Overcoming the Corona Crisis with solidarity-based financial and economic Policy and setting the course for a better EU.
by Heinz Bierbaum, Ralf Krämer, Fabio de Masi, Axel Troost und Harald Wolf
The Corona crisis has plunged the world economy into the biggest crisis since the Second World War. The scale of the crash by far surpasses the financial and economic crisis of 2008/2009 – according to World Bank estimates, the impact could be up to three times as severe. Unlike then, the current economic downturn synchronised – all industrialised, emerging and developing countries, and all regions of the world, are being almost simultaneously affected by the crisis. This has had a serious impact on global supply and value chains.
While the forecasts of most institutions initially assumed a relatively rapid recovery, this has now given way to a more realistic assessment: the recovery will be slow and hesitant. This is, however, based on the premise that the economy can be revived in the second half of 2020. The possibility of a second wave of the pandemic and the increasing disparity in crisis management timelines (USA, Brazil, UK) does not give cause for optimism. What makes matters worse is that many consequences of the lockdown will only become visible after a delay (risk of insolvencies, rise in unemployment etc.).
The actual economic development figures of the various institutions vary. Despite all the unclarity, however, some key assertions can be made: it is clear that the crisis will deepen existing inequalities in the eurozone. What has been driving the increasing inequalities are the differences in the development of the pandemic (Italy, Spain, France with particularly severe cases), and the specifics of various countries’ economic structures (e.g. the dependence on tourism in Greece, Italy, Spain).
Considering the major significance of global and intra-European value and supply chains for the eurozone, it follows that it would be strongly affected by a collapse in external demand. The EU Commission expects exports to fall by 13 percent. A severe shock in supply and demand will also lead to declining investment and will thus aggravate the protracted weakness in investment (not only) in the eurozone. The EU Commission expects a cumulative investment decline of 850 billion in current market value, which corresponds to about 6 per cent of the EU’s GDP. The consequences for public sector budgets are serious. They have been reduced as a result of the economic slump and the corresponding decline in revenue (taxes!), with a simultaneous increase in expenditures to cushion the social consequences and borrowing for economic stimulus programmes. The cumulative budget deficit of the eurozone states will – according to the spring forecast of the EU Commission – increase from 0.6 percent of GDP in 2019 to 8.5 percent of GDP in 2020. A decline to 3.5 per cent is expected in 2021. The total debt in the eurozone is estimated to reach 103 percent of the GDP in 2020.
The World Trade Organization (WTO) estimates that global trade will decline by about one third this year. The ifo-Institute expects that the disruptions in supply chains caused by the lockdown will only be the beginning of a long-lasting transformation in global production. Germany and the EU will be particularly affected: in 2015, 31 percent of German and 28.2 percent of EU value-added trade will have crossed at least one border. In the USA this was only 10 percent and in China 17 percent. 16 percent of the export value of the German economy is based on foreign outlays.
This is the background against which the European-level crisis management measures must be assessed.
The corona pandemic is the second major shock to hit the EU within a few years of the financial crisis. It is affecting a Union that has already suffered. The divisions that have become increasingly visible in recent years have been driven by the flawed architecture of the European Monetary Union and the policy of cuts during the financial and euro crisis. The Corona crisis threatens to trigger a further split. If the past policies are repeated, the danger of a break-up will continue to loom. For the EU to have a future again, economic reconstruction must be combined with a change in direction. In view of the global challenges we are faced with – climate change, trade disputes, armed conflicts, etc. – what is needed is a different EU, one based on principles of solidarity and one which stands for prosperity and unity. The economic recovery of the entire EU is also in Germany’s own interest.
In times of crisis, nation states must take powerful countermeasures to prevent the effects from becoming even deeper and more devastating. The EU states have, therefore, already had to massively intervene with their national budgets. The deficit restrictions of the Stability and Growth Pact were consequently suspended for the duration of the crisis. While this is a step in the right direction, it is not enough; when the debt rules take effect again once the crisis is over, the increased debt will put many states under renewed pressure to mandate cuts (see table). It was equally necessary for the ECB to agree to expand bond purchases under its PEPP programme and thus prevent a rise in interest rates that would drive up government financing costs and potentially lead to the break-up of the monetary union. It was particularly important that the ECB, in contrast with previous bond purchase programmes, has so far refrained from imposing conditions that would curb demand and has remained open to purchasing government bonds even beyond the respective capital key. This increased the pressure on the German government to stop resisting the pursuit of a common European financial policy.
In recent weeks, countries with existing high government debt ratios, such as Italy and Greece, have mobilised far fewer financial resources for crisis management than Germany. France, too, has fallen well behind Germany, whose contribution accounted for half of all the aid approved by the EU Commission. Due to the unequal contributions to the economy, fears are that the split within the EU will continue to deepen. The ECB was able to calm the financial markets through its interventions, but the real economy of the crisis states has remained in a depression due to the long-standing policy of cuts. The ECB’s monetary policy must therefore be complemented by a more active fiscal policy on the part of the EU and the member states.
