Albert Guivernau Molina
Professor of Economics and member of the Jean Monnet Chair in European Tax Integration at the Universitat Abat Oliba CEU
It is common to hear about the funds of the Next Generation EU Plan as one of the main drivers of the EU economic recovery after the pandemic, especially in Spain. These are extraordinary funds that are the result of a historic agreement that has led to an increase in the Commission’s budget to values close to 2% of European GDP and, for the first time, to the common debt issuance. But will they allow us to get out of the economic crisis resulting from the Covid-19? The answer is no, or at least not completely.
The responsibility for reactivating the economy lies with the states themselves, which have the fiscal policy instruments – taxes, public spending and transfers – to affect economic activity, the most standardized measure of which is the GDP growth rate. The Commission, whenever it is given the opportunity, and the ECB, which insists that the states must spend everything necessary, remind us that Frankfurt will always be there to help them finance themselves with an expansive monetary policy whose duration seems to be endless. Whether or not each state is successful in recovering from the crisis will depend almost exclusively on its economic policy and its productive structure, not on the Next Generation EU funds, which on the other hand will take time to be delivered.
The Next Generation EU Plan does not seek a recovery of the economy to bring it back to pre-pandemic values, but the transformation of those economies. The main lines of action will be research and development, digital transformation, the fight against climate change and the modernisation of traditional policies. This approach is far from the Plan E with which Spain tried to tackle the financial crisis of 2008, when the only objective was to spend, no matter how much. With the Plan proposed by the Commission, the States are obliged to present concrete projects for economic transformation – large infrastructures, sports centres or roads are no longer worthwhile – and here our country’s performance is utterly disappointing, even more so after it became known that during the last 10 years only a little more than 30% of the structural funds to which it was entitled have been used due to a lack of projects.
While the first arrival of the Next Generation EU funds – 10% of the 140,000 million potentially available to Spain – is expected this summer, more than a year after the agreement for the creation of the Plan, the ECB is acting quickly and decisively to provide liquidity to the states. At the last meeting of the ECB’s governing council, its asset purchase program was increased by 500,000 million euros, reaching 1.85 trillion euros, with a commitment to maintain the stimuli for as long as necessary. This monetary policy is allowing states to finance themselves at very low (even negative) rates, benefiting countries that would otherwise be penalized by the markets, like Spain, Italy or France. The dark side of this purchasing program is the increase in the ECB’s balance sheet to 7 trillion euros, 62% of the Eurozone’s GDP, as well as the generation of perverse incentives to get into debt.
In the case of Spain, the problem is not the capacity to get into debt, which is good, but what it is for. The ratio public debt/GDP, the most commonly used for comparison purposes, has a quantitative value, while the difference between the forecasts for economic recovery in the various EU countries is due to qualitative elements. It does not matter so much to get into debt, but for what: if the debt is to modernize the economy, generate more and better jobs or promote the transformation of the productive structure, it could be considered an investment. While if the debt is used to pay public salaries, ERTEs or subsidies, this indebtedness would become entrenched. Both options imply an equal disbursement of public funds, but they are not the same.
In short, the Next Generation EU funds can help, even if they are late, but they will not be “the engine” of economic reactivation, as many institutions claim. The ECB is helping to contain the economic impact in a quick and agile way, as the situation requires, becoming a true hero of this recession. In the case of Spain, as in the rest of the member states, the ability to come out of the crisis will depend on its economic policy, not so much on the role of the European funds, which for their part are seeking a transformation of the economy, not rebuilding what existed before. This crisis may be the last that the Eurozone faces without progress in its fiscal integration. Once again, we will see the US, with a coordinated fiscal and monetary policy, leave the crisis earlier than the whole of the eurozone.
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