The EU's Stimulus Package Fails Three Ways

Mish

As details emerge from the EU's spending stimulus, it's clear the marathon Covid stimulus summit was a complete failure.

First the Hype

Before diving into the multi-pronged failure, let's take a look at the mainstream media hype.

The Wall Street Journal reports European Union Leaders Agree on Spending Plan for Recovery.

European Union leaders agreed on a €1.8 trillion ($2.06 trillion) spending package aimed at containing an unprecedented economic downturn by resorting to new measures that could ultimately deepen the bloc’s economic integration.

The package, built around the bloc’s first-ever issuance of hundreds of billions of euros of common debt, came together early Tuesday after four days of talks among the bloc’s 27 leaders—the bloc’s longest summit in 20 years. German Chancellor Angela Merkel and French President Emmanuel Macron were forced to compromise on what would be spent and how much would be handed out in grants.

How Much?

Whoa. Hold on. 

The deal was not €1.8 trillion although that is what the EU would like everyone to believe. 

€1.0 trillion of that was a multi-year budget through 2027. That's a normal operating budget of about €167 billion a year.

Of the remaining €0.8 trillion in stimulus, €390 billion is in the form of grants, the rest of the stimulus is loans. 

Surprise Not: EU Reaches "Fist-Banging" Deal

Moreover, and as discussed earlier today, in Surprise Not: EU Reaches "Fist-Banging" Deal thanks to rebates, not even the €390 billion is real the rest is smoke and mirrors as is the €1.0 trillion.

Not even the total package is correct. The EU rounded up €1.75 trillion to €1.8 trillion. Hey why not? It's standard operating procedure.

A Deal But What Cost?

Please consider the Eurointelligence take A Deal But What Cost?

The real story of this morning’s deal is not the €390 billion in grants, but the price the EU had to pay to get there. The EU made three big sacrifices. The rule of law linkage to the budget is now effectively gone. The system of unfair rebates is not only maintained but enlarged: like Margaret Thatcher before, the frugals got their money back. Most important for us is the annihilation of the funds earmarked for various categories of investment, notably the climate change transition which is down from €30bn to €10bn, and a 50% cut in the funds earmarked for research. Several other categories of investments were also culled.

Got That?

The EU took money from the climate change budget, research budget, and other budgets then put that money into the Covid bucket in the form of grants.

Frugal Four Demands

Recall that Sweden, Denmark, Austria, the Netherlands and Finland, collectively known as the "frugal four" insisted no more than €400 billion in grants.

Note that the "frugal four" is really "five". The EU played down the dissent from five countries to four, something I just noticed.

Reassigning Finance

Eurointelligence explains the methodology to the the number below the Frugal Five demands.

One way they managed to get the total grants number down below €400 billion is by re-assigning various hybrid forms of finance as country loans. This is how the loan component of the facility went up from a previously-proposed €250 billion to €360 billion.

Stripping the grants components to its essential core, the grants part of the restructuring facility and the increase in the structural funds to eastern Europe, we arrive at volume of 0.7% of GDP for three years, give or take a decimal point. The money will be spent in roughly equal proportions each year, with 70% earmarked for 2021/22 and the remaining 30% in 2023.

US vs EU Comparison

The EU stimulus is spread out over three years: €136.5 billion in 2021, €136.5 billion in 2022, and €117 billion in 2023. €136.5 billion isn't much.

The EU is about the size of the US. 

The US will allocate $4 trillion or more and it will all be up front.

Viktor Orbán is the Deal Big Winner

If anybody got everything they wanted from this EU budget, it was Viktor Orbán. All of the concrete rule-of-law linkages were taken out, replaced by a vague but unspecified commitment. Angela Merkel even made a promise to Orbán that she would support the end of the Art.7 procedure against Hungary.

Viktor Orbán is the prime minister of Hungary. 

Under Article 7, the EU suspended Hungary's voting and representation rights. 

Article 7 is enacted when the EU identifies a member that persistently breaches the EU's founding values (respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities).

The Rebate

The frugals’ other big victory is the rebate. The Dutch rebate went up from €1.57 billion to €1.92 billion. And Austria’s rebate doubles to €565 million. The notion of rebates has plagued the EU ever since the days of Thatcher, not so much for financial reasons but because it poisoned the debate by focusing all attention away from the common good and onto what countries pay in and what they get out. 

Threats

David Sassoli, the president of the European Parliament, had threatened that MEPs would not support a budget that failed to address the following: climate change transition; new categories of own resources; the linkages to rule of law; and ending the rebates. This budget failed on all accounts. 

Another Dramatic Huff and Puff Bluff Coming

Another big huff and puff bluff is on the way. 

The European parliament may even reject the budget once or twice for added drama. Then Macron and Merkel will bang their fists and parliament will magically pass this deal at approximately 1 second to Midnight.

How the EU Works

Nothing is easy because all 27 nations have to agree to get anything done. 

