The EU Reconstruction Fund: Towards a Transfer Union

There is movement in the discussion about an EU reconstruction fund. Following the Franco-German proposal and the counter-draft of the „Thrifty Four“ last week, the EU Commission has now also presented its concept. As expected, the Brussels plan shows clear parallels to the German-French model. However, the total volume of the fund is to be even greater, at 750 billion euros. Analogous to the Merkel-Macron Plan, Brussels also provides for grants totalling 500 billion euros. In addition, however, the fund is also to grant loans amounting to 250 billion euros. The Commission’s plan even gives details of how much each country would benefit from the fund. As expected, Italy, which was particularly hard hit by the Corona crisis, is to be the main beneficiary. It would receive 81 billion euros in grants and 90 billion euros in loans. By comparison, Germany would receive 28 billion euros in grants and no loans.

The money should flow as quickly as possible. To finance the fund, the EU would therefore first issue bonds on the financial market. The parliaments of the nation states would still have to give their approval for this. The EU’s debt is to be gradually reduced over the next few years, on the one hand through EU taxes of its own (e.g. on plastics or digital equipment), but also through higher financial contributions to the EU by the nation states. Germany would account for the lion’s share and thus considerably more than it would receive from the fund itself.

At first glance, both the Merkel-Macron and the EU proposal appear far less groundbreaking than the Corona Bonds. The existing EU budget would be expanded in volume and the nation states‘ financial contributions to the EU would increase in the coming years. What is new, however, is that the EU would be able to take on considerable amounts of its own liabilities. This would amount to a paradigm shift. Until now, Brussels‘ financial room for manoeuvre has always been limited by the fact that the nation states wanted to keep their payments to Brussels within limits. This would change with the new proposal. The financial burdens on the states would be shifted into the future, which would also usually result in fewer conflicts with their own voters. The agreement to pay off the EU’s debts would, however, initially only be a promise – whether all EU states will keep this promise is uncertain. It would therefore be quite likely that debt-financed EU aid could become a permanent fixture once it is in place.

The new mechanism is likely to arouse covetousness, especially in Southern Europe. Ultimately, the risk for Germany would be hardly less than with corona bonds, as the federal government would ultimately also be liable for Brussels‘ debts. So what made Merkel change her mind? The ruling of the Federal Constitutional Court on the PSPP may have played a role here. It calls for a time limit on bond purchases by the ECB and the Bundesbank. The central banks thus serve as a crisis fire brigade, but not as a permanent solution to the problems of the common currency area. In order to keep the eurozone together, Italy in particular needs financial assistance. If the central bank’s bond purchases are cancelled, Rome is threatened with financial imbalance. Despite resistance from the Netherlands and Austria, the northern European states will therefore have no choice but to transfer funds to Rome. Instead of financing Italy directly from the federal budget, the EU is now to direct it, but the taxpayers will only gradually pay for it. In the spirit of the European idea, greater financial solidarity is probably inevitable, but an open discussion about the risks and side effects of the chosen form is desirable.

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