Wolfgang Schäuble issues warning on EU recovery fund

Europe risks failing in its mission to boost its growth prospects via the €750bn coronavirus recovery fund, Germany’s former finance minister has warned, as he questioned whether member states had the capacity to implement tough economic reforms.

“There is a lack of real progress, a lack of efficiency in the execution of [reform programmes] in the member states,” Wolfgang Schäuble told the Financial Times. “These difficulties worry me.”

Mr Schäuble, who is president of the Bundestag, said the EU had spent too much time arguing about the size of the fund and how the money should be distributed, and not enough “thinking about what to spend it on”.

“We should long ago have defined what areas the member states should be investing these funds in — artificial intelligence, digitisation, policies for tackling climate change,” he said. “I hope we can do this more quickly.”

His remarks chime with those of other European officials who worry that member states are dragging their feet over submitting detailed proposals for how they intend to spend the money from the fund.

While German finance minister, between 2009 and 2017, Mr Schäuble came to symbolise the fiscally hawkish policies pursued by the eurozone in the aftermath of the global financial and sovereign debt crises. He was famously in favour of suspending Greece from the single currency in 2015.

But since the pandemic broke out he has jettisoned his more conservative views on fiscal policy and embraced the extraordinary efforts taken by the EU to rescue the bloc from economic collapse. 

The centrepiece of those efforts is the recovery fund, which will see the European Commission issue unprecedented levels of debt and distribute it in the form of €390bn in grants to member states. Mr Schäuble said it was the “right response” to the coronavirus crisis.

But the commission has tied the release of recovery fund cash to economic reforms designed to deliver lasting improvements to the growth prospects of recipient countries, and, in particular, to boost innovation, digitisation and facilitate the shift to a green economy.

EU countries have been asked to submit detailed reform plans to Brussels by April, setting out how they plan to use the fund’s loans and grants. The commission will then scrutinise the reforms with the aim of beginning disbursements from the second half of 2021.

Valdis Dombrovskis, commission vice-president, said last week that disbursements would be subject to the achievement of “specific and measurable milestones” and that there remained “a lot of work ahead”. Some member states, he said, needed to be more precise in setting out exactly what events would trigger payments.

Mr Schäuble said he was concerned about how money from the recovery fund would be spent, adding that the commission had only “limited competence” to check how member states invested their allocation. “But when you ask what’s actually happening with the money, it can even lead to government crises, as we’re seeing in Italy.”

Earlier this month Matteo Renzi’s Italia Viva party withdrew from the Italian coalition government of Giuseppe Conte after complaining that it was bungling plans to spend the almost €200bn that Italy is due to receive from the recovery fund.

Mr Schäuble said he was worried the programmes presented by individual countries would not be ambitious enough. “We know very well what urgent steps each country must take to make Europe’s economy stronger, more innovative, dynamic and better able to compete globally,” he said.

But it is not just southern European countries that have been criticised for the reform plans they’ve submitted to Brussels. According to officials in Berlin, the commission is also dissatisfied with Germany’s own initial proposals, and, in particular, the lack of enthusiasm it has shown for reforming its pension system.

Mr Schäuble also addressed the EU’s decision to make it easier for member states to deal with the economic effects of the pandemic by setting aside the bloc’s budget rules until the end of 2021. The commission used a so-called escape clause to suspend the enforcement of the Stability and Growth Pact, which caps debt levels at 60 per cent of gross domestic product.

In the past, Mr Schäuble has always opposed attempts to soften the rules of the SGP but is now more open to the idea. He said he sympathised with those who say the pact should be reformed before it is reintroduced. “After the pandemic a lot of things will be completely different to the way they were before,” he said. “Whether they’ll be better depends on us.”

The recovery fund has proved controversial in parts of Mr Schäuble’s Christian Democratic Union: many hawks in the party only agreed to it on the premise that the commission’s issuance of debt is a one-off that will never be repeated. Olaf Scholz, Germany’s Social Democrat finance minister, has, in contrast, hailed it as a “Hamiltonian moment”, invoking the first US Treasury secretary who helped to create American fiscal union by taking on the debts of the states in 1790.

Mr Schäuble said such an analogy was inappropriate. “I just hope no one really knows what the Hamilton effect was,” he said. Such rhetoric “just strengthens the resistance of those who fear their national identity will be lost in European integration — which no one really wants anyway”.

Mr Schäuble said those pursuing closer co-operation in the EU and the eurozone needed to tread carefully. “For what you want to achieve in Europe you need to organise majorities,” he said. “You can’t build Europe against the will of the people.”

But he indicated that he himself did not see the recovery fund as a one-off. He said he had never completely excluded the idea of common EU bonds, “because I know very well that an economic and currency union needs to have them”.