Dr Nunez Ferrer: After losing Germany's support, 'frugal four' cannot stop the trend

Their main concern about loans or grants is the trust - in what way these funds will be used

Photo: CEPS Dr Jorge Nunez Ferrer.

EU budget rules are not designed for rescuing, but for operating under normal conditions. Now we have an emergency and you tell Member States that they will get all this money, expecting them to quickly prepare a programme and also spend the funds quickly, but in reality a year will pass until the first euro is spent. If there were absorption problems before, why shouldn't there be absorption problems with this recovery package, says Dr Jorge Nunez Ferrer, Senior Research Fellow at CEPS, in an interview to Europost.

Dr Nunez Ferrer, was it a surprise for you that the last European Council videoconference did not bring a specific outcome on the new Recovery Package?

No, because these are difficult discussions over decisions that are really putting into question the fundamental rules about the budget and proposing unprecedented changes. To some extent, it is a very difficult negotiation. You remember previously they were discussing “coronabonds” and there were two groups - the 'frugals' who were saying you should not mutualise the debt, and the other one saying we don't want macroeconomic conditionalities of the way it's done with the ESM, and so on. Now we add the money into the budget and we have the following - we mutualise the debt and the budget is subjected to macroeconomic as well as many other conditionalities. In a certain way, nearly every aspect for which the coronabonds were not accepted occurs in the budget. The only difference is that part of the money are grants. Maybe because their share in repaying the €500bn of mutualised debt will not have an impact on the debt sustainability of the beneficiary countries compared to the other trillions of already contracted debt.

The main reason to put the recovery fund in the EU budget is to avoid the debt burdens falling onto the countries that are having at the moment the biggest difficulties and that will be paid through the normal mechanism of resources shared by all Member States.

The real question is how this money will be used. The negotiations are difficult also because there is a lack of trust on some countries. The 'frugals' are specially concerned with Italy, because a lot of the decisions in the past were simply not looking into the future, not undertaking necessary structural reforms, but were into protecting the present, which is unsustainable. That is what the four 'frugal' countries are saying - the money has to be an investment that will generate a return that exceeds the debt or other liabilities taken on. It is not only to pay a debt but actually to generate something positive for the future. If you continue maintaining economic sectors that are declining, the economy declines and the future impacts will be worse.

The negotiations may seem slow, but these are actually quite advanced in relation to their complexity, discussions are serious and not a discussion of governments playing against each other. The fact that Germany changed its position put the real negotiations in motion. It will take time to strike a deal, but there is nothing strange in this. The normal seven-year multiannual budget was decided very late in the year the last time, so how can this highly unusual deal be faster?

Is the overall size of the Next Generation EU instrument of €750bn sufficient, or is it too modest, given the magnitude of the pandemic crisis?

If we combine it with all the national actions, it is probably going to be enough to restart for several countries. But it is not possible to cover everything with public money - it is a question of investment, of making the economy again attractive, it is a question of what we invest for the future. According to the Commission's calculations, the amount is sufficient if combined with other measures Member States have been adopting. The problem that we have is not the amount. Germany has adopted a series of measures - through state aid, tax and other assistance - a rescue package of support that is enormous. The problem is not only how much is the overall size for Europe, but what does it mean for individual countries. Spain will get quite a lot of money from it, and so will Italy, but that is normal because Germany and the Netherlands, for example, have so much domestic power, their assistance is incomparably higher than what Spain could enact, given that it is stuck with its accumulated past high debt.

The issue is not only about sufficiency, it is about the fairness of the distribution and how it will be spent. We can always say the glass is half full, or half empty, but the fact is that the size of Next Generation EU is much more than expected. It does address the questions right now and focuses in the right direction. The issue that is creating a lot of tension is the fear that grants will really give the wrong incentives, without a focus on the future return of the expenditure. I think the size of the instrument is good, it is certainly unprecedented. I do not want to judge if it is enough or not, because it is not an exact science, it is more of a philosophical and psychological question to some extent. The mere existence of the proposal has stabilised the markets.

In your view, is this instrument well designed for kickstarting the EU economy, given that the funds available are subject to conditions and reforms?

It is normal that there should be conditions and reforms, it is supposed that you have to be supported for something. But I am concerned that the instrument design at the moment is directly connected to the design of the way the EU budget works. Member States have had problems to plan, programme and absorb the normal funds. Now you are telling them we will give you more funds under the same rules and structures, pipelines, controls and also with programming on top of it. The rules of the EU are heavy, and sometimes they don't work so well, because they are based on ex-ante conditions, i.e. you try to make sure that money cannot be misused by putting a lot of rules beforehand, because it is difficult to hold countries accountable for financial mismanagement. So, the EU loads the countries with a lot of rules and controls to stop them doing something wrong. As a result, funding goes slow. That is why I think that the design of the EU budget is not the right design for a recovery or rescue package. The EU budget rules are not designed for rescuing, but for operating under normal conditions. Now we have an emergency and you tell Member States that they will get all this money, expecting them to quickly prepare a programme and also spend the funds quickly, but in reality a year will pass until the first euro is spent. If there were absorption problems before, why shouldn't there be absorption problems with this rescue and recovery package? I think that the EU budget is still too rigid and we have to find solutions for this.