Euro or corona bonds could play an important role here, i.e. through community bonds that could be either made available to the member states or that could finance a central budget. Not only do they mobilise funds, but they also level out the interest rate differences between the Euro states, which persist despite ECB programmes, and which put the economically weaker states at a structural disadvantage. These proposals have failed so far due to the resistance of Germany and other economically strong northern European countries.
This was also reflected in the package adopted by the Eurogroup in April 2020, the amount of which was estimated at 540 billion Euros. The high figure is based on the unrealistic assumption that all countries would use the programme to its full extent. Additionally, various private investments that are to be initiated / pushed through the programme would also be counted towards this total. It is made up of three components: “Sure”, a programme to finance Kurzarbeitergeld of up to 100 billion Euros; a guarantee for corporate loans by the European Investment Bank of up to 200 billion Euros; and a credit line of up to 240 billion Euros was set up within the framework of the ESM. The strict conditions normally associated with the ESM have been suspended for expenditures related to the Corona crisis. This, however, is with the understanding that the restrictive fiscal rules will be reinstated again once the crisis is over. The credit line has not been met with much approval so far. A whole group of economists has in fact turned against it. Italy has also spoken out against it. As on previous occasions, the ESM was still seen to have imposed strict conditions, the dramatic social and economic effects of which became apparent in Greece. Moreover, the volume reserved for Italy and the interest savings associated with the loans were far too low.
After the first package of measures presented by the Commission proved to be insufficient, towards the end of May the EU Commission presented a proposal for a EUR 750 billion programme of measures. This was shortly preceded by an initiative co-launched by Angela Merkel and Emmanuel Macron for a EUR 500 billion programme. In the meantime, the pressure had grown so much that the German government could no longer refuse a jointly financed European expenditure programme.
The EU Commission’s “Next Generation EU” plan provides for EUR 433 billion in subsidies, EUR 67 billion in guarantees and EUR 250 billion in loans. 560 billion is to be used for economic reconstruction (“Recovery Fund”), and structural funds are to be increased. Other funds, such as the “Just Transition Fund”, are also to receive additional resources. Repayment of the subsidies is to be made via the EU budget.
The proposal for the EUR 750 billion programme is an important step in the right direction. In the forthcoming negotiations, we must prevent the return of conditions that inhibit demand, such as wage and pension cuts or privatisation of public property, which jeopardise economic development and deepen inequality. It is doubtful whether the programme really represents “a fiscal policy turnaround of historic proportions”, as the DGB claims. It does in any case represent a significant change in previous European financial policy, as community borrowing was rejected on all previous occasions. However, the actual scope and exact nature of it is far from certain. The “frugal four”, i.e. Austria, Sweden, Denmark and the Netherlands, are already attempting to reduce the programme and make it subject to stricter conditions. As it happens, however, the programme is not too large, but too small. In light of the biggest global economic downturn in decades, we believe the European investment and expenditure programme requires an amount of one to two trillion Euros. What might be too much for individual states is easily affordable for the entire European community. With its great economic might and the European Central Bank (ECB) behind it, it has more than enough firepower.
As far as the EU budget is concerned, we support an increase in the Multiannual Financial Framework (MFF) 2021-2027 to 2 percent of gross national income. The budget must be linked to a different set of priorities. Instead of providing funds for further militarisation, these should be used to combat social and economic inequalities between the member states. It is particularly important to promote public investment to ensure that crucial social and ecological changes take place.
In order to ensure that the crisis measures are financed on favourable and standardised terms, we support the issuing of community bonds (Corona bonds). The financial resources must be made available specifically to the economically weaker states, regions, sectors, and put towards future challenges. This applies to socio-ecological industrial policy and to areas such as health care, digital infrastructure, education and research, as well as energy and transport. To this end, European state aid law must be reformed in order to enable greater state involvement.
It is essential that the use of these funds is monitored at the European level. This must not be done by imposing cuts and structural reforms that inhibit demand, as is the case with further liberalisation of the labour markets or services. We reject the linking of the reconstruction plan measures with the European Semester, as expressly provided for in the EU Commission’s proposals, and which the ‘Thrifty Four’ want to see tightened further still. Overall, the EU Commission’s powers to control and manage the allocation of funds must be limited and the European Parliament must be more closely involved. The democratic self-determination of the individual member states over their own budgets and their financial policy must remain unaffected.
The European Investment Bank (EIB) can play an important role in financing since it can cover a considerable proportion of the financial needs by issuing its own bonds. The bonds issued by the EIB would experience strong demand on the market and could even be bought by the ECB, as the ban on monetary state financing does not apply here. In practice, this would not involve any significant interest rate and liability risk for Germany, as the ECB can never go bankrupt in Euros. Thus, the ECB could include the EIB bonds in its recently extended PEPP programme.
The debts taken out to finance the crisis-management measures can thus be parked – at least in part – with long or even perpetual maturities on the ECB’s balance sheet and do not have to be repaid in the foreseeable future. If the fiscal rules that have so far been temporarily suspended were to take effect again, this would consequently necessitate massive spending cuts or tax increases and exacerbate the recession.
Neither the EU treaties nor the German constitution fundamentally oppose the issuing of Corona or Euro bonds, provided that they are issued in a clearly defined way and on a limited scope. The unconventional measures of the ECB are also legally permissible against the background of the acute state of emergency.
