Analysis. Austria, Holland, Sweden and Denmark oppose the Merkel-Macron proposal to deliver relief funds to Italy, Spain and France. ‘If you want help, you have to make far-reaching reforms so that you can look after yourself next time,’ said the Dutch prime minister.

EU’s fiscal hawks during pandemic: ‘look after yourself next time’

The “frugals” are on the offensive, and Giuseppe Conte is renewing his efforts. “In the next few days we will present a proposal with our ideas,” announced the Austrian Chancellor Sebastian Kurtz, and it goes without saying that this will be a counter-proposal against the Franco-German one. To avoid any misunderstanding, the Chancellor stressed that the latter was, of course, a “legitimate” initiative, but it is a matter that must “be decided by all member states of the EU.”

What the counter-plan that Austria is about to present together with the Netherlands, Denmark and Sweden will involve has been made clear by Austrian Foreign Minister Karoline Edtstadler: “One thing is certain: the money that will now go to Italy, Spain or France to get past the crisis must be paid back.” This is because the issue at stake is debt sharing, and this, for the Austrians and the Dutch at least (even if no longer for the Germans), remains the scariest prospect of all.

Conte did expect resistance and a stony-faced reply. He stressed that what the EU has made available so far, even including the Franco-German proposal of the Recovery Fund, “falls short of the estimates of what many public and private institutions say will be needed to keep the economy afloat”—“much more will be needed.”

He issued a sharp warning: “Basing the response to the coronavirus policy on distorted stereotypes would be more misguided than ever,” as it would “fan the flames of nationalism and widen long-term divisions in our union.”

In part, this was a position taken to counterbalance the pressure of the fiscal hawks, but from another point of view it reflected the awareness of the unsustainability of a Recovery Fund even at double the size of the €500 billion Merkel-Macron proposal, coming with an unsustainable overload on the public debt.

However, most likely the real threat is not the opposition from the countries more or less appropriately referred to as “Nordic,” also due to the fact that Germany has powerful instruments at its disposal to influence Austria and the Netherlands—while the road could prove more difficult with Denmark, which is not part of the Eurogroup. The real offensive of the fiscal rigorist front, far from being defeated even in Germany itself, is aimed in another direction, summarized by the formula “structural reforms.”

On Thursday, for the second time in two days, EC Vice-President Valdis Dombrovskis used this formula while being very clear about its meaning: the EU-level “Recovery and Resilience Facility … will be concentrating on investments and structural reforms,” and “country-specific recommendations will provide guidance in preparing [recovery and resilience] plans.”

We know what the term “recommendations” has meant so far in the EU’s vocabulary. Dutch Prime Minister Mark Rutte was even more explicit and brutal. He announced that the counter-proposal was based on loans, not grants, but also added that “if you want help, you have to make far-reaching reforms so that you can look after yourself next time.”

Rutte did not invoke the threatening word “memorandum,” but his meaning was the same as if he had, and from within the Italian government majority, the leader of the LeU Senators, Loredana De Petris, gave a reply: “If by ‘reforms’ they mean directing investment towards the green economy and digitization, that’s great, but if instead they want to return to the memorandums, the outcome would be even worse than in 2011.” It is obvious that this is precisely the end goal of the “frugals.” However, it remains to be seen how much traction they will be able to get, and a lot will depend on Angela Merkel’s ability to avoid being swayed by fear of an AfD offensive, which is already firing at full blast against the Franco-German plan.

However, this is not just a matter of a tug-of-war limited to the specific extraordinary circumstance of the COVID crisis. Underneath lies a faultline which puts the entire makeup of the future EU at stake. It is obvious that the same battle is also being fought on the front of the Stability Pact. On Thursday, Dombrovskis and Paolo Gentiloni presented the “spring package” with the traditional recommendations to the various states. They took note of the breach of the 3% deficit ceiling by all 27 countries, but avoided any kind of reprimand.

“The coronavirus has hit us like an asteroid and left a crater-shaped hole in the European economy,” explained the EC vice president. Under these conditions, any such assessment is necessarily suspended.

Yes, but until when? The Latvian and the Italian revealed tendencies that seemed to be radically opposite, not just merely different. Dombrovskis said that at the right moment, although “we cannot put a specific date” on it, there would be a return to the examination of the deficit and debt levels of the member states. Gentiloni was more vague: “When the situation changes, we will make decisions. Because at that point, it will not necessarily be the case that the Pact will still be what we have known so far.”

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