EU Commission President Ursula von der Leyen has done what Brussels does best: used a crisis to put together a superficially attractive package with poorly understood implications, writes Oliver Hartwich

To understand the mindset of European elites, it is worth going back to the words of the founding godfather or European integration, Jean Monnet: “Europe will be forged in crises and will be the sum of the solutions adopted for those crises.”

Monnet’s spirit of integration was alive in last week’s proposal to create a €750 billion fund to deal with the fallout of the coronavirus crisis. It is a gutsy move which pushes European fiscal integration to a new level.

At the same time, the package is still too small to make a substantial impact.

The significance of the proposed fund is not its volume but its construction. It marks a first step towards a different kind of European Union. Once again, the EU project moves ahead in a crisis, and once again it does so in a way that few people outside would understand. This procedure has a long history in Europe.

Former EU Commission President Jean-Claude Juncker famously explained how integrationist steps progress. In 1999, when he was still Luxembourg’s Prime Minister, Juncker told Germany’s Der Spiegel magazine: “We decide on something, leave it lying around, and wait and see what happens. If no one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back.”

Perhaps it is worth explaining first what the €750b package is not: It is not a silver bullet against the devastation caused by Covid-19. For that, it would need to be much larger.

Though that may sound surprising given the amount of money involved, it is worth remembering that in relative terms it is just a little more than 5 percent of the EU’s pre-crisis GDP. The package will also be deployed over the six years of the next long-term EU budget (2021-2027).

Roughly an extra percent of stimulus per year will not magically revive Europe’s economies. Certainly not when the scale of the Covid-19 downturn is likely to be in the double digits for many EU member states. Note also that even if the fund gets established, any money likely would not be paid out until 2021 – when the recovery should already be underway.

Italy is supposed to receive just under €173b from the EU fund in grants (€82b) and loans (€91b), which sounds like a lot without remembering that Italy’s public debt stands at €2.41 trillion. The EU package is so small it will not make a material difference in the recovery nor help over-indebted countries deal with their long-term solvency issues.

What is far more interesting is how the EU fund will affect the bloc’s political dynamic.

The EU Commission does not sit on a war chest. To finance the entire €750b recovery instrument, it must issue bonds to be repaid over 30 years but starting only after the next six-year budget period. That means from 2028 to 2058 the EU must service the extra Covid-19 debt incurred between 2021 and 2027.

This long time-frame binds Europe closer financially. But to put the EU Commission into a position to service the debt, it also needs new financing tools. The Commission has proposed a range of new taxes for that purpose, including a carbon border adjustment mechanism, a tax on non-recyclable plastics and a levy on big digital firms.

The EU Commission will also assign itself new tax powers previously the exclusive rights of the member states such as a new EU-level corporate tax – something the EU never had access to. Once established, this would set a precedent for further centralisation of taxation in Europe.

In other words, the European Union is changing into an organisation with explicit joint liability for debt. That is a major change because Article 310 of the EU Treaty does not even permit the EU to run deficits.

On one level, it is impressive how the EU Commission always uses crises to grab more power

This new fund makes the EU more like a super state and less like a federation of nation states because it undermines the sovereignty of member states and extends the European project. Until the Covid-19 crisis, there was no appetite for this.

Under the perception that strong, decisive and collective action is needed, even in countries previously sceptical of debt pooling, there is growing public acceptance of the €750b fund. In Germany, an opinion poll for Der Spiegel showed 51.7 percent supported the proposal.

Never mind that Germany will lose more than €100b by agreeing to the package (it receives €28b in grants and no loans while financing 21 percent of the €750b package). What are the chances Germans would agree to that in normal circumstances? Quite low.

As if designed to prove Monnet and Juncker right, EU Commission President Ursula von der Leyen has done what Brussels does best: used a crisis to put together a superficially attractive package with poorly understood implications.

On one level, it is impressive how the EU Commission always uses crises to grab more power. The EU may not be popular, national governments and parliaments may not want to surrender their powers and the proposed packages may not even make much difference (or sense). Regardless, nothing stops the march of European integration. Brussels has now guaranteed itself a comprehensive administrative role until 2058 and beyond.

It is even more impressive that Brussels convinced even the otherwise frugal Germans to sign a €100b cheque without a murmur from its public.

That is the power of a crisis. No other political institution in history has been built and forged as much in emergencies as the EU. But what happens when the EU itself becomes a crisis?

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