Next Generation Solidarity: EU Growth Package Instead of Business Cycle Stimulus

The EU Commission is thus attempting to go beyond the national aid packages with short-term economic impact to provide structural growth impulses for its poorer member states, particularly in the context of the "Green Deal" and structural change resulting from digitization (European Commission, 2020b). At first glance, this is consistent with the economic impact of the Corona crisis: with few exceptions, the deviation of the Commission's GDP growth forecast before and during the crisis is high in Western and Northern Europe, but remains significantly lower than in Southern Europe particularly. Especially the "Frugal Four" get off comparatively lightly. The average EU transfer payments to the Northern and Western European member states amount to about one percent of the GDP. However, this means that even the comparatively hard-hit Western European countries receive only moderate payments from Brussels. France, which was severely affected (Commission's GDP growth forecast revised by 9.3 percentage points), is expected to receive only 1.6 per cent of its GDP in EU transfers. Ireland, which was one of the countries most severely affected (GDP growth revised by 11.5 percentage points), is currently only allocated transfers amounting to 0.6 per cent of GDP. Western and Northern European countries are thus heavily dependent on their own, national business cycle and growth programmes. On average, these countries have initiated fiscal responses amounting to more than 10 per cent of their GDP - excluding loans and guarantees (Elgin et al., 2020).

This is contrasted by the high EU payments for Eastern and Southern Europe. On average, these countries would receive transfers amounting to 7.7 per cent of GDP: according to the current plan, Bulgaria is to receive as much as 15.2 per cent - Greece as much as 12 per cent (figure). However, Poland is also generously considered - although the economic damage here is predicted to be relatively mild. At the same time, national stimuli are much lower than in the richer West and North: In Eastern and Southern Europe, national programmes amount to only 6.1 per cent of GDP on average (Elgin et al., 2020). In Italy, national spending adds up to only 4.6 percent of its GDP.

A look at the national budgets reveals: for the distribution of EU funds, the national, mostly cyclical measures already decided upon are not taken into account. In countries such as Bulgaria, Romania, Slovakia and Hungary, more than four European Euros are added to one nationally spent Euro. In Estonia, Greece, Italy, Poland and the Czech Republic, national and European measures are balanced. And in Slovenia, as well as in Western and Northern Europe, a large share of the expenditures is paid from the national budgets. The EU is by no means compensating for a lack of national fiscal stimulus.

The findings are also reflected in corresponding regression analyses that attempt to explain the proposed European allocation formula. Neither national measures already adopted, nor the economic downturn provide a statistically significant explanation for the distribution of funds. Rather, only the structural, economic differences among member states were taken into account: Countries with a lower GDP per capita and countries with a higher unemployment rate in the long-term seem to receive higher transfers.

Brussels apparently did not intend to compensate the countries for economic distress or national fiscal restraint. This is in line with the EU’s sluggish processes that prevent agile economic stimuli. Instead, the Commission is applying a strong crisis rhetoric to help the weaker member states structurally. This may not be transparent, but nevertheless appropriate. Finally, the harsh reaction of the capital markets - for example with regard to the spreads on Italian government bonds - shows that some national governments quickly find themselves in fiscal distress. In this situation, only relying on monetary policy impulses of the European Central Bank becomes a dead end. The necessary sign of Europe-wide solidarity during the crisis and the long-term growth effect of the onetime programme justify the package’s size and its mutual funding. However, it must be ensured that repayment obligations are set transparently today, that the funds do not get lost in corrupt structures and that the projects are evaluated comprehensively.