This week, the European Commission proudly announced it has borrowed another €10 billion with the backing of EU member states in the context of the so-called “EU recovery fund”, or “Next Generation EU” (NGEU). It’s a new EU spending and borrowing scheme that will ultimately amount to €800 billion and is supposed to help EU countries recovering from the economic fall-out of the Covid crisis.

This comes on top of the EU’s regular €1100 billion multiannual budget and truly signifies a big step away from the European Union being a mere trade arrangement and is something that would have almost certainly not happened if the UK was still an EU member state, or at least if the UK was still a member, it would have been reserved for Eurozone countries.

The significance is not so much the size of the new EU scheme or the risk that a lot of the money is likely to be spent as badly as regular EU spending, which all too often ends up in the hands of organised crime, crony actors, vested — agricultural — interests and oligarchs close to those in power, especially in Eastern Europe. The first signs aren’t good. According to top Italian justice officials, the mafia would be completely prepared to start cashing in on the funds.

It is highly unlikely the cash injections will do much good in terms of promoting economic growth. According to the European Commission’s own figures, any new job created by the scheme would come at a cost of about €800,000 euro per job in Italy and €500,000 per job in Greece and almost €300,000 per job in Spain.

The real change: jointly issued debt
Sadly, however, this is all EU “business as usual”. The real change is that this time around, EU member states are ultimately guaranteeing that the jointly issued loans will be paid back.

According to a rough estimate in March by the German Court of Audit, this whole scheme ends up once again in transfers ultimately paid for by Northern European countries. The likes of Germany, the Netherlands, Belgium, Sweden, Finland, Austria would ultimately only receive around one third back from the money they would need to pay. For Ireland and Denmark, it would even be around five times.

The new scheme gives the EU the chance to influence policy choices made by member states

This new scheme was agreed despite the fact that the EU Treaties include a ban on the EU incurring debt or deficits, all with questionable interpretation of Treaty rules.

To a degree, the EU had already built up a pile of almost €300 billion of unpaid bills over the years, (of which it somehow managed to deny it was EU debt), and the actions of the European Central Bank ultimately amount to saddling Eurozone countries with ever more financial risk for which they were jointly liable. Through its so-called Target2 system — which regulates interbank payments between Eurozone member states — Northern European member states with a claim on the system are at risk in the event of a bankruptcy and Eurozone exit of another member state. 

The fact that the new European “recovery fund” now provides for more transfers to weaker Eurozone countries at the expense of non-Eurozone member states like Denmark or Sweden is something that has raised surprisingly little concern. Both Denmark and Sweden were part of the so-called “Frugal Four” of EU member states that opposed the creation of the new fund, together with the Netherlands and Austria, but they simply backed down in the end. 

Still, the biggest net recipients of the new scheme are not all Eurozone countries. Sure, Greece is among the top three, but so are non-Eurozone member states Croatia and Bulgaria. It is simply revolting to witness how EU leaders decided to create a scheme that will guarantee even more billions of euros of transfers to Bulgaria, when at the same time Bulgarians were protesting cronyism and corruption (which is often linked to EU funds) and while the Bulgarian ruling party has now suffered heavy losses in two consecutive elections.

In summary, the EU’s recovery fund is a big step towards a fully-fledged European transfer union, as EU member states are de facto jointly liable to pay back the loans. The idea that it would be “temporary,” as Dutch Prime Minister Mark Rutte has emphasized, is highly contestable. 

When the time comes to repay the money, it is written in the stars that cash-strapped EU governments will be only too happy to opt for the issuance of new loans to pay back the old ones, rather than to repay the loan by sending the bill to citizens. This is already “business as usual” for national government financing anyway. The ECB is keeping interest rates low, using various methods. One works as follows. Banks do not charge high interest rates on loans to governments, because they know that the ECB stands ready to buy up any Eurozone government debt from them, through newly created money, all at the expense of those saving in euros.

Some think a transfer union may be just what is needed to save the shaky European single currency, this is wrong

Demand to lend to the EU is strong, but even if interest would falter, there is little doubt that the ECB would simply jump in, perhaps together with other European central banks, so to engage them in monetary financing not only of Eurozone member states but of the European Union. 

Another option to pay back the money is to agree EU taxes, which is what EU leaders officially endorsed in their deal on NGEU last Summer. This may perhaps be a bridge too far, as it would be less convenient than to simply issue new EU loans, but we’re witnessing some movement here as well, with the European Commission now proposing that it would receive a part of the CO2 “emission trading system” — cash companies have paid in order to be allowed to emit CO2. This amid other continuous EU attempts to grab taxation power from EU member state democracies.

A transfer of power to the EU level
A particular problem is also that the new recovery scheme provides the opportunity to the European Commission to influence controversial policy choices made by member states. This is because EU member states need to submit “recovery plans” that are embedded in the so-called “European Semester,” a monitoring procedure whereby the European Commission makes recommendations to the member states on financial and economic policy. So far, these recommendations were usually ignored by member states, but now this system is getting teeth. If member states ignore EU recommendations, they’ll miss out on the cash that has been financed through debt for which they themselves are responsible.

Already, the European Commission is dragging its feet to agree to disburse cash to Hungary, claiming that there aren’t sufficient guarantees against corruption. That is absolutely correct, but the same argument can be made against other member states. 

In case of continuing disagreement, a special committee within the EU Council, composed of EU member states, can have a say, and ultimately EU leaders decide. Throughout the whole process, eurocrats carry decisive influence, something which is profoundly questionable from a democratic point of view. 

It’s not just corruption concerns that are being invoked to hold back the money which EU member states ultimately will need to pay for. The European Commission has already threatened that it will only grant Ireland “recovery fund” cash if it raises its low corporate tax rate, something which serves to attract business and economic activity to the Emerald Isle. 

Perhaps, ultimately, many of the policy promises made in the “recovery plans” — both those that are sensible and that are not — will not be implemented and perhaps EU leaders will simply shy away from lecturing each other. Alternatively, as with EU deficit rules, the rules may be applied in an arbitrary manner, very much how Ireland, unlike Germany and France, has been reprimanded for disrespecting EU deficit rules, those rules were first applied. 

Some may think a transfer union may be just what is needed to save the shaky European single currency, the euro. This is mistaken. Transfers do not create political unity but undermine it, as it dissatisfies both those that are unhappy to pay and those that are asked to comply with the conditions attached to the payments. This European transfer union, with constant haggling over whether or not the conditions to receive cash are correctly fulfilled amid complaints over undemocratic interference, will not bring Europeans closer together, quite the opposite.