MNI INTERVIEW: Draghi Report Likely To Call For EU Borrowing

MNI (BRUSSELS) - Former European Central Bank president and Italian premier Mario Draghi is likely to propose a big increase in the European Union’s budget to finance a central fiscal capacity, a move which would demand a treaty change, a former European Commission official and current senior fellow at leading Brussels think tank Bruegel told MNI.

Draghi’s upcoming report on boosting European competitiveness -- understood by MNI to be complete but only expected to be released in mid-September – will also include recommendations for funding long-term projects to boost productivity growth, Maria Demertzis said in an interview.

“One thing Draghi will talk about will be changes to the Treaty – that is what he means when he talks about ‘radical change’,” Demertzis said. “The big thing is the issue of increasing the EU budget and creating this federal component and the question is whether that is for cyclical challenges or dedicated to long-term strategic objectives. I think he will want both.” (See MNI INTERVIEW: Risk Draghi Report Ushers In EU Protectionism)

Commission President Ursula von der Leyen’s keynote speech last week on the EU’s strategic policy agenda for the next five years is understood to have drawn heavily on elements of Draghi’s report, but it will be up to the former ECB chief to explain how that vision might be effectively accomplished. Changes to EU treaties require ratification by all member states, and can be politically challenging.

HARD NUMBERS

“Neither Von der Leyen nor Draghi can decide on hard numbers now. Come November when the new Commission starts work one of the big things they will have to do is the next long-term budget [the Multiannual Financial Framework 2028-2034] where there is room to find money for the strategic priorities. But the European institutions cannot decide alone,” Demertzis said.

The even tougher question will be what to do in the intervening five years before the start of the next MFF in 2028 with a budget that is already up and running, she added.

“If money is found for key projects in the interim period it will have to be off-budget, and then it has to be decided whether it should be financed from national budgets or from EU debt.”

While that would be a question for leaders, Draghi can make recommendations. (See MNI: Watered-Down EU Deal Points To Resistance To Draghi Plan)

DEFENCE

Given that defence remains a closely-guarded national prerogative and the fact that EU countries have already “tremendously” increased their defence spending in GDP percentage terms, it is more likely that only one-off defence projects would be financed at EU level, either from national contributions or EU borrowing, according to Demertzis, pointing to the proposed EU Air Shield as most likely to win backing from EU states.

Industrial Policy, while newly in favour in Brussels, is more likely to be financed out of national funds and to rely first on flexible state aid rules, though a helping hand from the EU in the area of climate policy could make “enormous sense,” she said.

“We need to allow, as in the pandemic, for certain industries to advance even though we know the Level Playing Field is sacrosanct,” Demertzis said. “If you put the Green Deal at the EU level then you can start financing industries - that will mean Industrial Policy for very specific reasons – which is effectively to advance the green transition.”