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EU recovery package does not reward responsible economic policies

Member states with good finances likely to receive less

editor: REMIX NEWS
author: Századvég

The European Commission’s economic recovery package in its current form will in effect penalize countries with good fiscal policies, Hungarian think-tank Századvég writes in its analysis.

Although the European Commission presented its economic recovery package more than a month ago, on May 28, there is still very little information regarding either the actual borrowing method or the distribution of the funds between member states. With setting up the more than €750 billion package, the EU has wiped out a decade-long taboo by in effect making all member states participate in taking out the loan. Századvég looked at the available information on how that could impact Hungary and the Central European region.

The European Union plans to take advantage of the group’s overall AAA credit rating, which only a handful of member states have on their own and only one of them, Germany is a major economy. France is one notch down at AA, Spain has an A rating and Italy, struggling with a giant public debt and budget deficit has a BBB rating (Standard & Poor’s ratings).

In order to do so, the Council will have to approve the plan unanimously, but several member states have their reservations. The process is also even more complex than it would seem at first glance, because at the same time European leaders also have to work out the group’s budget for the next seven years. The two decisions are interconnected and both have medium- and long-term consequences, given that the loan will have to be repaid between 2028 and 2058, effectively impacting the next generation.

The mere fact that the proposal of a joint loan – that just a few months ago would have seemed unimaginable  – is on the table at all is in itself a step forward. It was primarily supported by the southern member states with poor public finances while the group called the “frugal four” led by the Netherlands opposed it, arguing that the European Union is not a “transfer union”.

The plan could only have become a realistic option after Germany changed its point of view and which materialized in the form of a joint German-French proposal, according to which the EU would take out a €500 billion loan that will be co-guaranteed by the member states.

The whole recovery plan was conceived in the face of disillusionment among the southern member states who have begun to question the very reason for the EU’s existence, so in that sense the whole scheme is a desperate move to save the crumbling eurozone.

But the proposal in its current form also means that those countries – including Hungary – which had a balanced fiscal policy in the past few years, managed to reduce their public debt and also excelled at defensive measures against the coronavirus pandemic will receive less from the package despite the fact that their relative development (i.e. GDP per capita) is lower than that of the most supported states. This in effect means that the poor are supporting the rich. 

Title image: President of the European Commission Ursula von der Leyen addresses a joint press conference with German Chancellor Angela Merkel, attending by video conference, on the start of the six month German Presidency of the EU at EU Headquarters in Brussels, Thursday, July 2, 2020. (John Thys, Pool Photo via AP)