By Kai Weiss, a researcher at the Austrian Economics Center in Vienna and a board member of the Friedrich A. von Hayek Institute.
For a long time, EU member state have been struggling with fiscal responsibility. Despite the EU’s “Stability and Growth Pact” officially keeping government spending in line, to some extent, most member states have been on a debt and spending spree since the euro crisis really, enabled by the ECB’s extremely loose monetary policies. Countries like Greece, Italy, Portugal, Belgium and France were already deeply in debt before the Corona crisis, which has only worsened.
Euro area government #deficit at 7.2% of GDP in 2020, government #debt at 98.0% https://t.co/YkgdAuz8kQ pic.twitter.com/sJHLhSP2kn
— EU_Eurostat (@EU_Eurostat) April 22, 2021
With the pandemic spreading across the continent and with severe lockdowns and restrictions to economic life being implemented, the situation has only worsened. Apart from many deaths and destruction of economic and social life, the Corona virus has also removed any remnants that were still left of fiscal responsibility in the European Union. The European Commission wants the Stability and Growth Pact to remain suspended during the whole of 2022 as well.
As a result of governments deciding to save all kinds of businesses and industries from impending doom, as a result of lockdowns, public spending share to GDP has increased dramatically over the last year.
A lot of these subsidy and support schemes will run for many years, but already now, the consequences are stark. France’s public spending ratio, for instance, has increased from 64.3% in 2019 to 80% in 2020, a 15.7% increase. Italy’s has even shot up by 21%, to 79.8%. The same can be said about almost every EU country, even for member states that had been maintaining their finances somewhat in order, like Germany, from 54% in 2019 to 73.5% in 2020, or Austria, from 48.2% to 58.3%.
In the meantime, however, new, expensive, spending schemes have also been decided at the EU level. The most well-known of these is the so-called “Next Generation EU” – fund, which involves EU countries jointly borrowing around 800 billion euro, meant to be transferred and lent to EU member states. Combined with the EU’s “Multiannual Financial Framework”, i.e. its long term 2021-2027 budget, this amounts to around 1.8 trillion euro. EU governments are currently submitting their – rather questionable – proposals to the EU Commission on how to spend it all.
While a fiscal response to the lockdowns was probably inevitable at the beginning of the Covid crisis, in order to prevent a genocidal effect on businesses, serious questions need to be asked now, in particular on who’s supposed to pay back all the money that will be spent out of this particular EU fund, which comes on top of runaway national government spending.
National politicians have claimed for the most part that as these funds are available, it is better to spend them. A quick look at the statistics mentioned above, however, should immediately raise some eyebrows.
Whatever governments spend, will need to be taken out of the economy, through taxation, either now, or in the case of the “Next Generation EU” scheme, in the future. A third option is not to finance all that spending through taxation at all, but to use monetary depreciation. Unsurprisingly, governments have opted for the second and third path, as the bill for the “Next Generation EU” fund in particular is being shifted to future generations.
The EU Commission has said its preferred option to repay borrowed 800bn #NGEU cash is to let member states pay half & also collect new EU taxes known as “own resources" for about €15bn a year, which should be sufficient to repay the borrowed funds by 2058 https://t.co/FZEj5UgNLn
— Pieter Cleppe (@pietercleppe) April 29, 2021
Politicians in the EU are currently really throwing around money as if there is no tomorrow. Despite an infamous economist having argued that “in the long, we are all dead,” there will in fact be a post-Covid world tomorrow. In this world, governments will be massively indebted, the euro further depreciated, and many businesses on the brink of collapse. As a result of the astronomical debt levels and the fact that the ECB’s monetary policies are already ultra loose, the room for any government response to a new economic crisis will be very limited. In effect, a major debt crisis following Covid may not be ruled out.
Both the EU and national governments have been completely oblivious to this. However, ignoring the challenge will not make it go away, so the complete abandoning of any fiscal responsibility will come to haunt us sooner or later. Someone will have to repay the money that is currently being spent. The name of the EU’s new 800 billion euro transfer scheme “Next Generation EU”, gives it away that it will be future generations.
Disclaimer: www.BrusselsReport.eu will under no circumstance be held legally responsible or liable for the content of any article appearing on the website, as only the author of an article is legally responsible for that, also in accordance with the terms of use.
