How the EU recovery fund amounts to an invisible transfer of power

Tuomas Saarenheimo, President of the "Eurogroup working group" and President of the "Economic and Financial Committee", which prepares the economic and financial affairs configuration of the Council (ECOFIN) (Copyright: EU Council)

On Friday, The Economist highlighted how “the European Commission is becoming more powerful, quietly” under the “maligned Mrs von der Leyen”, in charge since the end of 2019.

Duncan Robinson, the magazine’s “Charlemagne” columnist and its Brussels bureau chief, summarized it as follows on twitter:

The most important development is of course the EU’s new “recovery fund”:

“A plan to dish out cash to struggling governments has left the commission as a proto-treasury, signing off economic policy and handing out money. In exchange for a share of €750bn ($895bn) in grants and loans, EU governments must overhaul their economies in line with Brussels-approved plans.”

A big change as compared to Eurozone bailouts is that this time around, the European Commission does not only have leverage over Eurozone democracies that are going through financial distress, but also over the likes of Germany and the Netherlands, and even over non-Eurozone democracies like Sweden or Denmark, as it amusingly notes:

“Those countries that had experienced such a programme knew exactly what to do. Efforts from Spain and Greece, both bail-out veterans, were highly praised. Draft proposals suggested by the German government, which is more accustomed to prescribing economic medicine than taking it, were initially knocked back.”

The Netherlands does not seem overly keen, as it is the only EU member state to not have submitted a “recovery plan”, which serves as the precondition to receive EU cash, which in the Dutch case amounts to 6 billion euro. It is still planning to do so later, when Dutch coalition talks have been completed.

Interestingly, The Economist adds that the “temporary” scheme may very well become “permanent”:

“Commissioners such as Paolo Gentiloni, the Italian overseeing the scheme, suggest that the mechanism could be used again. Temporary measures can easily become permanent, as anyone who pays income tax will appreciate. At that point, the proto-treasury becomes a real one”.

In a separate feature, Belgian magazine Knack highlights the bureaucracy involved with the disbursement of EU recovery fund cash, noting:

“[EU member states] need to discuss with the European Commission how ‘green’ [a project] is. To do that, there are only three categories: zero, fourty or hundred percent…For every project, milestones and targets need to be presented, which are being monitored and reported. For example, the number of bike lane kilometers or the number of square meters of roof renovations”.

While some of that can be justified, in order to counter the very real risk of misspending and fraud, Knack also points out that the creation of the recovery fund has provided the “European Semester”, a largely non-binding EU process intended to coordinate national economic and fiscal policies, with binding teeth, this because “Member States must adopt the non-binding recommendations of the 2019-2020 European Semester in order to be given the green light” for EU recovery cash.

It’s important to realise that the “European Semester” does not merely serve as a tool for the EU to promote responsible budgetary policies, which is how it was initially sold.

Recommendations go way beyond this and have included suggestions for German life insurance companies to maintain sufficient capital buffers, recommendations for Spain on resolving failing banks, suggestions for Italy on labour reform and encouragements for more private and public investment in Germany, which is regularly slammed for its high current account surplus – never mind that this closely relates to the ECB keeping the euro artificially weak.

So far, for the most part, European Semester suggestions have been ignored by member states. But now, the European machinery is gaining the ability to withhold EU recovery fund cash to a member state refusing to implement such suggestions.

Regardless of whether these suggestions are good or bad, or whether it’s a good idea for the European Commission to come up with them, the key question here is what the legitimacy is for the supranational EU policy level to affect sensitive policy choices, which really should be the preserve of national democratic debate.

As big as the role for the European Commission may be to shape the whole process, an important role on whether or not to release the money is granted to the EU Council’s “Economic and Financial Committee” or “EFC”, which is an advisory body, composed of senior officials from national administrations and EU central banks, and presided by the president of the “Eurogroup Working Group” (EWG), currently Finnish civil servant Tuomas Saarenheimo (picture).

The EFC’s existence is being provided for by the EU Treaty, so it goes way beyond what some would consider a purely intergovernmental arrangement. If EFC bureaucrats cannot agree on whether the agreed conditions to receive the money are met, EU leaders need to decide. Again, the question should be raised what the democratic legitimacy is of EU leaders to have any say over each other’s national policy choices.

An example of such a sensitive policy area is for example pension reform. Here, the Belgian government intends, according to Knack, “to incorporate its planned pension reform in its recovery plan”, as pension reform has been a longstanding European Semester demand for Belgium. One problem: “No deal on this has been already agreed within the [coalition] government of PM De Croo. (…) Whatever the government of PM De Croo now incorporates in its recovery plan, will be harder to deviate from at a later stage. Otherwise, there is a risk that other EU member states pull the emergency brake”.

Knack adds that at least in Belgium, “all of this happens with limited parliamentary scrutiny. Nor the Lower House or Regional Parliaments will be able to consent, as things stand, to the plan before it is being submitted to the European Commission. In other words, they will lack any input on what their governments are planning with 6 billion euro. And afterwards it will be much harder to change”.

This should clarify the danger to those assuming that the presence of national officials or EU leaders in the decision making process surrounding the recovery fund is a guarantee for national democratic control. It is not. The requirement for governments to follow “European Semester” recommendations in order to receive EU recovery fund cash, has narrowed down the options dramatically for the Belgian government. EU recommendations on Belgian pension reform may well be quite wise, but other European Semester suggestions are much more questionable. The room for national governments to challenge these now comes at the price of losing EU recovery cash.

Have the consequences of Europe’s “Hamiltonian moment” for national democracy been properly thought through? Countries will be made liable for jointly issued EU debt, but in order to access the money that has been raised and for which they are liable, they’ll need to comply with all kinds of conditions set with limited democratic legitimacy. For governments acting as “net payers” within the “recovery fund” context, as for example Germany or the Netherlands, that is even harder to justify.

Perhaps in practice, politics will trump all of this, and EU governments may be wary to start micromanaging each other’s policies, but even then, the scope for political discord and wrangling within the EU will have been increased. Once again, the EU wading beyond what should be its core business – scrapping trade barriers – may backfire.