NGEU deal also increases the supply of safe haven assets available to assist the ECB’s monetary efforts. It also allows banks to diversify their own bond holdings away from national to EU bonds. This should help break the bank-sovereign doom loop that has been such a risk management concern.
But as with any fiscal stimulus there remain the questions about how it will be spent and how it will be paid for. Here things don’t look quite so well thought out.
Despite four days and nights of argument between European leaders in order to deliver the NGEU, along with a new seven-year EU budget, there was no firm decision taken on EU-wide tax-raising measures. There are loose ideas for digital taxes and for taxing climate unfriendly imports but so far only a plastic tax has been agreed on. Come 2028, when repayments of NGEU bonds start, the arguments around how to raise the money may be very difficult to resolve.
On the spending side, the temptation will be for the crisis-hit southern countries to prop up their ailing hospitality and tourism sectors that are likely to remain subdued for a long time and may never fully recover. A much better option would be to invest in next generation industries such as AI and robotics, reshoring of manufacturing, e-commerce ventures and overall energy efficiency that would take the economy forward and create new jobs.
While 30% of both the NGEU agreement and the budget are supposed to be spent on green activities, in putting together the budget existing agricultural and regional subsidies have been preserved whereas research and investment spending has been cut. This is not an approach that will help Europe hold its own in the coming technology and economic race with China and the US.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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