How European bonds are helping the pandemic recovery

Europe has begun to take key steps on its chosen post-pandemic path by raising the first 20 billion-euro tranche for a Covid-19 recovery fund. That may sound worthy and somewhat dull but it is neither. The EU's largest ever joint issuance of debt has stoked ambition and optimism among member states on a scale not seen since the creation of a European single market more than half-a-century ago. Consider this: an Italian minister harks back to the 800km of highway built between Milan and Naples in less than a decade in the 1950s and says the new money could “once again enable Italy to become an example to the world”. Spain’s prime minister Pedro Sanchez declares that the transformational effect of the imminent grants and loans could be similar to his country’s entry into the European bloc 35 years ago. And Mr Sanchez’s deputy suggests that Spain would now have the chance to position itself as “a super-modern country”. The breadth of the ambition to remake Europe is staggering. The continent is often called the old world because it has history and age and is considered otiose on account of its structural rigidities. But Spain is now dreaming of giving 75 per cent of its people access to 5G by 2025 and putting 250,000 electric vehicles on the road by 2023. Seat, a Volkswagen subsidiary and Spain’s only major domestic carmaker, wants to produce a cheap electric car in Catalonia and the Spanish government is eager to help by investing in a new battery cell factory that would boost Europe’s green car industry. In Italy, there is talk of high-speed rail across the Apennine mountains from Naples to the old Adriatic port city of Bari and improving other infrastructure in the south, the country’s poorest region. Germany will focus on digitalisation, electric cars and the development of a hydrogen economy. France has eco-friendly priorities, including investment in decarbonised hydrogen and developing key markets for green technology. By the start of this month, all but four of the EU’s 27 member states had submitted plans for funding under the bloc’s shared pandemic recovery effort, with seven requesting loans. The rest still have until the middle of next year to cobble together a plan and a further 14 months to seek a loan. The possibilities of what might be proposed are immense. So Christine Lagarde, president of the European Central Bank (ECB), is probably right to say that the money – roughly 750-billion euros from bond sales, which should start to flow into national coffers in the next few months – will literally “transform the future of Europe”. There are three ways the transformation may have already begun. First, the issuance of a massive pan-European bond has created a financial instrument to rival the world’s hitherto safest asset, US Treasuries. Investor enthusiasm for Europe’s triple A-rated securities has been described as one of the most highly-anticipated sales in recent times, indicating robust confidence in the bloc’s integration, prospects and direction of travel. Analysts at the Jacques Delors Centre, a Berlin think-tank, say the issuance of common debt at scale marks an irretrievable change in Europe’s financial architecture. Two more rounds of bond sales are slated for the weeks leading up to the end of July. Second, there is new force in “the whole idea of ‘a Europe that protects’,” according to political theorist Luuk van Middelaar of Leiden University. Eurosceptics, especially in Italy, the biggest beneficiary of the Covid-19 recovery fund, may find it harder to rail against an entity that so generously opts to share the post-pandemic burden. Add to that a third emollient factor. Unlike the eurozone crisis of a decade ago, European institutions, not least the ECB, are not preaching austerity and the need for price stability, no matter the cost to ordinary people. Instead, there is a willingness to do whatever it takes to stimulate economies and encourage spending for growth. This throws up the prospect of a permanent change to the EU’s habitual hard line on government spending by member states. Suspended during the pandemic, the rules oblige countries to keep deficits below 3 per cent and national debt below 60 per cent of GDP. This has often been seen as a straitjacket with France’s president Emmanuel Macron calling for a more forgiving fiscal regime, as has Italy’s prime minister, Mario Draghi, a former ECB head. By all accounts, Europe’s willingness to invest – by issuing debt – in individual members’ attempts at enterprise and experimentation has already yielded dividends. Reports from some European capitals indicate that the very experience of putting together multiyear plans for spending and structural reforms, with clear deliverables in the digital and green areas, was novel, as well as a teachable moment. But it may be too soon to say if such careful planning will become a habit. Much could go wrong and disastrously so. Renato Giacon of the European Bank for Reconstruction and Development and economist Corrado Macchiarelli recently said that Europe may be able to raise only between 15 and 20 billion euros a month for the Covid-19 recovery fund leaving many EU countries “high and dry until the end of the year”. That could prompt disaffection and fuel pockets of Euroscepticism. More important, there is the issue of oversight to ensure money is not lost to waste and fraud. There have been numerous previous scandals over the misuse of EU funds. Luis Garicano, a member of the European Parliament, has warned that “Europe could get mortally wounded if the aftertaste in 2026, 2027 of this big expenditure plan is a trail of corruption cases and of graft”. This is true. The launch, on June 1, of the European Public Prosecutor’s Office, the bloc’s first anti-fraud tsar, goes some way towards addressing such concerns. Unlike the existing anti-fraud agency, Olaf, the new public prosecutor will be able to carry out investigations and bring cases in national courts. For now it is fair to say that the success of Europe’s first tranche of 10-year bonds shows that the bloc has managed to sell investors something even bigger than debt: the idea that it is strong. And crucially, that it will be around and able to repay the money come 2031. Rashmee Roshan Lall is a columnist for The National