Filenews 2 May 2021
“THE BIGGEST RISK OF ALL IS NOT TAKING ONE”
MELLODY HOBSON – CEO ARIEL INVESTMENTS, CHAIRWOMAN STARBUCKS CORPORATION
OF IOANNI TELONI
While the pandemic has become more severe through the third wave that is now hitting Europe, European Union politicians are putting the finishing touches to the reconstruction programme known as the next generation EU.
Many analysts have accused the EU's political leadership of timidity, hesitation, slowness and lack of vision. Eighteen months after the outbreak of the crisis, Europe has not yet completed its planning. Ten of the union members have not yet ratified the plan. The latest tertiaries within the Polish government at least seem to add additional delay since unanimity is needed for the full implementation of the plan.
The way in which funds have been allocated to small countries of the union that have been disproportionately affected by the crisis. And for these countries the amounts will be significantly increased to have a real, measurable impact on their economies.
As we know from our trial, the reforms may be necessary but they are unpopular. In addition, because they will take time to implement this may also mean a delay in disbursement of funds. And that's a visible danger.
This slowness follows the failure of the Union's vaccination programme, which is rightly or wrongly blamed on the Commission's shoulders. And while the vaccination programme has finally be started so the states of Europe hope by the autumn to be in the same position as Britain and the US, the reconstruction programme is back. And without this programme, Europe itself is in danger of being left behind.
So does Europe want to move forward? What is it that organized groups in different countries fear to put so many obstacles in this project? And most importantly - if and when implemented how will this project help the members of the Union?
Let's take things in turns.
As Mellody Hobson, President of Starbucks Group, quite aptly observed, the biggest risk in any venture is that you don't want to take a risk. So to be fair, the two EU axis states – Germany and France – have indeed shown that they want Europe to move forward.
In the spring of 2020, when it was now clear that the pandemic would bring about a huge economic crisis across the globe, with Europe perhaps more heavily influenced by other blocs, Chancellor Merkel and President Macron agreed on a plan that provided that the EU would proceed with the issuance of hundreds of billions of euros of common European bonds, with funds channelled to member states – and especially to the less affluent.
The revolutionary thing about this proposal, as French Minister for Europe Clemet Beaume suggests, was the agreement to issue a mutual debt at European level, something that Economy Commissioner Paolo Gentiloni himself recognises would be unrealistic in the pre-covid era.
Last May the leaders of the 27 "vaccinated" the original plan with their own "ideas" and finally found ourselves as Europeans in the final form of the NGEU with a size of about 750 billion euros or 5.6% of the Union's GDP. Of these, EUR 672.5 billion will be used for the Recovery Fund for distribution to members in the form of loans and grants, while the remaining EUR 77.5 billion will be made available through various European programmes.
It is important to point out that the way in which funds have been allocated favours small Countries of the Union that have been disproportionately affected by the crisis. And for these countries the amounts will be significant to have a real, measurable impact on their economies. For example, for Greece this effect will be around 10% of GDP. On the other side countries like Denmark will get less than 1% of their GDP. In absolute terms, Italy and Spain will receive the largest funds.
It follows from the above that the Europe of solidarity seems to have found its way. It has taken the plunge of issuing mutual debt and has made a commitment to its weakest members for help that will not "choke" them into debt.
So the leaders of Europe, even after a long negotiation, have shown the way forward. So what holds back the implementation of the design?
THE FEARS AND THE FEARS
And while planning at pan-European level has finally got ahead, nationally things are at least mixed up. Two elements indicative of the situation have been mentioned above, ten members have not yet approved the plan, while in one country Poland one partner in the ruling party has said it will vote against the plan because it opposes mutual lending, so the government relies on the opposition's votes to approve it. If something goes wrong and the proposal is not voted in favour, the whole planning remains after unanimity is required. I believe that in the end Poland will also be in favour, even after Germany's strong appeals.
But if this develops this way, it will mean another delay in the implementation of the plan, which will unfortunately play into the fears of other organised bodies that see the EU as a hopelessly cumbersome giant from which Britain must escape. And as we know, although the centrifugal forces within the Union have been catalysed - apparently because of the pandemic they have not been exhausted.
