EU cracks as von der Leyen could clash with Merkel over Germany’s economic model

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The President of the eurogroup Paschal Donohoe has urged Brussels and EU member states to mobilise the new Recovery Fund as quickly as possible so that the cash starts to boost economies before the end of 2021. Mr Donohoe, who is also Ireland’s Finance Minister, said he believed the €750billion (£678billion) Recovery Fund would be enough combined with national fiscal responses to combat the EU’s worst economic crisis. However, he warned that speed will be extremely important.

At the end of December, the EU cleared the final big hurdles to implementing its €1.8trillion (£1.5trillion) seven-year budget, which will include an unprecedented European Commission borrowing programme aimed at helping member states restore their economies after the damage wreaked by Covid-19.

The challenge facing EU countries is submitting detailed reform plans to Brussels by April, laying out how they plan to use the recovery fund’s loans and grants, which are designed to boost innovation, digitalisation and facilitate the green transition.

The Commission will then scrutinise the reforms with the goal of beginning disbursements from the second half of 2021.

Mr Donohoe said the Commission and member states now had a “shared responsibility” to ensure the plans are developed and signed off.

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He said: “I do believe it is very important that we see the impact of that important agreement in economic prospects in 2021.”

However, EU member states are already ruffling their feathers.

Germany has reportedly refused to undertake structural reforms – a move which could lead to a clash between European Commission president Ursula von der Leyen and German Chancellor Angela Merkel.

According to the Handelsblatt, when the European Commission asked Berlin to draw up a reform list, what it got was a tax cut for electric cars, and some other measures the Government and the federal states had already planned.

The Commission was “fobbed off” and this has caused tensions between Berlin and Brussels.

The report reads: “There have been some disagreements behind the scenes between Berlin and Brussels.

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“According to information obtained from government circles, the EU Commission is missing real reform plans for the coming years in Germany.

“Representatives of the EU Commission have expressed this in discussions with the Federal Chancellery, the Federal Ministry of Economics and the Federal Ministry of Finance.

“The EU complains Germany lacks the zeal for reform that it always demands from other EU states.”

However, despite the Commission now withholding Recovery Fund money from Germany, in a recent report, the head of Oxford-based think-tank Euro Intelligence Wolfgang Munchau suggested it is unrealistic to expect Mrs von der Leyen to pick up an existential fight with Mrs Merkel over Germany’s economic model.

He wrote: “The Commission ended up nitpicking on small reforms that are ultimately irrelevant to economic growth and resilience.

“What this is telling us is that the recovery fund, like the fabled Juncker investment fund, could end up as smoke and mirrors.”

He added: “We should recall that the grants component of the fund – €310billon (£302bn) – is big in absolute money terms, but only about 0.4 percent of GDP if you spread its spending over five years.

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“While not a fiscal stimulus, it still constitutes a potentially useful structural reform facility – if the reforms are of the right kind. Investments into your own digital infrastructure – and in Germany’s case changing your constitution to allow people to use it – that’s reform.

“Reducing pensions or eliminating some quirks in the tax code should be way down on our list.”

Mr Munchau concluded: “It is our central expectation now that the recovery fund will end up like the Juncker fund: member states will categorise some of their existing investments under the recovery fund umbrella, and will use the freed-up resources for tax cuts and welfare checks. So it will be a simple stimulus.

“And northern Europeans will draw the inevitable and logically correct conclusion that it was a waste of money.”

Marcello Messori, an economist at Luiss University in Rome, echoed Mr Munchau’s claims, saying Italy’s EU recovery money was a “colossal opportunity but also an unprecedented administrative and managerial commitment for Italy”.

He told the Financial Times: “There is still much ambiguity concerning the state of the preparation of the Italian plan and in many cases the scope is too wide.

“With over 50 undetailed projects proposed, Italy still hasn’t narrowed down the proposals, but above all has not yet solved the problem of who has to supervise project implementation.”

Enzo Moavero Milanesi, former Italian foreign minister and Europe minister, said the country “had never been given the chance to spend a sum of this kind in recent years” but warned Rome’s national recovery plan had yet to “get off the ground”.

He said: “We have not yet turned to the business side, to companies, to firms, so that the concrete projects come directly from the ground. It is difficult to think that everything can be worked out at an administrative level.”

He said the country has suffered from an “endless number of rules and administrative constraints that complicate the market” and also been historically hampered from public spending by having the second highest public debt-to-gross domestic product ratio in the EU.

He concluded: “In theory, the problem of public debt could be overcome by drawing on European funds. The opportunity is incredible, but if we delay everything these resources may not produce the desired effects.”

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