Colin Powell, Secretary of State of the United States with George Bush Jr., is credited with the military doctrine of “overwhelming force”. Deploy all available artillery simultaneously to achieve a quick and forceful victory. It’s the strategy you used Mario Draghi as president of the European Central Bank (ECB) in 2012 to save the euro: “I will do whatever it takes. And believe me, it will be enough.”
The Italian prime minister has now resorted to the same method to design the reconstruction plan with which he intends to pull Italy out of the unprecedented Covid-19 crisis. Draghi has claimed from Brussels all the ammunition at his disposal: 68.900 million in grants and 122.600 million in loans to repay, which increase the debt. In addition, it will put an extra 30.6 billion of Italian money: in total, a bazooka that exceeds 220,000 million euros.
In contrast, in the request for help sent this Friday to Brussels, Pedro Sánchez opts for the moment for a more cautious policy. Although Spain can receive up to 140,000 million EU funds, the President of the Government has only asked the European Commission to Ursula von der Leyen the part of the subsidies, that is to say, 69,500 million. Of course, in the Spanish recovery plan it is announced that the other 70,000 million in cheap loans could be mobilized from 2022 to cover financial instruments for business assistance, as well as the new ERTE. But without any commitment.
Application for aid from the Next Generation fund
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In other words, Sánchez avoids getting even more debt in the short term. Public aid to cushion the blow of the pandemic and the collapse of tax revenues have triggered the Spain’s public debt from 95.5% in 2019 to 120% of GDP last year, a figure that is equivalent to 1.3 trillion euros. Our country is already the fourth most indebted in the EU, only behind Greece (205.6%), Italy (155.8%) and Portugal (133.6%). And Brussels has warned of the “high risk” of a recurrence of a debt crisis like the one in 2012, which forced a request for a bank bailout. The EU subsidies do not increase the level of indebtedness.
In addition to Spain and Italy, 11 other countries have so far sent their recovery plans to Brussels together with the request for aid from the fund of 750,000 million euros Next Generation EU. The rest will do so after the indicative deadline, which was April 30. Among the achievers, only three more countries have followed Draghi’s example and they also ask for the loans to be repaid, in addition to the subsidies: Greece, Portugal and Slovenia.
However, the Commissioner for Economic Affairs himself, Paolo Gentiloni, had asked all Member States, even the most indebted, to apply for both loans and grants. His argument is the urgency of maximizing the impact of the fiscal stimulus just when it is most needed and sustaining the recovery. Again the doctrine of “overwhelming force”. The EU has just relapsed into recession due to the new wave of infections and the delay in vaccines, while the United States and China are already growing again.
EU leaders are examining their conscience these days when they see the magnitude of the budget stimulus mobilized by the US president, Joe Biden. His administration has just carried out a aid package of 1.9 billion euros. In addition, it has announced a 2.3 trillion infrastructure plan and another 1.8 trillion education-focused plan. In contrast, the background Next Generation of 750,000 million euros will not begin to disburse aid until July at the earliest. The EU risks being left behind in the global race for recovery.
Distribution of spending on recovery plans
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Apart from the firepower deployed, the other big difference between Spain and Italy (the two countries hardest hit by the pandemic, those that will receive the most aid from the EU and therefore the most directly comparable) is the star power what Draghi brings. ‘Super Mario’ has managed to transfer his prestige and credibility as president of the ECB and savior of the euro to his position as prime minister in Italy, at least until now.
All the international press is focusing on Draghi’s reconstruction plan, with glowing articles in the German and French press or in the Financial Times, the Brussels bible. Or with experts who are dedicated to counting how many times the word “competitiveness” appears in their proposal (there are 50).
Despite their differences, four powers of the EU (Germany, France, Spain and Italy) have made a common front this week in order to pressure both Von der Leyen and the rest of his partners so that European funds start flowing as soon as possible. The big four wanted to set an example by sending their respective investment and reform plans to Brussels in a coordinated manner, the requirement demanded by the EU in exchange for aid.
The plans are very difficult to compare, as they do not use a common template and the amounts of money at stake are very different. At the same time, all share the same spine: the priority given to double digital and green transition, with the aim of improving the EU’s resilience to future crises. The fund’s regulations make it mandatory to allocate at least 37% of aid to the fight against climate change and at least 20% to digitization.
