Gonzalo De Cadenas-Santiago, MAPFRE Economics’ Executive Director.
It seems that the EU takes its greatest strides in extreme situations; from its post-war foundations to the current crisis. The institutional response, from both the ECB and the Commission, has risen to the occasion and consolidated the leadership changes that took place in the transition from 2019 to 2020.
Lagarde has involved the ECB to an extent that can only be compared to that of the previous crisis, with purchasing programs that now amount to 1.4 trillion euros (among other important measures). Von der Leyen has responded to the ECB’s efforts with instruments, both for the first line of defense against the current crisis and for Europe’s recovery plan, representing a similar level of support (of 540 and 750 billion euros, respectively), which bringing the Union’s combined efforts to over 15 percent of its GDP. This emergency action plan is unprecedented, not only in terms of amount, but also in terms of the tacit commitment to transformation that accompanies it.
The commitment that has been made by the President of the European Commission reveals the goal of economic and productive transformation that informs the NextGenerationEU plan, stemming from both the aspiration to commit to boosting productivity—by investing in skills, technology and sustainability—and the need to make this investment viable, by involving the private sector to ensure rationality and economic sustainability.
But I find the method of recovery funding and transformation that this potentially entails particularly remarkable. The idea of financing the reconstruction by appealing to the wholesale markets with the issuing of new long-term instruments funded by the EU budget—regardless of what final form the measure takes—is the strength that the European Union needs to gather the momentum and speed necessary in order to abandon the status quo that had previously defined it (the status quo is an example of a Hamilton Compromise).
Debt issuance creates new instruments from which the financial sector can take leverage, with very long terms consistent with the idea of permanence of the European project. In addition, it releases pressure on some sovereign assets that provided refuge, breathing life, again, into the financial system, which manages the long-term savings necessary to rationalize sustained investment over time, the increase in productivity and growth and, therefore, the fiscal sustainability of the project. And, finally, it is a mechanism for a commitment based on solidarity between members, regardless of the final form it takes.
Although the proposal is not a Hamilton moment (it isn’t, for now, giving rise to a European Treasury as was the case in the US), it does lay foundations that will guide the effort in two key directions: redistribution, due to the very fact that liabilities are honored using the Union’s budget, and relations with non-EU countries, because the necessary creation of new fiscal figures (regional adjustments of the price of CO2, commercial adjustments with China, digital rate, etc.) will require international coordination. And these two elements, which will define the EU’s domestic and foreign governance, are key to the EU fulfilling its new vision and securing its leadership in the future.