The “Next Generation EU”

Sandra Holdsworth

EU fiscal union only a possibility because UK is exiting – Kames Capital.

The “Next Generation EU” initiative could go down in history as the moment that the collective states of the EU dipped their toes into fiscal union waters, thanks in no small part to Brexit and the coronavirus crisis, according to Sandra Holdsworth at Kames Capital.

The initiative involves raising €750bn from the public debt markets to fund a series of grants and loans to be spent across the EU on a number of initiatives. The immediate financing comes from the bond markets but the EU debt will have to be repaid in the future.

To do this the European Union will have to raise revenue, increasing what is known as ‘additional new own resources,’ something that Holdsworth, Head of Rates at Kames, believes would not have been possible if the UK were still a member state.

“What is interesting is whether this could have ever been possible if the UK had still been a member of the EU. The UK almost certainly would be a net contributor rather than beneficiary from the programme.

“As we know from history, the UK had regular form for rejecting EU ever-closer-union ambitions. In 2011 David Cameron’s infamous treaty veto prevented a deal to solve the euro crisis of the time. EU contributions could double under the current plans. In a world where Brexit never happened, it would have been highly likely for the UK similarly to veto the plan.”

The money will be distributed according to a number of programmes with some countries benefiting and some countries contributing. The size of the current plan is to increase the ceiling on member country contributions to closer to 2% of country level GDP, as compared with the existing budget of around 1% GDP. It could be the first of a series depending how electorally and politically popular it becomes says Holdsworth.

“There is a direct fiscal transfer of €300bn from contributors to beneficiaries. This, if it is agreed upon will be a significant moment in the EU‘s history. It goes some way to remove the existential risk of the Euro and thus the financing premium that some countries pay for debt.”

“It starts to remove the country risk for investment as EU members are more closely intertwined financially. The chances of sovereign debt crises begin to recede leading to a more stable economic environment across the EU and benefitting the region as a whole.”

Three key figures all women – have decided that now is the time when the EU should take the first steps towards fiscal union, the part that needs to evolve if the monetary union is going to be sustained.

This is not ‘complete union’ but a step in that direction, binding the nations of the European Union ever closer as they make joint financial liabilities in pursuit of funding economic recovery.

“The European Union President, Ursula von der Leyen, presented the first draft of the EU recovery plan “Next Generation EU.’

“This comes after the worst health crisis for 100 years, the worst economic crisis since the Great Depression and at a time when the President of the European Central Bank, Christine Lagarde, has been telling her political masters that the Central Bank will do what it can, but is running out of monetary ammunition.

“None of this has passed Angela Merkel by. The Chancellor of Germany, arguably the most influential leader amongst EU nations and the leader of the richest country in the Union is in her last full year of power.”

“The three most powerful women in Europe will be delighted to have avoided a Britain-shaped obstacle, allowing them to take the step no one thought possible. Ironically, many UK commentators forecasted the demise of the EU post the UK departure.

“I would suggest the opposite, the absence of the UK has made a stable EU economic environment more likely. The UK government and their Brexit negotiators should take note. All is still to be debated and agreed upon of course, but this could be the genesis of an era of larger EU budgets with tax and spending powers.”

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