Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb. But only if you don’t look too closely.

European Council president Charles Michel © OLIVIER HOSLET/POOL/AFP via Getty Images
European Council president Charles Michel
(Image credit: European Council president Charles Michel © OLIVIER HOSLET/POOL/AFP via Getty Images)

If your dream is a United States of Europe you may not much mind a crisis: it is usually one of these that prompts a new step towards EU integration. So it is with Covid.

The strict lockdowns most EU governments adopted as their main pandemic policy have created economic carnage across the continent. The European Central Bank (ECB) has done its bit – but it also asked and asked for a dose of fiscal intervention as well. The Commission has delivered: its latest seven-year budget is to be bumped up with the €750bn Next Generation EU Fund (NGEU) to help the worst affected countries.

This comes with three interesting bits. The first is that the €390bn of the cash is to be distributed as grants, not loans – usually, the EU likes to pretend that it is not in the business of fiscally transferring between rich and poor EU members by dressing transfers up as loans (conditions can always be changed later).

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The second is that the cash is to be directly borrowed by the Commission itself with the issue of new bonds with various maturities from three years up, extending to 2058, and guaranteed by its own revenues. Previously, Eurobonds have been jointly guaranteed by the EU countries, something the German public (the most likely to end up on the hook) have not always been mad for.

The third relates to the second – if the Commission is to guarantee payback from its own revenues (known as “own resources” in EU-speak) it’s going to have to bump them up. Right now, the Commission gets a smallish flow of cash from the EU countries in the form of customs revenues and a percentage of each country's VAT revenues. That’s not enough – so the new deal comes with a new ability for the Commission to raise its own resources via new taxes (on digital activities and carbon, for example).

This is all important. it means the Commission will no longer be just a middle-man between national tax revenues and EU spending: it can leverage its own budget with common debt. It also means that it can directly subsidise countries for the first time. Neither of these things could have happened (indeed, been imagined outside the minds of fanatics) this time last year.

You can argue that this is a one off, that the amount is not that big (€750bn is small beer in a money-printing world) and note there is an “emergency brake” in there (allowing countries to object to the way others spend grant money). But the history of EU emergency brakes is not a useful one.

We also know there is little so permanent as a temporary EU scheme that advances the federal cause: note the way in which the European Financial Stability Facility (created as a bailout vehicle in 2010) is still with us. Future crises are bound to be met with similar schemes. And the definition of a crisis will be fast watered down – particularly given the low rates at and ease with which the EU will be able to borrow.

The NGEU fund does, then, represent a real moment for the EU. But a Hamiltonian moment? No. This deal looks as if it brings EU countries closer together; as if it is the kind of muddle-through that makes the EU’s survival more likely than less. But there is a chance that its explicitness does the opposite. Several one-time red lines have already been crossed here – and the “own resources” one is yet to come.

Many EU populations already find their financial obligations to the EU irritating, but at least the cash they send it is non-direct. New taxes levied directly on their activities to pay for things they didn’t vote for might make them wonder again about the democratic legitimacy of the EU. Charles Michel, the European Council president, referred to the magic of the European Project when this latest deal was announced. Like all magic, it might work best in the dark.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.