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Yannis Varufakis has an op ed in the Guardian in which he says the deal is a very bad one and will lead to the disintegration of the EU. He gives three main reasons for his pessimism:

  1. Estimates for GDP (income) are for a drop of at least 10% on 2019 levels with some countries like Greece and Italy suffering even more and yet the 11 June Eurogroup communique talked about balancing budgets by 2021. This would be huge deflationary.

  2. Echoing Matthew Lynn, he says the recovery plan is far too small to be effective with Italy and Greece receiving a net boost of only 0.6% and 2.0% respectively every year from 2021 to 2023. In arriving at these figures he ignores the fact that interest rates on the loans element of the plan will be much lower enabling Greece and Italy to make considerable savings on debt service costs they would otherwise incur.

  3. "Third, the political conditions under which the funds will flow are a Eurosceptic's dream. " He argues there will be constant rows at European Council level over whether recipients of grants are doing enough to merit them in terms of economic "reforms" or adherence to democratic norms with (e.g.) the Dutch constantly lecturing the Greeks on how to run their country.

Each criticism has its merits, and to a degree we will have to wait and see whether his dire prophecies come true. On the more optimistic side, I would make the following observations:

  1. The Eurogroup communique is just crazy and can and will be ignored. We don't know how long it will take various EU member states to return to 2019 levels of activity, but there is no case for austerity until at least that has been achieved.

  2. Nobody ever said that all the heavy lifting to recover from the pandemic will be done by the EU. The 0.6 to 2.0% of GDP annual boost to GDP represented by the recovery plan grants is in addition to whatever measures are taken at national level. It is unrealistic to expect Germany to be entirely responsible fro the recovery of the Greek and Italian economies. In addition, the plan offers the prospect of near 0% interest rates which will greatly assist national efforts at recovery.

  3. We shall have to wait and see about his point three. Again it is unrealistic to expect net contributor countries to write blank cheques for net recipients to use as they please, while at the same time flouting democratic norms, allowing endemic corruption, or gross inefficiency in the allocation of monies granted. That is what democratic oversight of spending in any polity should be about. It could get very emotive, but at the same time the gross amounts of money allocated to each country will be determined by agreed macro-economic criteria (how badly an economy has been impacted by Covid-19), and the individual projects will be vetted primarily by the Commission in line with current budgetary oversight practice.

For Yannis Varufakis, European integration seem to be an entirely one way street. He wants a lot more money, free of any conditions or oversight for peripheral economies like Greece to be paid for by net contributor member states. That is not going to happen. It is not what happens now, and what we are seeing is a significant boost to fiscal transfers part funded by mutualised debt for the first time.

In my opinion the greater threat to further European integration is precisely the attitude being exhibited by Yannis. For him the world is never enough. The plan can be amended in future years if further changes are required, but for once the EU has responded to a crisis in a reasonably substantial and timely way. Let's not destroy the goodwill required to sustain that effort before it has even begun.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jul 24th, 2020 at 11:24:56 PM EST

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