News & Media

European Recovery Fund needed to boost a post-Covid recovery

6 May 2020

Speech by Duncan Smith TD
Party Whip and Spokesperson on Climate Action, Communications Networks and Transport.

Once again, the EU is faced with a major crisis. And this crisis has the potential to make or break the Union.

The test this time is whether the EU can demonstrate solidarity between its member states based on shared democratic values, or whether it wants to just be a marketplace. 

One of the reasons why the UK was never fully integrated into the EU was because they only wanted a single market, not a political community. But Labour’s view is that the EU can only be successful if it is built on solidarity and mutual assistance between member states.

I welcome the EU’s decision to use €540 billion from the European Stability Mechanism to assist member states, without many of the onerous rules that usually come with ESM loans.

I also particularly welcome the recent action by the EU to host donations to developing countries to assist them in their response to the epidemic. The target of €7.5 billion set on 4th May was essentially reached within 24 hours, which is testament to the surge of global solidarity brought about by the COVID-19 epidemic.

But my main focus is on the idea of a European Recovery Fund.

My colleagues from the Party of European Socialists proposed a €1.5 trillion Recovery Fund to help all our countries rebuild after this crisis. I am glad that EU leaders recently agreed to create a new fund of at least one trillion euro, which is a great step forward. However, a lot hinges on the model of financing used to underpin this fund and decisions about how the fund will operate.

In short, we need a fund that distributes grants as well as loans, which targets more assistance to the worst affected countries on the basis of solidarity not their proportion of the EU’s population, and we also need the fund to be financed at EU-level, not by piling on unsustainable debt onto member state’s already over-stretched national debts.

The Recovery Fund proposal is important so I want to spell it out in more detail.

The first point is fairly self-evident. When countries and major employers are already over-stretched they cannot afford to take on too much additional debt.

There are going to be many viable enterprises across Europe that will only be viable if they are given grant aid, not loans.

Likewise, there are countries that will have the capacity to quickly get their public finances in order, but only if they are given grants not loans.

The choice is between being pragmatic about what will work versus being ideologically opposed to grants. Unfortunately, a number of governments across the EU are ideologically opposed to the idea of giving grants to other member states. The irony is that this ideological opposition will make the EU’s recovery slower and more painful, just like after the 2008 banking crisis, when the same ideology dominated EU thinking.

We cannot make the same mistake twice. Other parts of the world, including the United States, came out of the 2008 crash faster because they were not prisoners of ideology. Across Europe, people cannot be asked to endure another set of austerity years. People will not tolerate more austerity, and we have already seen the rise of Eurosceptic and populist politics in response to those ruinous policies.

This time around, the EU has to give grants in addition to loans if economic recovery is to be faster and more sustainable.

The second point is that the European Recovery Fund must be focused on the areas of greatest need, regardless of geography. In normal times, the EU carefully allocates funds based on member state population size and contribution to the EU budget. But we are not living in normal times and those rules cannot apply.

A European Recovery Fund needs to allocate money to where it is most needed to boost recovery and to rescue as many viable jobs as possible in the aftermath of the crisis.

It is also an opportunity to direct funds towards environmentally sustainable activity and to speed up the EU’s transition to a low carbon economy.

Again, this is a choice between being pragmatic about what actions will help economic recovery versus being ideologically opposed to any kind of fiscal transfer. Unfortunately, a similar set of governments are blocking this idea because they fear a domestic political backlash if they are seen as using their own tax revenue to fund other countries’ recovery.

However, the Party of European Socialists’ model of a European Recovery Fund took this concern into account.

There is no need for member states to fund other member states directly, as long as the EU borrows money at EU-level and repays that money from its own resources.

As such, there should be no objection to channelling money to where it is most needed, as that will benefit the whole EU in the long-term. We will all be worse off if regions of Europe are left behind in the recovery. Hence the Recovery Fund must be targeted where it is most needed.

The third point about the Recovery Fund is that it should be raised at EU-level and paid for at EU level.

In this context, I’m glad to see that our own government has backed the proposal for Eurobonds to fund the recovery.

The logic of raising debt at EU level to create the Recovery Fund is fairly straightforward.

Many EU member states have relatively high public debts following the disaster of 2008. Some of us will find it difficult to borrow money to raise those debts further, even though in Ireland we are still fortunately able to borrow at very low rates.

The EU exists as a separate international entity with the capacity to borrow, but it currently has no debt. Compare with the United States, where debt is carried at Federal level as well as at State level.

To use the analogy of bank accounts. Many member states have already reached their overdraft limit on their personal accounts. But we have a shared account with our partners with no overdraft at all.

It makes much more sense for us to collectively use our shared account to finance the Recovery Fund rather than to individually pay more to extend our already large overdrafts.

This is where some member states fear being asked to directly finance others. But that is not what is proposed. If we borrow at EU level, we should also repay the debt at EU level.

The EU has modest revenue raising capacity, mostly from custom duties and sugar levies. But these could be expanded, for example with the proposal for a Financial Transaction Tax at EU level.

Also, the original proposal for a €1.5 trillion fund envisaged perpetual or very long life bonds, which have a surprisingly low annual cost. A €1.5 trillion Recovery Fund could be financed for as little as €5 billion in interest payments per annum, and as a perpetual bond the capital would never come up for repayment.

The EU has the capacity to service such a debt. Over time, inflation would erode the capital cost to a much lower level, which means that it could be paid off decades later, just as some post-World War Two bonds have only recently been paid off.

I hope that the idea of a European Recovery Fund will be agreed sooner rather than later, as the future of the EU depends on a successful economic and social recovery after COVID-19.

I would like clarity from the Government about whether or not they support a European Recovery Fund along the lines that I have described. I would appreciate a detailed response about what the Government agrees with or disagrees with in relation to any Recovery Fund.

In relation to bond-buying by the European Central Bank, which is currently keeping national borrowing rates slow and keeping inflation down, there has been a major challenge to the ECB’s Quantitative Easing approach by the German Constitutional Court. It has made a ruling that will potentially halt participation by the German Bundesbank or the German government in this policy, which would have major knock-on effects, and could jeopardise the stability of national debts in numerous member states.

All of this stems from a legal case taken by an independent group of businesspeople and academics who are ideologically opposed to any burden sharing across EU member states and who oppose the €2.7 trillion programme.

While this ruling excludes the €750 billion Pandemic Emergency Purchase Programme (PEPP), there is now expected to be a further legal challenge to its legality.

What is the Government’s understanding of the German court decision, and what actions are being taken to ensure that the ECB’s bond-buying programme can continue, including what actions are being taken to ensure that the Pandemic Emergency Programme is legally robust?

Also, what is the Government’s understanding of how this national-level ruling challenges the authority of the European Court of Justice and the ECB?

Key to all of this is solidarity Minister. Solidarity amongst EU members and solidarity between the EU and the rest of the world. Europe has a responsibility to be a leader in the global recovery. We need to stand strong in solidarity with those that need it. In mid March, 52 Doctors and nurses from Cuba arrived in Lombardy on a day when 800 people died from COVID 19. That was an incredible act of global solidarity. The EU needs to reciprocate this and work to assist Cuba who are being impeded by tightened US embargos of accessing equipment to help combat the pandemic. COVID 19 should be used to break traditional enmities and hostilities. I supported the call of the UN General Secretary Antonio Guterres who called for an waiving of sanctions in order to tackle the crisis and he said”, this is a time for solidarity and not exclusion.” We are all bounded by our common humanity and need to defeat this virus. The EU should be moral leaders on this.

There are other aspects of recovery that I would like to mention, but time is limited.