– Andrew Macken
With all the news around COVID-19 and the ongoing political dramas surrounding the US general election, it seems an historic change in European philosophy has gone largely unnoticed. In July, EU leaders agreed to an extraordinary €750 billion recovery package called the Next Generation EU (NGEU).
The NGEU represents the first time the EU will employ large-scale common-borrowing to fund counter-cyclical fiscal stimulus to complement existing fiscal policies from individual national governments. Previously anathema to German policymakers, the concept of common-borrowing received near-unanimous support domestically – which, in and of itself, is nothing short of extraordinary in a fragmenting German political system.
Contrast today’s dynamic with the Eurozone’s 2011/12 recession during which there was no appetite for counter-cyclical fiscal policy. Instead, during this period, austerity was the order of the day – which largely exacerbated and prolonged the economic weakness and placed a much heavier burden on the European Central Bank (ECB) to employ unorthodox monetary policies to help stimulate a recovery.
A core idea of the NGEU is that, over time, there will be genuine own resources of the EU that will be available to repay the borrowings required to finance the program. And these are not just in the form of transfers from member countries. Academic researchers believe that a carbon emissions trading scheme, for example, would generate enough common EU revenue to repay all of the debt over time.
The NGEU is not without risk, however. The biggest risk is that this opportunity is squandered, killing the program as a much-needed precedent and blueprint for the management of future economic crises within the EU. Projects proposed by member countries under the program need to include measures to effect long-desired (and difficult to implement) structural reforms. And the approval of projects is made by the vote of other member countries. Failure for projects to deliver promised benefits may call into question the efficacy of the program longer-term.
For the same reason, of course, there is a strong incentive to get this right. The combination of large-scale countercyclical fiscal policies with large and unconventional monetary policies and long-term structural reforms is an economist’s dream path to sustainable recovery. Germany’s new openness to common borrowing has allowed for this once-in-a-generation opportunity for the EU. If successful, the NGEU will go down in history as one of the important economic silver linings to an otherwise tragic global pandemic.
Andrew Macken is the Chief Investment Officer at Montaka Global Investments.
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