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EU Budget

This recovery is at the expense of consumers

Unsplash Creative 0.0: Photo by Didier Weemaels

The EU's stimulus package isn't the right way to go...

On July 21, 2020, the twenty-seven member states of the European Union agreed on a "historic" stimulus plan. In total, 750 billion euros will be injected into the European economy. For the first time in the history of the European Union, member states have agreed to collectively take on debt to the tune of €390 billion. Borrowed on the bond markets, this sum will be paid to the States most affected by the crisis, unconditionally.

While Angela Merkel said in June 2012 that she would not agree to Eurobonds, the Covid-19 has acted as an accelerator to the political will to implement them.

European Commissioner for the Internal Market Thierry Breton welcomed with a tweet that the European recovery plan will in no way result in the creation of new taxes to be paid by European citizens before specifying that "it is only at the borders of our internal market that we will impose taxes"! As if it were not European consumers who were going to see their purchasing power cut by the amount of these taxes.

The only tax officially enacted so far is the one on non-recycled plastic. Applicable from January 1, 2021, this tax will take the form of national contributions. While it is the Member States that will be responsible for making these contributions to Europe, they could come from several sources, including a contribution from market players. In such a case, the cost will likely be passed on to consumers. The risk is also to reduce the capacity for investment and innovation of the industries concerned.

The other funding avenues considered are those of the GAFA tax - still under discussion - and the European carbon tax - which would come into force no later than January 2023. President Emmanuel Macron announced on French television that these new taxes, in addition to financing the recovery plan, will penalise "large companies and international players who do not play our policy game". This is a very naive view of how the market economy works. In reality, it does not matter whether the tax is imposed on the consumer or the producer, the financial result remains the same: the cost is higher for the consumers and the profits lower for the producer.

While stimulus packages are prevalent, their return on investment is never guaranteed. Historically, the performance of stimulus packages has often turned out to be disappointing.

Harvard economist Alberto Alesina has spent the end of his career analysing thousands of budget adjustments in hundreds of countries. In 2010, when the debate was in full swing following the turmoil of the subprime crisis, the expert on budgetary policies explained in an opinion piece to the Wall Street Journal stimulus packages based on increasing public spending were far less effective than those based on tax cuts and budget restructurations. Indeed, while market players react positively to a lasting and credible drop in the level of taxation, the increase in public spending sends the opposite signal, i.e., that taxes will increase in the future.

Another advantage attributed to the liberalisation shock is that this method allows power to be distributed to consumers instead of concentrating it in a few administrations which will make choices for others.

It is, therefore, possible to revive the economy without placing an additional tax burden on consumers. It would even be an opportunity for the "bad students" of the euro area to consolidate their public finances — the crisis has shown that countries which are already heavily indebted are the most vulnerable to an exogenous shock.

Unfortunately, it is in the opposite direction that the European Union seems to be heading: towards the increasing disempowerment of the laxest economies. How long can such an arrangement last?

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