John Bruton

Opinions & Ideas

Category: COVID 19

WHERE CAN THE EU FIND THE AMMUNITION TO FIGHT A CORONA VIRUS INDUCED ECONOMIC SLUMP?

The Covid 19 outbreak, and its deep financial aftermath, will put the European Union under unprecedented stress over the next five years or more. Brexit will add to these tensions for some members, notably Ireland. It is a matter of vital national interest for Ireland, that the EU gets its response to the crisis right, and does not allow it to create dangerous social distancing between the states of the EU.

A crunch point will be reached next Tuesday when EU Finance Ministers must make vital short and long term decisions.

 The existing structure of the EU is unfitted to a crisis like this. The public expect the EU to act, but has not been given the EU the powers it needs to do so. 

Unlike the states of the EU, the EU itself has no capacity to borrow money, and no capacity to raise taxation. So it  often lacks the financial clout to take decisive action.

 The amount it is allowed to spend is a mere 1% of GDP, whereas EU member states can and do spend around 40% of their GDP.

Membership  of the EU has been enlarged to include populations who have radically different understandings of the obligations and responsibilities of EU membership.

 Some think EU membership is compatible with authoritarian systems of governance.

 Others think EU membership is about entitlements, without commensurate responsibilities.

 Yet others see the EU as a means of creating a sphere of influence and projecting national power. 

Some (like the UK) see the EU as just a trading arrangement, with few political obligations at all.

 Many see membership of the EU as a transaction, from which they should always gain more than they were giving up.

 The countries and regions that gain most from the EU Single Market, are either unaware of the gains, or mistakenly think it is all due to their own efforts.

 A recent study by the Berthelsmann Foundation showed that the big objectors to Eurobonds (Germany , Austria and the Netherlands) gain almost three times as much per capita from the EU Single Market as do the assumed beneficiaries of the Eurobonds, Spain and Italy!

 If the Single Market were to fail, the objectors would lose the most. But their national politicians fail to tell them this. Incidentally the study showed Ireland to be a big gainer from the Single Market.

Meanwhile the countries and regions that gain comparatively less from the Single Market resent this, and fail to acknowledge that they too are gaining from being in the EU Single Market, albeit a bit less than the others are gaining. Envy blinds some to reality.

Of course, these contradictory feelings are rarely expressed publicly, but they there under the surface, ready to emerge when a crisis happens and decisions have to be made quickly. 

Covid 19 has been such a crisis.

 The first reactions of some EU members were revealing, and deeply troubling.

On 4 March, France and Germany decided to block export of personal protecting equipment outside their own borders, even within the EU. This was done notwithstanding the fact that restrictions on export to other EU states are forbidden by Article 35 of the EU Treaty.

 Two days later, Italy requested an extraordinary meeting of EU health Ministers. This was declined, notwithstanding the fact that the health crisis was worse in Italy than elsewhere, and Italy (like Greece) had already borne the brunt of the refugee crisis, with little or no help from its EU partners.

 It took several days of pressure before the export bans were lifted, and 1 million German masks eventually did reach Italy. Meanwhile China scored a public relations coup by getting equipment to Italy, equipment that Italy’s EU partners had failed to supply. 

The Institute Montaigne, a French think tank said this episode will leave “deep scars” in Italy’s relationship with its EU partners north of the Alps.

The restrictions on economic activity, as well as the direct health and income support costs, arising from Covid 19 will dramatically increase the debts of all states in the EU. 

Assuming a 20% drop in GDP as a result of Covid 19, an economist in the Bruegel Institute in Brussels  has estimated that the Debt / GDP ratio of Italy could rise from 136% of GDP to 189%, that of France from 99% to 147%, that of Spain from 97% to  139%, and that of Germany from 59% to 94%. 

 As all these countries can expect their workforces reduce in the next 20 years, because of past low birth rates, this is a very troubling prospect. A way needs to be found to spread the  debt as widely as possible and as far as possible into the future.

One of the proposals made to do this is Eurobonds which would enable counties to borrow with a guarantee from all eurozone states. The interest rate might be lower but it is still just another form of borrowing. If Italy issued a Eurobond, it would still be increasing its overall debt, and might face a higher interest rate on its ordinary bond issues. Another objection is that it might take 18 months or more to get these Eurobonds up and running, and the markets need something quicker.

Another proposal is that distressed countries borrow from the European Stability Mechanism (ESM). Some believe that the ESM is too small for all that needs to be done. Others worry about the conditions that might be imposed.

Meanwhile the ECB continues to buy the bonds of member states. For example it owns 26% of all German government bonds and 22% of all Spain’s bonds. This bond buying by the ECB enables governments to continue borrowing, but its support is confined to members who are in the euro. It is using monetary policy to achieve the goals of fiscal policy, which is controversial.

I suggest a better solution would  be to allow the European Union itself to borrow, up to a limit of (say) 0.5% of the EU GDP, to spend exclusively on Covid 19 related expenditures. 

Article 122 of the Treaty already makes provision for the EU to give aid  to help states suffering from “natural disasters and exceptional occurrences” beyond the control of a member state or states. Covid 19 meets this criterion.

