90 hours! it is the number of negotiations hours spent to build the European economic recovery plan. Ultimately, it is no less than a “historic agreement” that would have been approved by all the member states of the European Union. In any case, this is what has been proclaimed loud and clear by many European leaders, starting with Angela Merkel and Emmanuel Macron on July 21st 2020.
But facing such a success, some voices have nevertheless risen to voice their concerns. Voices of concern about the sums committed by this plan, compared to the huge deficits created by the pandemic, but also to the future use of this money. This plan will allow, of course, significant investments, but which some still consider insufficient, starting with the European Parliament.
So, even if this plan is historic in terms of debt, which will be shared directly at the level of the European Union, will it be also equally at the economic level? Will this plan make possible a relaunch of the European economic machine, sustainably and strongly? These are the questions we will try to answer in this short article.
- The public debt to transform the economy
The first element on which this European plan will focus is the debt. In fact, no less than 390 billion euros will be allocated by the European Union to member states in the form of grants and 360 billion in the form of loans. Even if the debt is pooled, which will make possible a borrowing at very favorable rates on the financial markets, the leverage that the countries will once again use is obviously that of the public debt.
The first question that can then be asked is the relevance of this new public debt. Is it really a good idea to borrow money again
in on the financial markets, when most European countries are already very heavily indebted? Will we be able to relaunch growth in Europe in a sustainable way through these new loans? When we look at the use of public debt by some countries in recent years, the answer seems to be rather negative.
But debt is not necessarily a bad tool, even in the context of such a crisis, provided all the same, that it is used for productive purposes, allowing to obtain a fairly significant return on investment, and sustainable over time, to be able to repay it. A use that was more oriented towards the compensation of budget deficits in recent years, by the European countries, and which did not ultimately allow to have a sustainable and stable growth.
But more than for productive purposes, this debt must also be used to transform the European economy. An economy that has tended to slow down
in recently , with a significant lack of investment in research and innovation. These are key sectors in today’s economy, as we can see through the massive investments of companies like the GAFA. Apple, for example, invested $19 billion in research in 2019, or nearly 8% of its turnover that year.
The borrowings planned for the recovery plan are therefore relevant and justified, and the willingness to invest in sectors such as ecology and digital, shows a real objective for the European Union to transform its economy in depth
2. The sectors to be targeted by this plan
We therefore understand the wish from the countries of the European Union to transform the economy by guiding investments in sectors considered to be key. But let’s try to clarify which sectors are impacted, or should be, by this stimulus package.
The first sector that seems very urgent to develop, and which will probably be one of the pillars of tomorrow’s economy, is the one of “green chemistry”. Indeed, banning Round-ups or other chemicals such as Nicotinoids without viable substitutes has no other effect than endangering our farmers and our industries, already challenged by competition across the Atlantic and Asia.
In addition to this, this sector faces very strong competition from chemicals based on fossil-based products, and requires more R&D investments than those of today. However, it is an extremely promising market, which concerns both the medical, food, materials, and cosmetics fields, all of which are looking for alternative solutions. Solutions which, if found by European companies, would allow us to become a leader in this new market.
The second sector, which is also very promising, is that of energy, especially hydrogen-based energy. We need to invest in new fuel cell systems, such as PEMFC (proton exchange membrane fuel cell), or finance projects allowing the creation of new hydrogen transport systems, such as cars, trains, or even planes. It is a completely clean energy when used as a motorization system, and which could enable the creation of an industry that would , in 2030, be worth around 10 billion euros, and that would have more than 40,000 jobs in France, according to a prospective study by the French association for hydrogen and fuel cells. More specifically, the “airbus” battery project already funded by states and 17 companies with over 8 billion euros must be strengthened, to offer an alternative to Chinese and American offers, well ahead with an overwhelming market share of this still emerging market. These markets offer significant growth’s potential, they are part of a low-carbon investment model, expected by the younger generations to better achieve carbon neutrality by 2050. One of the outstanding questions is nuclear power, which could be an essential solution for the energy transition of some member states, particularly in Eastern Europe, to achieve the objective.
Thirdly, one of the key sectors of the global economy, in which Europe is far behind, but which is in the sights of the recovery plan, is digital. Indeed, