New and Old in the EU Anti-Crisis Policy

The EU economy is once again in crisis. In its summer forecast, the European Commission is not too optimistic about the prospects for GDP growth in the EU: approximately -8.3% versus -7.7% in the spring forecast. This reduction in GDP is almost twice as bad as that witnessed during the crisis in 2009. At the same time, other old problems are exacerbated today. Again, there are more affected and less affected countries, again the difference in the competitiveness of the economies of the union is obvious. The question of the problems of solidarity in unification arose again. How new are all these components of the crisis and how soon can anti-crisis measures be considered?

We should say right away that the main aspects of the current crisis in the EU are, in principle, not new. At least we can argue for sure that the COVID-19 pandemic was not the only cause, and the main prerequisites were formed long ago. Of course, anti-epidemic measures played the main role in curtailing economic activity, but practically all the accompanying factors in one form or another already existed. First, the EU was for some time embroiled in a de facto prolonged crisis of economic growth, which was caused by a whole range of factors. These include chronic underinvestment (a low rate of gross capital formation at a high rate of gross saving), a relatively low science intensity of GDP, a large set of demographic problems, and unresolved social issues. Second, the problems of previous crises were muted, but not completely resolved, which is associated with the third factor - the unequal competitiveness of the EU member states. Because of this unevenness, symmetric economic shocks affect each country in its own way, and the institutions created during the periods of past crises solve problems to the extent necessary to prevent the collapse of the entire union. Concern about improving the competitiveness of a low performer remains largely the concern of the low performer. And this is understandable: the strong one does not always want to create mechanisms for the redistribution of funds in favour of weaker players. In many respects, this leads to a permanent crisis of solidarity in the EU.

This, in fact, functionalist approach to integration, expressed in the creation of ad hoc institutions for the solution of any problem, can be considered a peculiar feature of anti-crisis management in the EU. In addition, all these problems are superimposed on the unevenness and incompleteness of the integration structure of the European Union. As a result, anti-crisis policies can be eclectic and selective. However, in defence of the union, we must say that such eclecticism in measures is explained by the specifics of the integration union. After all, the EU is not a state, but a complex system of division of sovereignties.

When we talk about anti-crisis macroeconomic policy, we first of all mean its two most important components: fiscal and monetary. However, in the case of the EU, there are difficulties. When considering the "common EU" anti-crisis policy, it is difficult to talk about the integrity of any of its components, since powers are distributed not only between national and supranational authorities, but also often between EU institutions. This is probably why it is more correct to speak not about a single anti-crisis policy of the EU, but about a set of anti-crisis measures.

Probably the easiest is the practice of monetary policy instruments applied by EU institutions. As you know, for countries belonging to the Eurozone, it is fully determined by the European Central Bank (ECB) - that is, transferred to the supranational level. In the current situation, the ECB has perhaps most promptly and effectively responded to the coronavirus crisis. Back in March, an asset purchase programme of 750 billion euros was announced, and in June, the expansion of this virtually new round of quantitative easing policy to 1,350 billion euros was initiated. The programme will operate at least until June 2021, and the announced order of numbers is, in principle, comparable to previous rounds of the ECB's quantitative easing policy (during the period of the programme, the total assets of the ECB increased by approximately 2.5 trillion euros). The use of this instrument is not a new and unpredictable step on the part of the ECB, since the first round of easing policy was announced in 2014 and showed some results. Such measures refer to the instruments of unconventional monetary policy, which are applied when the central bank cannot use traditional levers such as the key rate (in 2019, the rate on the main refinancing operations of the ECB was 0%, which objectively made it difficult to reduce it). The first rounds of asset buying policies largely helped to maintain minimal inflation in the euro area, so there is confidence that the current measures will help the Eurozone avoid falling into a deflationary trap, although the overall macroeconomic effectiveness of this unconventional measure is still a debated issue in economic circles. It is also worth adding that the ECB's policy, contrary to the regulator's image of a financial Cerberus, is in many ways an instrument of solidarity, since the asset purchase programme (especially the part that is aimed at buying back government bonds) primarily mitigates debt difficulties in problem countries. By the way, now the asset purchase programme has been extended to Greek securities for the first time. Of course, the ECB does this not out of humanitarian considerations, but in order to maintain the stability of the currency union. Unfortunately, so far the degree of harmony and efficiency of the bank's monetary policy is much higher than that of its fiscal counterpart.

In fact, of course, there is no common EU fiscal policy. And this is explained by the fact that states are not ready to lose their sovereignty in the sphere of public finances. However, we can talk about individual elements of policy, which in one way or another can be qualified as measures related to public finances. The general architecture of such measures should include the general EU budget, which, however, is not comparable with the budgets of national states (it is only about 1% of the total GDP of the union). Moreover, this budget is not formed directly at taxpayer expense, as are the budgets of national states, but in a special way: about 70% of all revenues come from the contributions of member countries, from their GNI. Furthermore, it is necessary to say about the system of fiscal regulation or supranational supervision of the budgets of the countries - members of the Eurozone (the main document is the Stability and Growth Pact). We are talking about the practice of control by the European Commission and the Council of the EU over the balance of national budgets. Such control is necessary to prevent states from accumulating excessive budget deficits and then excessive national debt, which could then jeopardise the stability of the euro area. This is an extremely important point, because, unlike nation states, where monetary and fiscal policies are designed to perform the functions of macroeconomic regulation, mutually complementing each other, the EU Economic and Monetary Union (EMU) is deliberately separated from the general budget. Finally, the third element could be considered special anti-crisis mechanisms created to resolve the crisis of sovereign debt in the eurozone. These primarily include the European Stabilisation Mechanism, which provides loans to problem countries.

