Fair and equal recovery for the European economy

The global impact of Covid-19 has been, and still is at this point, far-reaching and all-consuming. However, now that the initial wave of health risks has passed, the focus of governments has shifted from managing the pandemic to the question of consequences. Worldwide, the serious economic consequences of the quarantine period were implicit in the response to the mitigation policies right from the get-go. Controversial statements from controversial figures, like Donald Trump and Jair Bolsonaro, the presidents of the United States of America and Brazil respectively, echoed the sentiment that the risks of shutting down economies would potentially be worse than the impact of letting the virus run rampant. In the Netherlands, where the lockdown for businesses has gradually been relaxed from 11 May, these economic ramifications became a pressing issue.

Many businesses, including hairdressers, beauty salons, cafes, restaurants and movie theaters, have been given permission to open, under the condition that they adjust their regular practice to prevent the spread of the virus. This change was made under pressure from the businesses themselves, as many of them were unable to survive another month without income. Lowering the number of customers per business was seen as the lesser of two evils; it does slightly increase the risk of spreading the virus, but at least these businesses can slowly start producing revenue again. The enforcement of the new conditions, however, reflects the volatility of the apparently positive situation in the Netherlands. It has become clear that until there is a vaccine or effective treatment, things are not likely to return to normal. And of course, many businesses are still not allowed to reopen, especially in the events industry, as large gatherings are still forbidden.

However, the internationally pressing question is how the economy overall will fare in a state of continued uncertainty. Even with many businesses opening again in the Netherlands, most small businesses and large corporations and multinationals in Europe are still struggling.

The European Commission has therefore decided that an appropriate course of action is to establish a massive recovery fund to aid those countries that have suffered the most. This recovery plan, as laid out by the President of the European Commission, Ursula von der Leyen, optimistically aims at the protection of lives and livelihoods, the repair and prosperity of the European Single Market, creating a socio-economic upturn, supporting urgent investment and guaranteeing a level playing field. This last point is rather vague, giving rise to the question of what exactly this goal implies. The answer to this can be found in the intended financing of this recovery plan.

The primary financial backing of the plan comes from the EU 2021-2027 budget, which stands at approximately 1.87 trillion euros. 750 billion euros of these would be set aside to finance the recovery of the economies of member-states. This recovery fund will be available especially for the harder-hit southern European nations, like Italy, Spain and some Eastern European member states. The European Commission has set out several possible methods of raising this money, since the plan was first announced on the 27 May. Firstly, a new EU-wide tax hopes to raise some 30 billion euros per annum. Furthermore, common corporate taxes, digital taxes and green taxes are projected to amount to approximately 10 billion euros per annum, 1.3 billion euros per annum and 31 billion euros per annum respectively. The green tax will largely be raised through the issuing of pollution permits and carbon allowances. Green tax, however, as noted by Jorge Núñez Ferrer, senior research fellow at the CEPS think tank, needs to be approached with caution. The potential consequences of alienating trade partners is a substantial risk, and could potentially spark a trade war. The digital tax, on the other hand, will see international players like Amazon and Google financing the recovery of Europe. This hints not so much at a recovery package as to a redistribution of capital among economic agents. More so when considering that the initial funding is to be supplied by debts from economic union, using the proposed 2021-2027 budget as collateral.

Additionally, based on the EC’s descriptions of the intended use of these tremendous amounts of money, these point primarily to cash injections and investments. In particular, the EC has outlined a three-pronged approach that aims to achieve the goals it has set out. Firstly, the plan will support member states with investments and reforms through direct monetary injections, grants and loans. Furthermore, financial support will be offered to ‘cohesion policy programmes’ that will aid in tackling socio-economic problems resulting from the pandemic. The primary example noted by the commission was youth unemployment. Rounding off the first prong is the aim of incentivizing sustainable business through direct investment. The second approach aims at jump-starting the flagging economy by revitalizing private business. This is to be done by direct investment in businesses that have, firstly, suffered from the restrictions created by the pandemic, and secondly have been deemed viable enough to receive ‘urgent support’. This facility, however, places the decision about which companies will receive these grants entirely with the EC and its subsidiary councils. As such, the decision as to what is meant by ‘urgent’ and ‘viable’ will undoubtedly be made in order to benefit the European Union.

Given that this money is to be collected for the purposes of protecting livelihoods, repairing the European economy and rebuilding economic prosperity, this facility can play out in one of three ways. Firstly, the injection into private business is distributed among those companies that are legitimately facing bankruptcy as a consequence of lost business. Secondly, the injection will be distributed to those companies that stand to employ the largest quantity of people, thereby consolidating European cosmopolitanism through shared business ventures. And lastly, this injection may go to those companies, which, just as in the last economic crisis in 2009, were deemed ‘too big to fail’. The consequences of their failure would be more severe than the consequences of injecting massive bailout funds to keep them afloat. As demonstrated by the comments of Commissioner Johannes Hahn, who is in charge of crafting the budget: “Europe will arise more competitive, resilient and sovereign.” We may therefore presume that the budget will serve the purpose of economic consolidation in the European Union.

In light of this it is clear why the reactions to the proposed recovery fund have been rather mixed. Christopher Schmidt, in the Dutch newspaper Trouw, made the analogy of asking any two random EU citizens what they think about the plan. The response will vary based on political opinion. Clearly this heterogenous status quo is no different on the level of individual member states. It is unlikely that Italy or Spain will reject gargantuan monetary injections to support their economy. But this plan will require, as elaborated by Mrs. Von der Leyen, a unanimous vote . This means that all 27 member states will have to agree to redistribute wealth, with little to no guarantee of any solution to the underlying issue, Covid-19, in sight. Suffice it to say that the Netherlands, which can expect only 6.8 billion euros in grants from the EU, in comparison to 250 billion for Italy, for example, might be among the states that veto the proposal.

There is, however, also support for the recovery plan. Frans Timmermans, Dutch diplomat and first vice president of the European Commission, has spoken openly about the benefits he perceives the plan to bring to the Netherlands. Timmermans pointed out that while the Netherlands, or Germany for example, are able to afford national policies to supplement recovery, the inability of other member states skews the European Single Market. This disparity carries with it inherently negative implications for the Dutch economy. Timmermans used the example of being able to buy Dutch flowers in Italy, which would naturally be impossible if the Italian economy were so badly damaged as to hinder significant trade. Homogeneity in the recovery of the European economy is desirable in another respect as well, as it allows the restructuring of certain aspects of business. Timmermans specifically pointed to policies that incentivize more sustainable, greener and digital business practices as a benefit that could arise from the situation.

This optimistic, or rather opportunistic, attitude is perhaps more functional than the protectionist attitude previously held by the Netherlands. Covid-19 is forcing pre-existing systems to restructure themselves to facilitate the danger of the situation, regardless of any political or economic desires. This turn of events may well serve to restructure much of the world order anyway. Perhaps Timmermans and the European Commission are on the right track, leveling the playing field to permit fair and equal recovery.

Written by Maurits Seijger