The significance of extending the fiscal flexibility given to European Union member-states so they have the space to help their economies recover was highlighted by Bruno Le Maire in an interview with the EU correspondents of several European top newspapers, including Kathimerini. The French minister of economy and finance also revealed his government’s willingness to accept the logic of partial liability as the basis for the common debt issuance that will bankroll the Recovery Fund. This concession, which is a step back from the goal of a Eurobond, makes it more likely that there can be agreement on the matter with Berlin.
Regarding the fiscal rules, Le Maire says: “We should be aware that the economic recovery will be long, difficult and costly. It will not be like turning on a switch, only a matter of a few days, or weeks, or even months. It takes time to open shops, restaurants, to restore the production capacities of our industrial companies. Which means that we should not make the same mistakes that we made in 2009-10, when we limited the flexibility very quickly and paid a huge price for that. My conviction is that we should go step by step, supporting the economic recovery as long as it will be necessary, not restoring the fiscal rules too soon, because it would clearly jeopardize the economic recovery.”
On the Recovery Fund – a proposal he himself presented to the world two weeks ago – and how it will be funded, the French finance chief repeats that his country would prefer a joint issue with guarantees by all EU member-states to underpin it, where each country is in principle liable for the whole of the debt that will be issued by the new instrument. However, responding to a question about the European Stability Mechanism model, where each member is liable only for its share as represented in the total capital of the organization, he says that “we are open to other options, but now is time to decide. And if we want to be able to decide, we need to be able to compromise. Everyone will have to take a step in the direction of other member-states. This is what we have done to reach this first decisive consensus on the global package among the 27 finance ministers.”
Irrespective of the form of common guarantees, Le Maire explains the ways in which the French proposal differs from a Eurobond in its pure version (which “should remain a possibility for the future,” he notes) and can therefore be accepted at the level of heads of state and government in the April 23 teleconference. “We propose to raise common debt only for the future. That’s the key difference with Eurobonds, which were also about past debts,” he says. The Recovery Fund, he adds, is also different from Eurobonds because it has a definite end-date, and because it is geared toward a single purpose: investment. “That’s why I think there is room for negotiation among us [which can lead to a final agreement]. Our Dutch and German friends should be sensitive to the following argument as well: This is the best scenario from an economic point of view. Using common debt issuance is better than using the Multiannual Financial Framework [MFF, the EU budget]. Raising debt at very low interest rates allows the cost of the recovery to be spread over time, while spending funds via the MFF places an immediate burden on public finances of member-states.”
He says that common debt issuance by a “coalition of the willing” instead of all member-states would be a clearly suboptimal alternative. “I strongly believe we should stick to the unity of the eurozone and the EU. To be wise is to remain united. We have to be wise and audacious; I think both are possible.”
The money raised by the Recovery Fund, through a special purpose vehicle or through the European Commission, according to Le Maire, will be given to EU member-states in the form of “grants, not loans,” based on the effect of the pandemic on their economy. The precise methodology, he says, should be set up by the Commission; it won’t be for the members themselves to decide. Investments “will be between three and five years,” while debt servicing shares will be based on the gross domestic product of each country and will take place over 10-20 years. Noting that a coordinated recovery “will cost a lost,” he gives a ballpark figure for the size of the Recovery Fund of 1 trillion euros.
He is keen to highlight the reasons why the new Fund is vital to dealing with “the greatest crisis the EU has faced in its history,” as “huge public expenses will be required to meet the investment needs of the day after.” If all 27 member-states want to move at the same speed, we need common funding for investments. “Otherwise, there’s the risk that some countries like Germany and the Netherlands will recover quickly – because they have the fiscal space to fund their recovery, while other countries will lag behind, running the risk of widening existing divergences and leading to the end of the eurozone. That is what is at stake,” he says.
Furthermore, if the recovery is slow, he warns, “we risk losing the race of the 21st century” and falling behind in technologies like 5G and artificial intelligence. “In a few years we won’t be able to compete with China or the US,” he says.
But the French minister says he is “very satisfied” because “many political leaders and economists in Germany are changing their mind and supporting our proposal.”
Le Maire praises the initial economic response to the crisis by member-states and EU institutions – from the activation of the general escape clause to the new 750-billion-euro bond-buying program of the ECB. He calls the 540-billion-euro package agreed after “long negotiations” last Thursday by the Eurogroup “good and strong,” emphasizing that the Recovery Fund is a “key part” of it and that France will not accept any attempt to separate it from the other three pillars and postpone it indefinitely.
Asked about the Dutch position in these negotiations, he says it “was hard throughout, but not negative.” All governments have to face public opinion at home, he observes. “In the final stretch of the negotiations I worked very closely with my Dutch colleague Wopke Hoekstra and we paved the way for a compromise.” He also highlights the role played by French President Emmanuel Macron and his call Thursday morning to Dutch PM Mark Rutte, saying that it was “decisive.”
It is clear, though, that Paris and The Hague have different interpretations of parts of the agreement. For example, the common statement that emerged from the Eurogroup notes that the countries that make use of the ESM’s precautionary credit line will be able to use the funds to cover “direct and indirect healthcare, cure and prevention related costs due to the Covid-19 crisis.” In his post-meeting press conference, Hoekstra ruled out any possibility of using the ESM money to stimulate the economy.
“I know that some of the member-states are disputing this, but it’s written in black and white: The ECCL should be available for all direct and indirect costs, including prevention costs; and the lockdown is clearly a prevention cost,” replies Le Maire. “So the consequences of the lockdown should be in the scope of the ECCL [enhanced conditions credit line].” He is, however, “totally convinced” that there won’t be any further disagreements on this in practice.
On the possibility of a debt crisis in Italy if there is no common debt issuance, he praises his predecessor at France’s Finance Ministry, Christine Lagarde. “You know that the ECB is playing its full part, and I really think that it is the best protection against any kind of debt crisis,” he says. Finally, he does not rule out the possibility of France itself applying for ESM funding. “I cannot tell you what the requirements of the French government will be in two, three or four months.”