The Tussle for Europe's Money | By Vikrant Sharma

The Tussle for Europe's Money

By Vikrant Sharma 

Founder-Editor, The Global Telescope 

 

What began in the 1950s as a project to facilitate closer iron and coal industry cooperation in Europe has ended up as the European Union in 2020. The currency move to Euro near the start of this century was a bold and ambitious move, forever linking the economies of most of EU’s member states. While many dreamt of a more united Europe even during those earlier days of European partnership, including Winston Churchill, few could have possibly predicted the close-knit bond that Europe shares now courtesy the European Union.

When COVID-19 caught the entire world off-guard and unleashed its devastation, starting around March 2020, entire countries went to lockdown and economies virtually stagnated overnight. The same global economies, mind you, that are based around the principle of steady demand and supply. With disruption of this scale being predicted for a long duration, fears grew of bankruptcies, job losses, loan defaults and a crashing GDP.

Frankfurt, Germany

This happened around the world. The task to salvage the economy fell on the shoulders of central banks. A central bank is not a traditional bank that deals with consumers; it can instead be considered the banker of banks. Every nation has a central bank that controls and manages the monetary policy of the country based on myriad economic factors. Described as a ‘lender of last resort’, the central bank controls the supply of currency in the market and uses multiple variables to control inflation in an economy. When a bank needs urgent money to manage day to day affairs, it goes to the central bank. Basically, it is the backbone of any country’s economy. USA has the Federal Reserve, UK has the Bank of England and India has the Reserve Bank of India.

As Euro is the currency of most European Union member-states, they do not have a different central bank in each country (can you imagine how chaotic that would be?).

Instead, the European Central Bank (ECB for short) controls the economy of the EU. Headquartered in Frankfurt, Germany, the ECB is currently headed by Christine Lagarde who worked as the IMF (International Monetary Fund) chief prior to this.

As soon as the COVID crisis began, all countries announced monetary and fiscal measures to control the economic damage. The Federal Reserve, the central bank of the US and arguably the most important one, has been extremely proactive in announcing various measures to ease up the credit facilities and cushion the blow. Since the world is still licking its wounds from the 2008 financial crisis triggered by  the fall of Lehman Brothers, the Federal Reserve has been on its toes to prevent a disaster of similar proportions.

On the fiscal policy side, the task to announce a financial package for the European Union was trickier than a comparable package announced by any one country. Since the EU is comprised of multiple countries with varying economies, and crucially different levels of debt, their interests did not lie in the same course of action.

Already debt-heavy countries like Italy and Spain that suffered the most during the pandemic demanded grants from the European Union that would kickstart their economy and would not have to be paid back. The ‘Frugal Four’ of Austria, Netherlands, Denmark, and Sweden, on the other hand, preferred loans over grants to the countries that needed them so that the money would eventually be returned by these nations. This is reflective of the larger North-South EU Divide. The northern countries in the EU, such as the so-called Frugal Four, enjoy a strong and rich economy. Contrary to them, southern EU states such as Greece, Italy and Spain are servicing debt-laden economies and rely much more on EU money. This became evident near the start of the Greece financial crisis that has continued since the last decade, when the EU was practically forced to bail Greece out via a loan.

To deal with the financial impact of COVID-19, the EU Commission initially proposed a recovery fund of €750 billion, and had later supported a joint proposal by Paris and Berlin which said that out of this fund €500 billion should be in grants to the EU nations worst impacted economically, and the rest in loans.

The debate on the economic package came to a head in Brussels during the EU Summit in July when the distribution between grants and loans was negotiated. On the table were also the trillion-euro EU budget and the conditions for the money to be given. Dutch Prime Minister Mark Rutte said during the summit that talks had turned ‘fractious’.

In the end, the leaders agreed on a €750 billion recovery fund and a further €1074 billion in European Budget for 2021-27. The core grants part of the recovery fund was reduced to €390 billion from the initial proposal of €500 billion, and more loans were guaranteed in turn.

This is a landmark deal for Europe that shows that consensus between EU is possible even when an extremely large amount of money is concerned. It is unprecedented in multiple ways, but from the surface it shows the world the continuing unity of a Europe that was supposed to fall apart and divide in the opinion of many.

My prediction is that this will serve as a reminder for a considerable length of time that the European Union can successfully come together and work as one.

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Author: The force behind the blog, Vikrant Sharma is the Founder-Editor of The Global Telescope. A student of law, he is deeply passionate about history, political science, public international law, international relations, and diplomacy.

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All views presented in the article belong solely to the writer. The editor does not support or condemn the views, and neither does The Global Telescope. The Global Telescope remains impartial and promotes every individual's right to freedom of speech and expression while not holding any responsibility for the views presented whatsoever.