Of course, such a conceptual architecture does not reflect the entire complexity of the system of distribution of financial powers in the EU, but it makes it possible to identify some of the traditional options and tools for EU anti-crisis management. So, in the field of the general budget, its small volume can be considered characteristic; there are difficulties associated with compelling the member countries to increase its volume, as well as a lack of full-fledged general elements of budget financing. Its focus is not on the macroeconomic stabilisation of the entire Union, but on the implementation of certain areas of  EU activity (financing of agricultural, regional and other EU policies). Regarding ​​fiscal regulation, it has always been necessary for countries to maintain budgetary discipline, and after the debt crisis, the flexibility to apply these rules was greatly reduced by the tightening of the Stability and Growth Pact. At the same time, there has always been resistance in the Eurozone to the creation of any solidarity financial mechanisms, although there have been discussions about the need for a separate Eurozone budget or so-called Eurobonds (that is, collective securities). Finally, in the field of anti-crisis institutions, an extremely important principle in the EU was the conditionality and repayment of financial resources. That is, usually, as a condition for receiving support, it was necessary to meet certain criteria, and the funds were mainly provided on a credit basis.

In the current situation, many are talking about implementing a number of fundamental changes to this approach. First, the activation of the role of the European Commission, which is lobbying for the adoption of large-scale anti-crisis measures, is obvious. Second, it is proposed to finance these measures not only at the expense of the member states, but also by issuing joint EU securities. Third, the European Commission has de facto suspended the Stability and Growth Pact. Fourth, the creation of a new anti-crisis fund is being announced.

But are all these changes so new? It is difficult to say unequivocally, however, there’s no reason to expect a new wave of radical change. For example, the documents of the European Commission have repeatedly mentioned the possibility of the flexible application of the Stability and Growth Pact.

One of the first plans to support the economies of the affected states was announced in April by the European Stabilisation Mechanism (that is, the already -existing anti-crisis institution), which announced its readiness to allocate up to 240 billion euros, which was originally slated to be provided to countries on an unconditional basis. However, this statement was immediately followed by speeches by politicians from the "stingy" EU countries (primarily the Netherlands, Austria, Sweden and Finland), according to which the ECM funds will be provided unconditionally only for financing health care; the rest is subject to the conditionality principle.

The plan of the European Commission, which appeared a little later, claims to be very revolutionary. Thus, it is proposed to increase the limit of the new seven-year budget plan to 1.1 trillion euros. If we compare this amount with the previous plan for 2014–2020, the volume of which was 959.5 billion euros, then the growth doesn’t appear to be particularly serious. True, it is necessary to take into account the UK's withdrawal from the EU, which also added difficulties to the discussion of the individual contributions of the member states. If the original version of the new multi-year plan is adopted, then this can be considered a serious victory for the European Commission. Its second proposal is the creation of a 750 bln euro European Recovery Instrument, the key institution of which will be a special Recovery and Resilience Facility, capable of providing up to 560 billion euros. The European Commission plans to receive these funds by issuing common EU securities. Initially, the Commission proposed to provide up to 500 billion euros in the form of grants (that is, on a “non-refundable” basis), but the “stingy” states called for a significant reduction in this figure. As a result, on July 21, 2020, the EU countries managed to reach an agreement according to which the Recovery Mechanism will still be enforced. The total amount of grants dropped to 390 billion euros, but the general outline of anti-crisis measures remained unchanged. The Commission will still borrow money on the open market, and this partially violates the prevailing stereotype that solidarity financing mechanisms in the EU will not work. Apparently, this decision can still be considered a kind of mini-revolution. Many are surprised by the change in the position of Germany, which has traditionally opposed such steps (at least this was the case with Eurobonds during the sovereign debt crisis), but called for a recovery plan to be adopted in the spring. True, some analysts, to a greater extent, associate the change in rhetoric with domestic political reasons.

But even if we take into account all the originality of the current steps of the EU, two fundamental points can be noted. First, the principle of conditionality in the provision of funds is likely to remain in place. At least this term appears in the proposal of the President of the European Council, Charles Michel. 

Second, some researchers note that in the history of the union there have already been cases of raising funds in the financial markets on behalf of the union (meaning the issue of UES securities during the 1973 oil crisis). And finally, thirdly, the formal division between the general budget, the fiscal components of the EMU, and special anti-crisis mechanisms still remains. Indeed, no one is talking about the creation of a full-fledged and permanent mechanism for the redistribution of funds between member countries; rather, it is again about a new instrument, created ad hoc. That is, the traditional emphasis of the EU on crisis management remains. Yes, the abnormality of the situation forces us to take significant measures, but it is too early to talk about fundamental changes.

Of course, the EU cannot be regarded as a nation state. In the same way, supranational anti-crisis measures cannot be evaluated in a similar vein. In the current conditions, as in a mirror, the main flaws in the structure of European integration are reflected. However, at the same time, the EU is trying to play a role in solving the current crisis and thus legitimise its existence in the eyes of the wider European public. At the same time, the problems of harmonisation of interests and the same issue of unequal competitiveness of the member countries are reflected in the effectiveness of the measures being taken. This is why the instruments of a single monetary policy are likely to work earlier and more efficiently than elements of fiscal measures.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.