The European Commission has set out guidelines on how EU governments should spend the recovery fund
The European Commission has set out guidelines on how EU governments should spend the recovery fund © Geert Vanden Wijngaert/Bloomberg

Over the years the EU has developed a habit of overselling programmes and exaggerating headline numbers. This time, at least the headline number is for real. The so-called recovery and resilience facility that was agreed in July will indeed end up disbursing the €310bn earmarked for grants.

There has been a lot of talk about a historic agreement, even a Hamiltonian moment. Even if this characterisation were true, the agreement would still have been the easy part. It will be much harder to make it succeed on its own terms. Only then will this nascent financial facility have a chance to evolve into the real thing — a permanent source of funding for the EU.

The chances of that happening are not good. The big danger now is what the Americans call “pork-barrel” spending, a fiscal splurge crafted for the sole purpose of generating political support for those who spend it. This is exactly what I expect to happen in this case.

Last week, the European Commission produced an important document that set out guidelines to EU governments on how to spend the money and how to prevent it from ending up in a pork barrel. It is not a bad list, although I think the priorities are too diffuse. The bigger problem, though, is that member states will almost certainly not follow these guidelines. Germany, for example, plans to fold most of this money into its ordinary budget. I doubt that most of it will really go into new investments, by which I mean investments that would otherwise not have been made.

Once the European money goes into the same pot as all the rest, it will become exceedingly hard to distinguish the impact of old from new money. Prepare for smoke and mirrors — followed by exaggerated claims of the programme’s success.

As regular readers know, I have been advocating a eurobond for a long time. The €310bn grants component of the recovery fund is not really big enough to count as a discretionary fiscal stimulus. It will account for 0.7 per cent of the EU’s gross domestic product over a period of three years. Instead it is best to look at this as a pilot test. My worry is the test will come to be regarded in sceptical countries such as the Netherlands and Finland as having flopped. If a television pilot flops, the show never gets made.

A flop would be money wasted, or spent on pork-barrel projects, or a failure to generate growth. There are not many ways in which this programme can succeed or be seen as having succeeded. But there are many ways in which it can fail.

One already foreseeable problem was recently identified by the European Court of Auditors. It concluded that the commission had been exaggerating the amount of money spent on climate change. The commission uses a similar set of criteria for the forthcoming recovery fund. It wants 37 per cent of all investments to be green. This is a noble aspiration. But it is not a credible one.

What happens is that the commission categorises all investments into three classes — with a 0, 40 and 100 per cent green content. The system is also known as tagging. The way it works is that numbers are rounded up to the next highest threshold. So if a project has only the faintest connections with green investments, it would end up in the 40 per cent category.

There is no way that 37 per cent of the recovery fund money will be spent on green initiatives. It would be better to have a lower but more honest target for green spending and to allow for variations among countries. Italy, for example, has a much greater need for transport infrastructure spending. Guntram Wolff, director of Bruegel, the Brussels think-tank, was right to warn that the fund could fail without good governance and a clearly stated purpose. He is more constructive in his criticisms than I am, but the message is ultimately the same. This is a potentially dangerous moment for the EU.

Remember, this fund is the main plank in the eurozone’s crisis response to the coronavirus pandemic. There will not be another one next year. You may applaud the apparent U-turn on budgetary frugality of German chancellor Angela Merkel as much as you like. In the end, we always come back to the same problem: namely, that policy co-ordination in a monetary union of sovereign nation-states has its limits. National governments answer to their voters, not the EU. Democracy always gets in the way.

If we really want a eurobond that gets the job done, we will need nothing less than a federal political union. This cannot be fudged. If you conclude that a federal union is unfeasible or undesirable, it is probably better to take a step back rather than keep on resorting to hype.

munchau@eurointelligence.com 

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