 But the EU is not using this power, because its budget is fully committed to other things. It has no room to respond to sudden emergencies.  It would have such room if it was allowed to borrow. This power could then be activated to allow direct transfers of funds to a state in acute distress because of Covid 19 or the like, without adding to the recipient state’s debt.

Doing this would require an amendment to Article 310 (1) of the Treaty. This article presently requires the EU always to run a balanced budget. This could be amended to allow borrowing  that was confined to spending on matters, like Covid 19, that had arisen suddenly and were beyond the control of the state looking for help. Such a limited borrowing authority would command a lot of support from the electorate.

It would also be borrowing under the democratic control by the Council of Ministers and  European Parliament, something that does not apply to bond buying by the ECB.

The EU faces is an unprecedented situation which justifies unprecedented actions.

THE G20 NEEDS TO SHOW REAL LEADERSHIP ON THE GLOBAL VIRUS THREAT

It is welcome that, at last, the G20, representing the world’s most important countries, and 90% of the world’s population, is getting together in a teleconference to discuss the health and economic crisis caused by the Covid 19 virus. It has been obvious for several weeks that coordinated international action was going to be needed.

 Given that the G20 was brought into being in 2009 to deal with precisely this type of global crisis, the banking crisis of 2008, it is amazing that it has taken the Saudi Presidency of the  G20 so long to convene at meeting. They were pressed into doing so by India. 

In 2009, when the G20 was first convened, there was a reasonable relationship between the two biggest world powers, the US and China. Gordon Brown of the UK was in the chair and substantial programme of action was agreed and implemented. The Financial Stability Board was set up, and a global programme of actions to stabilize banks was agreed and put into action.

 China led the way in stimulating its economy through infrastructure spending and this helped get the global economy going again. Germany and Europe benefitted from this through exports.

Now that lives, and not just livelihoods, are at stake an even more vigorous programme of action from the G20 is needed.

 The US and China need to stop sniping at one another and start cooperating. The US and China coming together to work on this global threat would give hope to the world.

 Japan set a good example that the US might now follow, when the crisis first  broke out in Wuhan. It donated protective equipment to Wuhan and Japanese MPs donated 5% of their personal salaries to the virus containment efforts in China. This was a remarkable gesture in light of the previous public hostility between these countries, going back to World War Two.

The Covid 19 crisis has revealed how much we all depend on the chronically underfunded World Health Organisation(WHO). The WHO will be part of  this teleconference convened by the Saudi Chairman of the meeting, King Salman.

 In recent budgetary proposals, the US White actually proposed halving the US contribution the WHO. Instead ALL G20 members should agree to double their contributions to the WHO.

Trade barriers, many of them recently erected, are also hindering efforts to save lives.

The international Chamber of Commerce in Paris has said

“the recent escalation of trade barriers is now wreaking havoc in key medical supply chains”.

 For example, restrictions on exports of life saving equipment, including masks, test kits , disinfectants and ventilators, have been introduced by some countries. The global trade in test kits is worth $186 billion and that in disinfectants is worth $308 billion. 

 The Global Trade Alert Team in Switzerland say that damaging export bans have been introduced by a list of countries including  Bulgaria, France, India, the UK, Korea, and even by Saudi Arabia itself!

 In the case of ventilators, export restrictions would be particularly damaging. There is no firm on the entire continent of Africa, and only one in Latin America, that is capable of manufacturing ventilators. And even the countries, that do have manufacturing capacity, will have to import some of the components.

Even soap and disinfectant have to be imported by most countries. 78 countries impose tariffs on soap and 23 impose tariffs on disinfectants.  This is crazy in present circumstances.

The G20 should decide that all barriers to trade in goods, including soap, that the World Customs Organization(WCO) has said are critical to fighting the virus, should be removed straight away.

 The EU should abolish its  own export authorisation system for ventilators because it will slow down production and cost lives, especially in the poorest countries of the world.

The G20 also needs to consider the longer term economic effect of the shut down in global economic activity.

 Big countries with big tax bases can protect themselves and their firms. Germany has introduced a big package of aid for German firms.  But an Italian firm, producing the same product as a German firm, may not get the same aid as its German competitor, and this could destroy the level playing field of the EU Single Market.

 No country derives as much benefit proportionately as Ireland does, from the existence of fully fair and open EU Single Market. So Ireland should support EU coordination of all business supports to ensure that all firms, whether from big or small countries, can compete fairly.  

The ECB has taken welcome steps to help Italy, and other heavily indebted countries, that have been hit by the virus, to borrow at reasonable interest rates. But that simply adds to their debts.

 Collective EU action, financed by collective EU borrowing, in support of particular health related spending should be undertaken. At the moment, the EU can neither raise taxes nor borrow, and that means it is unable to cope with crises like this one.

I propose

  • the immediate elimination of all tariffs and restriction on the export or import of goods identified by the WCO as vital to fighting Covid 19
  • a mutual assistance programme to help countries with the greatest shortage of equipment and  intensive care beds
  • the exemption of medical staff, who have been tested, from immigration restrictions to allow them go where they are most needed

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