Clean energy is an element of the modernisation financed by Next Generation EU. Would this tool be a game-changer for the countries highly dependent on coal, for example?

Of course, the new financial support has increased substantially the Just Transition Fund that is specifically designed for this. The Next Generation EU is a game-changer, because it is a considerable amount of fresh money, not transferred from the cohesion policy. The challenge is that you have to combine it with other funding. The Just Transition Funds is focused on the specific geographic areas where there are coal mines, coal power stations, peat farming, shale gas and certain high energy intensive activities.

The Just Transition Fund is to phase out activities, but it's not enough on its own to create a new economic structure. This is possible if combined with other funding. The fund combined with the normal EU budget with Next Generation EU top-up could change whole regions for the better, together with well-designed programmes. One of the biggest examples of how this is done is in Flanders in Belgium and some other regions which needed strong structural changes. Greece has already decided to close all its coal areas in the next three years and they will use these funds. This level support could be a game-changer and you can have a decisive decarbonisation move.

For example, the coal regions with power stations have a lot of engineers, and if you manage to use the potential of the people, you can shift to renewables and also attract what some call factories of the future. We have an example in a Bulgarian area where one of the biggest bicycle production businesses is located, while the region benefits from EU support, the business has been set up through private investments.

You can use the EU support to create the right conditions for transforming the economy, because with this levels of funding it is possible to do something daring. Much will depend on the willingness and seriousness of the local actors and the government itself. The negotiations are at a high level, but the programmes have to be designed locally and are extremely important. The funds could be a game-changer, but it still needs the people in the region to do it. The Bulgarian regions should have the courage to go into a new future because it is clear that for example coal mines and coal power in particular are losing money today and will be losing money tomorrow. If they don't do something and only use the money to survive, they will only slow down the decline, but they will eventually collapse. And the day the region collapses there is no way to swim easily out of it. That is a political decision and it means telling the truth: “Take the opportunity now, or collapse later.” The time is now to take a medicine and to build a better future, not in 10 years.

The 'frugal four' always said that they would not back debt sharing, and insist on loans and not grants. Could an 'only loans' approach be effective in helping countries which have been hardest hit by the coronavirus crisis?

Their position is not very sustainable, and in a Monetary Union that idea is very questionable. Their main concern about loans or grants is the trust - in what way these funds will be used, because of the past experience with the EU budget. There are countries that have been getting money for 30 years and were the first to collapse in the crisis. And many people are wondering what they did with the money, why didn't they modernise? From a public opinion perspective, it may be perceived that the EU will be giving them money to continue underperforming.

There will be hard negotiations, but ultimately I think they will find some solution and it will not be only loans. The most affected countries are unable to take on even more debt. The discussions will be on implementation - if you don't trust implementation you will want to have loans, but if you trust implementation you may consider grants.

However, once the 'frugals' lost Germany's support, their position is unsustainable. They can push for some wider obligations, but they will not stop the trend anymore.

What changes does European Council President Charles Michel have to make in the new negotiating box in order to meet the demands of both the thrifty countries and the European Parliament, which set a high bar on the next financial plan?

This will be a discussion between the countries, and the European Parliament will only be able to intervene in the margins at the last minute. There will be an enormous pressure on MEPs to get this done. So, the Parliament is again - as every time - strapped in contradictory pressures. They will probably discuss a bit more the size and the distribution of the grants, maybe the ratio between grants and loans. There will be some shifts, but I do not think there is enough space for big changes - after all, the proposal of the European Commission is more significant than many expected.

Neither 'the frugals' can stop the direction nor the European Parliament block it with more demands. This is really a discussion about the future existence of the European Union, about the future of the Eurozone and the stability of the euro. It was a bit surprising that Macron and Merkel met shortly before the Commission presented the Recovery Package proposal. This may not be a coincidence, and the commission went rather surprisingly fast in preparing the response. I don't know who managed to convince whom, whether Merkel convinced von der Leyen or vice versa, or when.

What is clear for the council is that they have to discuss something that is very fundamental - the survival of the European Union. For Merkel, now taking the presidency of the Council, this is a very serious issue to address at all costs. All key players are very big Europeans, and they decided that it is the moment to act. The Netherlands has internal problems, Austria has internal problems, but in the end they only need some political assurances. Can 'the frugals' really put at risk the political sustainability of the EU? None of them is in fact anti-European, they may have a different concept, but none of them wants to see the European Union collapse.

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Dr Jorge Nunez Ferrer is a Senior Research Fellow at the Centre for European Policy Studies (CEPS) and holds a PhD from Imperial College of the University of London. He has over 20 years' experience as evaluator and advisor in the areas of EU budgetary and financial instruments, national and regional strategic planning, public financial management, smart cities, energy transition and trade policy.

During his career he has been an academic, European Commission official and a consultant for governments and international institutions, including hands-on experience developing strategies at regional level. In 2016 he was the lead author of the background study for the High Level Group on Own Resources chaired by Mario Monti. He is presently also training EU officials, national officials and European Parliament staff and assistants for the European Institute of Public Administration (EIPA) on the EU budget.

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