Intermoney | There is no shadow of a doubt about the importance of the current crisis in Europe, but once again the intensity of the problems has not been the same in every country. This is key ahead of the European Council meeting on 19 June, where the Recovery Fund to respond to the COVID-19 crisis and a new long-term EU budget will be discussed. For example, in The Netherlands, the unemployment rate is expected to reach 4.2% in May compared to 2.9% in February. This figure will be revised upwards in June when people subject to temporary unemployment will start to be counted as unemployed. However, this situation will occur in the EU as a whole and will have a particular impact on countries such as Spain. So the unemployment figures, in relative terms, will remain equally low in cases like the Netherlands and will show that the impact of the crisis has not been the same for everyone.
So once again, the big challenge for the EU will be that the crisis has not been homogeneous for all partners and, in turn, recovery will become less complex in some countries than in others. Against this backdrop, and once it has more or less been taken for granted that the worst of the crisis is behind us, agreement on the EU’s recovery plan begins to get complicated. We have long insisted that as time goes by, the general sense of emergency will be diluted in favour of a less ambitious plan, which will not be in the interests of Spain and Italy. In other words, the €750 Bn (€500 Bn of this in subsidies) proposed for the Recovery Plan and the 1.1 trln for the EU budgets in the period 2021-2027 should be seen as a maximum approach which will end up being reduced. Particularly as far as the €310 Bn in subsidies for the Recovery and Resilience Facility are concerned.
For the time being, in Brussels, they already assume that Friday’s meeting of European leaders will only be part of the debate on the measures to be taken. The European Commission had already postponed any agreement until July and the press release announcing the upcoming European Council flags: “The EU leaders’ debate will serve as in-depth preparation for a summit to be held later on, if possible in person”.
The reality is that we approach the European Council meeting on Friday with two distinct groups of countries clearly expressing reservations about the Commission’s proposal. Some because they do not welcome any attempt to share risks or to articulate large-scale subsidy mechanisms. While there are others which complain about the design of a programme they believe benefits nations they consider to be rich. These criticisms shape the axis of the frugals (Netherlands, Austria, Denmark and Sweden) and the Visegrads (Hungary, Poland, Czech Republic and Slovakia). These countries would be joined by Finland and Estonia, which have also shown their discomfort with the Commission’s proposal. In Finland’s case, the Constitutional Committee of its Parliament recommended a vigilant stance towards the European Commission’s Recovery Plan, as it represents “qualitatively, and by the size of its financing, a new kind of element in the functioning of the EU.” In the Committee’s words: ‘The Committee understands that the agreement does not necessarily comply fully with EU law. The (Finnish) government must ensure there is an appropriate legal basis in EU law for the (Recovery Plan).”
In total, the list of countries critical of the European Commission’s stimulus plans includes 10 out of the 27 EU members. And we must remember that this is a decision requiring unanimity. So, while we believe the Recovery Plan will succeed, we also estimate that it will mobilise less than the €750 billion currently targeted.
The point is that when the French government itself is working with forecasts of an 11% contraction of its economy in 2020, or when the Italian Minister of Economy acknowledges that the collapse of domestic activity will exceed the 8% they had predicted for this year (given the more costly recovery of sectors such as tourism), an ambitious stimulus plan on a pan-European scale is imposed. Furthermore, a plan where subsidies should play an important role. For example, Italy has a deficit which its authorities already admit will reach 10.4% of GDP in 2020, plus debt will shoot up to 160% of GDP. So a support plan based only on loans would deepen the existing problems. Whatsmore, we must bear in mind that subsidies will not be free, which was elegantly recalled by the ECB president when she pointed out that Italy cannot let this crisis “go to waste.” In other words, it will have to respond to this challenge with reforms.
Meanwhile, Germany’s political authorities are reluctant to modify their forecast in line with a GDP contraction of 6.3% in 2020. However, there is no doubt there is a very real risk that the European locomotive could fall back further than expected in the short term. So it is fairly likely the EU Recovery Plan will take shape, but the question is how long it will take and, above all, what the amount will be.
On the other hand, what will require less effort to formulate is the European Commission’s proposal to protect strategic EU companies from purchases by foreign corporations backed by “unfair” state subsidies, taking advantage of their currently low valuations. The proposal is expected to be presented on Wednesday and will focus on the aluminium, steel, semiconductor, shipbuilding and automotive sectors. These are the industries where a higher incidence of non-EU groups with subsidies in the form of zero-rate loans, unlimited state guarantees, low tax arrangements or the support of state funds has been identified.
According to Reuters, foreign companies wishing to acquire a stake of over 35% in EU companies with a turnover of more than €100m should inform the Commission if they have received more than €10m in state aid in the last three years. In practice, this could lead to a ban on operations. But it would also seek to prevent unfair competition in the single market from foreign companies with public support. Such companies would have to sell assets, reduce their market share or make payments to the EU to rebalance any distortions.