The no bail-out clause in the European Treaties and the ban on direct financing for the ECB aggravate the crisis and create an artificial risk of insolvency in the eurozone. After all, states can usually never go bankrupt in their own currency. However, the legal and political conflict surrounding the ECB, its limited mandate, and important conditions such as the troika agreements from the Euro crisis, always feed doubts about the solvency of Euro states.
The EU treaties must therefore be amended in order to enable the ECB to provide direct state financing. The ECB should continue to be committed to price stability, but its mandate should also be extended to other aspects such as full employment and economic development. A strengthening of the EU’s fiscal capacity and a more coordinated European fiscal policy is urgently needed because the ECB is not a permanent substitute for a democratically responsible fiscal policy.
Despite support from the monetary policy, the Corona crisis will continue to put public finances under pressure. Even before the crisis, the European fiscal regime was far too restrictive. In a few years’ time, in addition to the debt brake taking effect again, there will also be repayment obligations, which will create pressure to introduce cuts. The regulations in the fiscal treaty and the Stability and Growth Pact to reduce the public debt ratio to a maximum of 60 percent of GDP within twenty years is extremely restrictive and cannot be justified economically. Moreover, the ban on new borrowing exacerbates the enormous investment gap and forces states to pursue harmful austerity policies. This is because investments are typically financed by loans. The fiscal treaty, the debt criteria of the EU treaties, and the macroeconomic governance of the EU are harmful and must be overcome. At the very least, public investment must be excluded from the structural deficit (non-cyclical deficit).
Revenue stream improvements are of a long-term importance. In the coming years and decades, the EU will require considerably higher financial resources than in the past. If the plans of the EU Commission are fulfilled, the subsidies to the member states, originally financed by borrowing, are to be repaid starting from 2027. According to the EU Commission, this is to be achieved not only by contributions from the member states, but also by additional resources from the EU’s tax revenues. Examples include revenues from the EU emissions trading system, a CO2 border tax and a digital tax. DIE LINKE does not consider it necessary for those loans to be repaid. If they are repaid, it demands that the repayment is financed primarily through additional taxes on large assets, to be levied by the member states or directly by the EU.
Additional revenues are also necessary to finance long-term investment, a future programme for the EU, and to strengthen the structural and cohesion funds. Together with the European Left, we advocate a fund for social, inclusive, solidarity-based and ecological development. It should, above all, fund public and social services. In addition to the existing programmes and to cutting expenditure on EU military programmes such as the European Defence Fund or the “Military Mobility” programme, we propose financing the additional expenditure with higher taxation of large corporations, large assets and individuals in top income brackets.
DIE LINKE demands an EU-wide minimum tax rate for companies with broad and standardised tax bases. We need common minimum standards for the taxation of large assets and for top earners. In order to prevent tax tricks by groups – such as the internal shifting of profits and losses – taxes may have to be levied directly “at source”.
For greater transparency, we want country-specific public reporting on corporations regarding key figures such as profit, taxes paid, turnover and employees at EU level, as well as am obligation to publish public registers of letterbox companies, foundations, trusts and real estate, held other than for own use, pertaining to all owners.
Digital companies pay an average of just 9 percent tax on their profits in the European Union, while other companies pay an average of 23 percent. The EU countries lose billions of Euros in tax revenue as a result. Tax regulations are needed to ensure that digital companies pay taxes that are in line with those of other companies. These taxes must also be distributed to the countries where the digital companies make their sales. An intermediate step is the introduction of a separate digital tax.
The fight against tax evasion must be intensified through automatic reporting obligations for banks, the possibility of freezing suspicious assets, withdrawal of bank licences for non-cooperative banks, improved law enforcement against tax evasion and capital controls. Double taxation agreements with uncooperative states must be terminated. We want to revoke the licenses of banks operating in tax havens. Aiding and abetting tax evasion and tax fraud are criminal offences and must be punished.
Tax authorities need a larger staff and the European exchange of information must be improved. Banks and other service providers which engage in tax evasion and money laundering must have their business licence withdrawn. We need a new corporate criminal law against Deutsche Bank and Co.
DIE LINKE reiterates its demand for the introduction of a comprehensive financial transaction tax of 0.1 percent, which would curb harmful speculation without impairing investments in the real economy. It supports the campaign “Tax against poverty” and its demand to the Federal Government to introduce a comprehensive Financial Transaction Tax as a priority in the German EU Council Presidency, which began on 1 July 2020.
Unfortunately, the project of a Financial Transaction Tax has gone downhill in recent years. According to the current plans of the German and French governments, only trading in shares, but not in bonds and derivatives, would be taxed. Intraday trading within minutes or fractions of a second would also be exempt from the tax. The revenue would thus melt down to a fraction and the regulatory function would be hindered.
Even before the Corona pandemic, this plan was a mistake. In a situation in which unexpectedly huge financial needs arise, it becomes even more of an aberration. A comprehensive European Financial Transaction Tax is indispensable for the economic reconstruction and socio-ecological restructuring of Europe, as well as financial aid designated for the poorest countries on earth.