Yanis Varoufakis: Have Merkel & Macron Just Announced a Eurobond-Funded Godsend for the EU?

Yanis Varoufakis: Have Merkel & Macron Just Announced a Eurobond-Funded Godsend for the EU? 1

Yves here. It’s gratifying to see what I think of as the old Yanis Varoufakis back. As much as it made sense on one level for him to throw his lot in with Syriza, and Greece was in such desperate straits that it wasn’t entirely crazy to try for what amounted to a Hail Mary pass, the new government managed to have its bad situation worse. Its efforts to overplay a very weak hand managed to unite the usually not-all-that-well aligned EU against Greece, resulting in even tougher austerity terms than were originally on the table.

And there was a narrow path to at least a less terrible deal. The EU was terribly frustrated by corruption and the lack of tax collection in Greece, save for government employees. Syriza as the new kids in town, and self-styled radicals, in theory could have cracked down on the oligarchs. Syriza went early on to US Treasury officials, and initially got a sympathetic hearing (and recall the US has some sway at the IMF). I’m told by DC insiders who were party to the discussions that had Syriza looked serious about tackling the broken tax system, Treasury would have twisted arms in Europe to cut them slack, and some European countries independently would have been sympathetic.

What was the play Syriza failed to execute? They could have threatened to yank the licenses of the major broadcasters unless they paid their taxes due. But I am also told Syriza felt it depended on favorable coverage to stay in power and didn’t feel it could afford to alienate them.

Now to today’s topic, a proposed EU recovery fund. An overview from CNN:

German Chancellor Angela Merkel and French President Emmanuel Macron proposed the creation of a recovery fund worth €500 billion ($543 billion) that would help the EU countries and industries hit hardest by the coronavirus pandemic….

“To support a sustainable recovery that restores and enhances growth in the EU, Germany and France support an ambitious, temporary and targeted Recovery Fund,” Merkel said, speaking at a video news conference….

Divisions among member nations have slowed progress on a recovery fund that the European Commission had hoped could raise at least €1 trillion ($1.1 trillion) to rebuild regional economies.

Charles Michel, president of the European Council of EU national leaders, had called for the package to be operational by June 1. But the Commission failed on May 6 to finalize its proposal.

Differences over whether the fund should provide loans or grants to the hardest-hit countries such as Italy and Spain stalled progress. Grants, or direct money transfers, would imply a degree of debt sharing that states such as the Netherlands, Austria and Germany have long resisted…..

Macron said the EU recovery fund would enjoy the backing of the European Central Bank. While the fund would have to be repaid over time, that burden would not fall solely on those who need the help most.

“These 500 billion euros will have to be repaid,” Macron said, but “not by the beneficiaries,” he added.

The Financial Times has more detail on how the plan might work:

No one should think their joint proposal for a €500bn spending plan funded by EU debt issuance unlocks a quick and easy resolution to negotiations among national governments. All 27 member states need to be on board, as does the European Parliament, for their plan to turbo-boost the EU budget to reach fruition.

But Germany’s decision to back the idea of the EU borrowing money on a large scale and then handing it out as budgetary transfers to hard-hit parts of the bloc marks a huge shift by Berlin. Ms Merkel and Mr Macron’s announcement applies pressure on the so-called frugal states in the north to concede that at least part of the recovery fund should be distributed in the form of grants, rather than loans, to beleaguered countries…

There are two key elements to the deal. Firstly, both countries want to empower the European Commission to borrow unprecedented quantities of money on the financial markets to create the €500bn recovery fund that will help support economic reconstruction efforts across the union.

The commission already has the ability to borrow money, but it has never been permitted to do so on this scale. Henrik Enderlein of the Hertie School in Berlin calls it a potentially “Hamiltonian moment”.

Secondly, Ms Merkel’s confirmation that the money would be treated as EU “budgetary expenditure” marked an important concession by Germany, which previously sided with those advocating loans to beleaguered states.

But many of the most difficult questions have been left open pending Ms von der Leyen’s expected announcement of a full set of budget proposals from the commission next week. Chief among them: if the money is paid out in grants, how exactly does the EU’s borrowing get repaid?

Mr Macron said that the answer is still — to put it gently — a subject of negotiation. The money “could be reimbursed by the member states by a repartition key that depends on their weight in the budget, by contributions that we could choose to decide on later, or by another mechanism”, he said.

Our David had already dampened down expectations for it by pointing out how early stage it was:

It’s a declaration, not a decision or even an EU policy statement. All such declarations are laboriously negotiated, and are interpreted in different ways by different parties. It’s not really a question of believing Macron (who is essentially untrustworthy anyway) so much as accepting that the game the French are probably playing is, firstly to get a joint statement with Berlin that commits the Germans to certain things, and secondly to count on the general atmosphere of crisis to push them towards the French position subsequently, with help from other members of the 27. It may or may not work ; we’ll see.

But as you’ll see, it’s even less of a step in the right direction than the hype would have you believe. Varoufakis’ statement is terse, so listen up!

By Yanis Varoufakis. Originally published at his website

On Monday 19th May 2020, Chancellor Merkel and President Macron announced a joint proposal for a 500 billion euro common fund, to be financed by allowing the European Commission to borrow from the money markets. The fund will, according to the Merkel-Macron proposal, finance directly businesses across the EU – by means mainly of transfers. Is this a breakthrough? Here is my answer on behalf of DiEM25.

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