Europe is turning into a planned economy with massive debt

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BrusselsReport.eu
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By Derk Jan Eppink, a former Dutch MP and MEP

In the European Union, plans are piling up. In the summer of 2020, the 750-billion-euro Covid recovery fund was portrayed as a once-in-a-lifetime event. Apparently a short lifetime, because on 9 September 2024, the former president of the ECB launched the Draghi plan with a price tag of 800 billion euros. Last week Ursula von der Leyen, president of the European Commission, presented the ‘ReArm Europe’ plan. The bill: another 800 billion euros. In the EU, a lifetime is five years, the term of office of a European Commission.

The Covid recovery fund has already shown which way this financial bonanza is heading. For the first time, the European Commission itself entered the capital market to raise 750 billion euros, under the guarantee of the member states; the Netherlands for approximately 46 billion. To the Commission’s horror, interest rates rose and the costs of the operation increased by 57 billion. The final amount is now 807 billion.

Casino budget

The European Union budget is reminiscent of a casino. In the current budget cycle 2021-2027, which amounts to more than 2 trillion euros, 30 percent is ‘climate-related’. Frans Timmermans’ Green Deal, presented in December 2019, permeates the entire EU budget. The ‘Green Deal Investment Plan’ (2021-2030) covers a total amount of 1 trillion euros, with partial funding from the EU budget, the EU Emissions Trading System and funds via the European Investment Bank (EIB).

The energy and climate transition is now facing reality. The ‘Timmermans Plan’ has unattainable goals, such as Europe becoming the ‘first climate-neutral area in the world by 2050’. Europe is pricing itself out of the market. Companies are leaving the continent because energy costs are too high. The economy is stagnating and the Timmermans Plan needs to be scaled back.

But not to worry, there is the aforementioned Draghi plan, from the former ECB president who wanted to save the euro in 2012 with the statement ‘whatever it takes’. The ECB then printed unlimited amounts of money. ‘Super Mario’ cannot be left behind and launches a ‘competitiveness compass’ to get the European economy back on its feet.

How does that work in Brussels? The European Commission recognises the ‘unforeseen damage’ of the energy transition and turns the climate plan into a ‘rescue plan’. The report is written in Brussels, with a ‘figurehead’ for the sales pitch. No one is better suited for the job than Draghi, who is as famous as he is infamous in Europe.

The Draghi plan ties in with the internal market because it is about competitiveness. Draghi pulls a ‘competitiveness compass’ out of the hat with two aims: more decarbonisation and more competitiveness. In the current situation, this is contradictory. Those who want to implement climate policy even faster (fossil-free by 2050) are completely torpedoing Europe’s competitive position. China and the US will immediately jump into the gap. But Draghi is not one to be caught off guard, because after Timmermans’ Green Deal, he wants a “Clean Industrial Deal” of his own. This is a ‘speed up law’ with ‘action plans for the decarbonisation of intensive sectors such as steel, metals and chemical products’.

Bureaucratic centralism

Draghi then launches a ‘compass’ that belongs in the East German handbook of bureaucratic centralism. He formulates ‘three transformative, horizontal imperatives: innovation, decarbonisation and security’. He then lets five ‘enablers of competition’ (a kind of floater) loose on them vertically: simplification, fewer obstacles in the internal market, more competition in financial markets, quality jobs and better coordination. This mix should strengthen competitiveness.

It would be better if Mr Draghi started by simplifying his own plan. It is a mystery what those 800 billion euros are needed for, even if it is just financial lubrication for his policy mix. It is expensive, but Mr Draghi will not do it for less than 800 billion.

Ursula von der Leyen cannot afford to be left behind. The argument in the Oval Office of the White House between President Trump and his Ukrainian ‘counterpart’ Zelensky gave her the long-awaited opportunity to turn the EU into a military power: from toddler to giant in record time.

She immediately spoke of a ‘Wiederbewaffnung’ (which sounds different in German than in English) and the official title became: ‘ReArm Europe Plan’. She joined the leading group: 800 billion! ‘Uschi’ (her pet name among intimates) will not settle for less. As with the Covid recovery fund, the EU wants to borrow 150 billion euros on the capital market. The Commission will then lend this money to member states that set up joint defence production or make joint purchases. A European internal defence market must be created. It should be noted that Von der Leyen, as German minister of defence, left the Bundeswehr (German army) in a lamentable state, even though she paraded around on horseback.

Trick box opens

However, the committee chairwoman falls short of her 800 billion by 650 billion euros. The box of tricks is opened. The member states are in financial distress. The criteria of the Stability and Growth Pact (SGP) – a maximum budget deficit of 3 percent and national debt of a maximum of 60 percent of GDP – are being violated everywhere. There is no room for a financial arms race, unless member states cut pensions, close hospitals, reduce education and lay off civil servants, for example. That will lead to a revolution on the home front.

Von der Leyen has a magic formula: 1.5 percent of GDP for defence does not count in the assessment of the SGP criteria. She refers to article 26 of Regulation 2024/1263, which offers a ‘national escape clause’ for ‘extraordinary circumstances beyond the control of the member state that have a major impact on finances’. The European average for defence spending is 1.5 percent of GDP. Some countries spend far above that, others far below. Using this Brussels arithmetic, Von der Leyen arrives at an additional 650 billion euros for defence spending: 150 + 650 = 800. The European flag is flying high.

We must remain vigilant because the Commission is setting its sights on European savings and pension assets: approximately 300 billion euros are located in capital markets outside of the EU. This makes sense because capital flows to markets with the highest returns. They are happy with this. Not everyone is like pastor Harmen van Wijnen, chairman of the executive board of Dutch pension fund ABP, who withdraws funds from lucrative markets in faraway places because they are ‘not morally responsible’. As a pastor preaching from the pulpit of the capital market, he can now invest the ABP assets in the ‘European arms industry’. The European Commission wants to return those 300 billion euros to the ‘European Capital Market Union’, now rechristened the ‘Savings and Investment Union’.

The question is: how long will this money bonanza last? The annoying thing is that loans have to be repaid. The Covid recovery fund has already shown how quickly interest rates can rise, and with them the costs. Prices are also rising, especially in the defence market where there is now huge demand, and delivery times are getting longer. Higher inflation is undermining purchasing power, savings and pensions.

Debt bubble

There are bubbles in the EU’s plans. Of the Covid recovery fund, 52 percent is a gift and 48 percent is a loan. Who will repay these ‘gifts’? Repayments will start as early as 2028. Countries that received the most grants, Italy and Spain, are crying no! – because it is a grant. Will the Netherlands, a net contributor, be asked to pay again? Interest costs will make the Covid recovery fund extremely expensive, up to around 860 billion; the coverage is extremely weak. The result: a call for European taxes.

All planned economies have failed so far. The Pavlovian response to failure is to plan even more. European planners are blindly steering towards a debt bubble. It will burst. We just don’t know when. But at this rate, certainly ‘within a lifetime’.

 

Originally published in Dutch by Wynia’s Week

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