MNI INTERVIEW:Any NGEU2 To Focus On Cross-Border Projects-Buti

The European Union has little appetite for more joint fiscal transfers on the scale of its EUR800 billion NextGenerationEU programme, former top European Commission official Marco Buti told MNI, adding that any successor initiative is likely to focus on cross-border infrastructure rather than on funding projects in individual countries.

A key political condition for any NGEU 2.0 will be the requirement to abide by the EU’s new fiscal rules, said Buti, who until recently served as chief of staff to Economy Commissioner Paolo Gentiloni and currently holds the Tommaso Padoa-Schioppa Chair at the European University Institute, where he coordinates the EMU Lab.

He points to the "glaring" omission of the need to rein in public debt from the otherwise comprehensive speech on the future of the bloc by French President Emmanuel Macron on Thursday.

"Adjustment at the national level, and common resources at the European level, that has to come onto the table together to be politically viable,” Buti said in an interview, noting that a commitment by France to put its fiscal house in order had been an important condition of German support for the original NGEU deal.

POLITICS TOUGHER

While in the autumn the next European Commission will consider what if anything might succeed the current NGEU, Buti observed that political conditions are “much weaker” than in 2020, when Macron came together with former German Chancellor Angela Merkel and Commission President Ursula von der Leyen to launch the original programme in response to the economic impact of the Covid pandemic.

But, even though it was opposition from Germany and like-minded countries which prevented NGEU from marking a paradigm shift towards a greater fiscal role for the bloc, the former official still saw a possibility that Berlin could come round to supporting a new instrument, perhaps seeing the benefit of such a new programme, given the long-term vulnerabilities of its own economic model

“Germany was the big winner during the global financial crisis. but the winners of yesterday are not the winners of today or tomorrow,” Buti quips.

An NGEU 2.0, while its focus would be on cross-border infrastructure rather than projects in individual countries, could address the long-term concerns shared both by the broader EU and Germany, namely an over reliance on external demand, an ageing population and a lack of presence in most cutting-edge technologies, he added. (see MNI: EU Set To Consider New Agency To Fund Defence-Officials)

Former Italian Prime Minister Mario Draghi, who is working on a report into EU competitiveness, recently expressed impatience with the lack of progress towards key EU goals such as Capital Markets Union, suggesting that a hard nucleus of countries could take the necessary steps together.

Buti said he agreed that such an “intergovernmental” approach might function in some specific areas, but cannot be the norm.

"On CMU an intergovernmental approach might make sense, while on the defence side it might also open up the possibility of renewed cooperation with the UK,” he said, noting a “clear intergovernmental flavour in Macron’s speech.

“The challenge is finding institutional arrangements that make integration go forward, but do not result in Europe à la carte,” pushing against either moving at the speed of the slowest member state or at partial groups moving first.

Buti said that the upcoming round of Excessive Deficit Procedures against 9-10 EU countries can be reconciled with long-term funding needs for defence as well as the green and digital transitions. (see MNI: 5-10 EU States Seen Facing Excessive Deficit Procedures)

The EU’s new fiscal rules allow for countries to make deductions if interest rates are higher at the beginning of a debt-reduction programme, meaning that the annual 0.5% of GDP a year adjustment in fiscal deficits required under the EDP could be reduced in practice to 0.3% or 0.4%, helping ease future spending needs but cautioning that many more resources would be required from the central EU level.

Such investment would also help mute the deflationary bias of national fiscal adjustments under the new rules, he said.

Buti says that the coming EDPs should be seen as a kind of "adjustment period or a transitional regime for many countries before they become subject to the full rigours of the new rules.

Although lower adjustments in the short run was an Ecofin political deal, high-debt countries profiting from the full flexibility in the short run, “will face a steeper correction down the line. Some smoothing of the adjustment may be desirable,” Buti noted.