“AMERICANS CAN always be counted on to do the right thing,” Winston Churchill is supposed to have quipped, “after they have exhausted all other possibilities.” There are two problems with the quotation. First, there is no evidence Churchill ever said it. Second, today the phrase applies better to Europe’s leadership than to their friends across the Atlantic.
Take the European Union’s recovery from the pandemic. For the first time since last spring, economic optimism is in the air. Across Europe, vaccines are going into arms, summer holidays are being booked and bars are opening up. The European Commission has just jacked up its growth forecasts for 2021 and 2022, citing the bloc’s €750bn ($910bn) recovery fund as one of the reasons why. This cash should start appearing in European treasuries later this year. As a whole, the EU’s GDP will be back at its pre-pandemic level by the end of 2021. This is slightly faster than expected and is due to happen only a few months behind America, which has had the benefit of Donald Trump and Joe Biden’s blockbuster stimulus packages. In the ten-year gap between their initially bungling response to the euro-zone crisis and the pandemic, European leaders seem to have learned some lessons, even if they still have not learned them thoroughly enough.
Where the European Central Bank was actively making things worse a decade ago, it is now helping governments out of their hole. In the spring of 2011 the bank was raising rates and worrying about a brief flurry of inflation, rather than stagnant growth. It was not treated as a lender of last resort until a year later, when Mario Draghi finally pledged to do “whatever it takes” to save the euro. Then began Mr Draghi’s long, slow crusade to make the ECB adopt unorthodox measures, such as quantitative easing. As a result the bank is able today to print money, (largely) ignore inflation hawks and keep interest rates at historic lows. Its official mandate of price stability has been replaced by an unofficial creed of supporting economic growth, reducing unemployment and doing “whatever it takes”.
If the technocrats have changed their tune, so, to some extent, have the politicians. Long-held political certainties have been revisited. During the previous crisis common debt was suggested as a necessary step to guarantee the future of the euro, only to be dismissed by the likes of Angela Merkel, Germany’s chancellor. Mrs Merkel reversed course last May. After a year of haggling, the commission will begin to issue up to €750bn of the stuff, which will be dished out to countries in the form of cheap loans and grants. True, on a continental level, the scheme is tiny. But for some of the individual countries most in need of the cash it is significant. In Germany, it is a piddling 1% of its GDP. For Italy, though, the figure is about 11% of GDP. Greece, meanwhile, is due €32bn of loans and grants—a useful sum for an economy of roughly €170bn.
For rich countries, EU funds are a fiscal aperitif. It is up to national governments to pump up their economies in the post-crisis era. Here, again, attitudes have changed, though not yet enough. In contrast to a decade ago, spending is now more likely to be seen as a solution than a sin. Countries such as Greece endured economic vivisection, forced to slash spending rather than stimulate their economies. This approach failed either to reduce Greek debt or to produce faster growth. These days, advocates of a return to austerity are thinner on the ground.
With luck, political circumstance could embed this new attitude permanently in the EU’s own rules on government spending. Although temporarily suspended during the pandemic, EU countries are obliged to keep deficits below 3% and national debt below 60% of GDP. In an age when the national debt of Italy, the third-largest EU economy, stands at about 160% of GDP, these rules can seem quaint. Europe’s struggling southern economies have called for an overhaul ever since the previous crisis. Now they may get their wish. France’s president, Emmanuel Macron, has long advocated more forgiving fiscal rules. So has Mr Draghi, now the prime minister of Italy. Meanwhile the rise of the Green Party means that the next German government will probably be the most profligate in a generation. It is a rare alignment which could, just possibly, lead to a more permanent shift.
Here comes the boom!
Boom-mongers have not yet routed the doom-mongers. There is plenty of opportunity to muck things up. Inflation still haunts European politics. While the noises coming from the ECB suggest that a modest rise in inflation this year will be brushed off, this claim will only be properly tested when German politicians start screaming. (The upcoming election will give plenty of excuses for such hysterics.) An improved economic outlook may lessen the pressure on countries to overhaul the EU’s spending rules. Rather than turning the recovery fund into a permanent scheme, ready to issue more debt if needed, some governments will try to keep it a temporary one, setting up a needless drama about rebuilding it in the next crisis. The tyranny of low expectations hangs over the EU. In the previous crisis, mere survival was enough, never mind prosperity. Now waddling only slightly behind America’s economy—never mind China’s—is being held up as an achievement. For a bloc with designs on being a superpower, that is not enough.
Yet the EU is stronger than its critics allow. It can correct its errors, albeit slowly. It took a decade to unpick the mistakes of the previous crisis. So long as the EU is not a state, it will not have the speed, power or flexibility of one. Across the Atlantic Mr Biden can launch a plan to spend trillions, knowing he has the power to do so. By contrast, EU politics is kaleidoscopic. Consensus must be cooked up among a rotating cast of ministers and amid ever-changing alliances. Reluctant countries have to be slowly cajoled. A stronger, more coherent EU is coming, but not for a while. It could still take a lot longer to exhaust the other options. ■
This article appeared in the Europe section of the print edition under the headline “Whatever it took?”