It would be really unfortunate for the future of Europe if, because of myopic micropolitics at local level, the European structure and the security and economic progress it has achieved over the last seventy years are being undermined, while there are real external risks to the Union. Therefore, let us hope for a rapid and uninterrupted approval of the Planning so that its implementation can proceed immediately. But how will the effectiveness of the project be ensured?
RESULTS
To understand the importance of the effective implementation of your plan I mention a direct benefit that arose simply with the expectation of its implementation. The margins of bond rates between Europe's strongest and weakest economies have started to shrink substantially. This in itself means saving hundreds of millions of euros in interest payments for countries such as Greece, Italy and Spain.
And there are many who believe that the issue of mutual bonds will bring about a substantial structural change in the European government bond market since with the issuance of the large pan-European bond issue, the EU will now have at its disposal a tool comparable to AMERICAN bonds – a secure asset that will support a genuine economic union. There are a number of economists who believe that the Euro crisis of the past decade simply would not have happened if there had been such a tool in the arsenal of European authorities.
The successful issuance of pan-European bonds will demonstrate that the EU is potentially and truly able to issue such a bond when threatened with a crisis or has to achieve a grandiose objective such as that of recovery from this pandemic.
However, in order to make this hypothetical situation a reality, the recovery plan must be judged as effective in its implementation. And there are two recommended ones – the EU and institutions and national governments in general. The EU is responsible for approving and monitoring national projects. National governments have a responsibility to create national projects within the EU guidelines and that lies with the great responsibility and burden that the Member States have to bear, since they will also have the task of faithfully implementing the projects.
At European level, planning foresees and assumes that at least 37% of the funds will be spent locally on environmentally related items. At least 20% will be spent on the digital reshuffle of each recipient country. In addition, planning in each country should also follow the EU's recommendations for structural changes and reforms. For us here in Cyprus the last requirement will be the most difficult, since there are specific commitments that we had made through the support programme and we seem to have "forgotten".
And in this "translation" of the guidelines from the Pan-European level to the national level, the outcome of the Plan will be judged. For example, countries such as Spain are reacting by wanting to use the funds to relieve those affected by the pandemic. As Mr. Angel de la Fuerte of madrid think tank FEDEA said in an interview with the Economist magazine, businesses in Spain first need to survive until tourists come back and then think about solar panels and windmills. And while many will agree with Mr Fuerte, great attention needs to be paid to the allocation of funds between supporting sustainable businesses and investing for the future so that the country does not stay with a previous era economy with low productivity and competitiveness.
THE EXAMINATION OF DENMARK AND CYPRUS
To understand the danger, let us take the example of Denmark, the country which, as mentioned above, will take about 1% of its GDP from the Plan. Denmark is already investing 65% of its GDP in climate targets!
As we know from our point of view, reforms may be necessary but they are not popular. In addition, because they will take time to implement this may also mean a delay in disbursement of funds. And that's a visible danger. The plan foresees that national plans will be ready by the end of April. This is followed by the approval of the Commission and the European Council. Given the volume that the two bodies have to go through, even ECB Director Ms Lagarde expressed fears of slow progress. Time is therefore just as vital as the efficient use of funds. It has been estimated that an effective and timely use of the funds could increase EU GDP by up to 1.5% in the short term.
Countries such as Italy, which for years has not seen an increase in its economy in real terms, can benefit greatly if it seizes the opportunity, even though its performance in using European funds is not particularly good. But the opportunity presented to her is twofold, since thanks to the generosity of the project, the Euroscepticism that dominated the country has fallen sharply. And national projects such as Greece and Spain have earned Brussels' appreciation for their quality and ideas.
ANIMIC RECOVERY DRAFT
Let's finish with realism but keeping the positives. In America, President Biden is preparing to implement a $1.9 trillion plan and everyone expects the economy to recover a year ahead of the European one, whose recovery plan seems anaemic.
But if we consider that with the plan the EU is taking important steps towards the completion of economic union, has regained solidarity among members and has for the first time in years a vision that includes the environment and technology (the two pieces that its young people are interested in), then it may have a unique opportunity to move forward. Because as Mellody Hobson said, "The biggest risk of all is not taking one."