Expenditure on building rehabilitation
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Both Germany, France, Spain or Italy ensure that they exceed the thresholds. Berlin maintains that it will allocate 90% of European money to these two chapters. Now it is up to Brussels to verify, for example, that green investments indeed are, something that NGOs have already questioned. Greenpeace has branded the Draghi plan “ecological fiction”.
All the plans are also similar in that they include investments in the seven “emblematic initiatives” that the community Executive has proposed. The most repeated are the promotion of clean technologies in the transport sector and, above all, the rehabilitation of public and private buildings with the aim of saving energy. In this chapter, the investments range from the 15,220 million euros that Italy has planned to the 2,500 million of the German plan.
“The German plan includes little funding for policies unrelated to the digital and green transition, possibly because Germany is among the four countries that will receive the least money. The plans of the other three countries are much more diversified, and include political priorities such as inclusion. social, education, research, health and including culture and sports in the case of Spain“Zsolt Darvas and Simone Tagliapietra write, del think tank Bruegel.
If the investments of Madrid and Rome are compared, the Draghi’s priority for the construction of new high-speed train lines (with a chapter of investment in infrastructures of 25,130 million euros), in which Italy is far behind Spain.
Distribution of spending in Italy’s recovery plan
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What’s more, Italy wants to devote 15,630 million to health, while Sánchez’s plan only contemplates a game of 1,069 million for renovation and modernization of the health system. The great paradox is that no country has used the special credit line of the European Stability Mechanism (ESM) that the Eurogroup agreed a year ago. Money that any Member State can use unconditionally as long as it is dedicated to health. Spain has 25,000 million at its disposal. But nobody wants to request this aid because of the stigma effect, because of the role of the ESM in rescuing the euro crisis.
Apart from investments, the reforms included in the recovery plans are very different in each country, precisely because they have to respond to the recommendations made by Brussels depending on the structural problems of each economy. In this chapter, Sánchez bets on quantity. 102 reforms without a clear common thread and without placing the emphasis on those most urgently needed in Brussels: labor, pensions and tax.
“The plan has some notable shortcomings: the lack of reformist concreteness in key areas such as pensions, the labor market, public administration, green taxation or the internal market “, write the experts of the Center for Economic Policy of Esade in your first analysis of the text.
In contrast, Draghi, a master of the story since his time at the ECB, opts to focus on only four major reforms, which in his opinion Italy needs to get out of the hole. Mmodernization of public administration and cutting the bureaucracy; justice reform with the objective reduce trial times 40% for the civil sector and at least 25% for the penal sector; legislative simplification and repeal of laws that have a “negative impact” in the daily life of citizens or companies; and measures to boost competition and end monopolistic abuses.
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The Italian Prime Minister also plans to undertake a review of personal income tax before the end of July in order to rationalize the structure of the tax and gradually reduce the tax burden, while preserving the progressiveness and balance of public finances. With this reform it aims to lower the tax fraud rate and increase employment among women and young people. In contrast, Sánchez has announced that his tax reform will mean a tax increase.
Macron’s plan also concentrates all its energy on three reforms central. First of all, a Climate Law whose objective is to accelerate the green transition. France also raises a reform of unemployment benefit, whose objective is to increase incentives to return to employment. The third great reform pursues restore budget balance, with a review of the quality of public spending and a spending rule with a five-year horizon.
The French president also agrees to continue the reforms already initiated before the crisis, such as the pension or the reduction of tax level, since France is one of the countries with the highest tax burden.
Of the four big countries of the eurozone, Germany’s plan is the sparsest in reforms. In the version presented last Tuesday by its Minister of Finance, Olaf Scholz, the only major reforms mentioned refer to the modernization and digitization of the public administration and the elimination of investment barriers.
The plans of Spain, Italy, Germany and France are already before the court in Brussels. The Commission now has a period of two months to note them and Ecofin will have an additional month to approve (or reject) them. If there are no more setbacks, European aid could start arriving in July. But no one in the community capital rules out new surprises and delays.
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