Merkel had to buy Orban's vote or he alone would have killed the deal. 

Then Macron and Merkel had to use smoke and mirrors to buy out the frugal five known as the frugal four. 

Germany used to be a part of the frugal six but Merkel does not want any major failures on her watch.

Guess what? This was a major failure in at least three ways. 

This Deal Will Weaken the EU

In case it's not obvious, resentment over this deal will further weaken EU.

But hey, we got a deal! 

There is only one time in the history of the EU where a deal was not reached. Congratulations to the UK.

Brexit happened!

Mish

Comments (21)
No. 1-13
Tony Bennett
Tony Bennett

"the rest of the stimulus is loans. "

...

..... never to be paid back.

The algorithms got the word they wanted -- Deal --

That was the whole point of the exercise, right??

caradoc-again
caradoc-again

It's quite normal.
No surprise.

UK leaving is no big deal to the EU either but UK needs an extra £40bn-£60bn p.a. in tax take - upto about 7% increase to help with Covid - very hard to achieve.

Tariffs might have to help on imported cars and spares as we have no deal with the EU - it will encourage UK consumers to come off German/French cars. Let's see what happens. It might help a little - some reckon 7bn, others say towards 12bn depending on what tariffs on what items.

It will be a hard time for all.
No deal is baked in, add that to the shit cake.

caradoc-again
caradoc-again

BTW, what happens when fhere is an EU bank crisis and bail-in rules kick in?
What rules will be changed then? Who pays?
Only a matter of time.

Maximus_Minimus
Maximus_Minimus

If the old tricks are followed, the grant will be added to a loan which the recipient will borrow at zero. The grant portion will cover the loss in case the loan goes sour. It's a well rehearsed game. There won't be a sudden outbreak of frugality, only redistribution of free money.

caradoc-again
caradoc-again

The point is they now have some form of mutualisation, a rough template they can use. Messy but Lagarde and the ECB can get to work and the EU survive. I'm no fan but it doesn't matter, now watch them use this ability in future crises, on steroids.

Amazing no one comments on how much control the French now have of everything.

Rachael F-F
Rachael F-F

It appears that the EU could ultimately push its members towards a two-speed EU with the more fiscally responsible northern states in one tier and all the others in another. With every decision, it becomes clearer that its almost impossible to steer the EU in a direction other than more Brussels and federalism. We've seen this before - the EU lost a net contributor to its budget.

Webej
Webej

That the law-linkages are gone should be no surprise. They are an affront to the sovereignty of the nations involved, and basically are a demand to capitulate to woke values represented as the tradition of Western society (but never were), about gays and bequeathing the land of your progeny to foreigners. Insistence on such points are a sure way to stall any summit.

The frugals would have included Britain if it were still part of the EU. It also includes Germany, which is allowing the Netherlands to deflect all the rebukes that would ensue if Germany spoke their mind (Germany is dominating the EU, Germany has conquered Europe after all and governing over occupied territory, Germany is the biggest beneficiary, etc). Germany and the Netherlands were in a very similar position pre-Corona (>10% trade surplus; budget surpluses; fast decreasing government debt; unemployment so low they need migrant labor to keep things going), but nobody can blame the Dutch for their aggressive & imperial past. The frugals would also include the Baltics and part of the eastern provinces if they weren't the recipients of structural ESF funds and the like.

The frugals simply do not want to pour money in the southern tier while having nothing to say about taxation, investment, and especially spending. Such money will disappear in a bottomless pit unless there is serious investment in restructuring and projects that at least promise a ROI. But that requires a kind of fiscal integration which didn't happen in the US until after the civil war.

Anda
Anda

If you want to remove the veto or "ego" of countries how better than to have them subscribed to failure

The ECSC is going on three quarters of a century old though, and actually it has only continuously expanded into what is eu today in that time. So small detail of mutualised debt and the need for combined fiscal monitoring while the sum is by comparison with the US minimal ? That the deal is a failure is nothing compared to how much a failure countries will be if they do not fall into line and play along. It is all managed, and there are no serious bids to leave euro and assume own competency that I make out, and when there are they tend to get way-laid.

However, european countries and eu are under many new stresses now, so it is not given that this or other responses will be satisfactory. In europe though most countries do not easily have other formats to turn to, such is the level of integration and trade, and a large part of any society are quite entrenched with whatever it is eu offers them.

Casual_Observer
Casual_Observer

I'm no Trump fan but why aren't they wearing masks in the above photo if they are close enough to bump elbows.

tokidoki
tokidoki

The rich gets richer, the poor gets poorer.

Sounds like a success to me.

Maximus_Minimus
Maximus_Minimus

The big European tourist destinations (France, Spain, Italy), individually received as many tourists as the whole of US. Unless you believe tourism will roar back, the mainstay of economy of many EU countries is gone.

GaiaMoney
GaiaMoney

Counting the money maybe missing the point - eurobonds are coming. For a different take on the euro deal https://gaiamoney.wordpress.com/


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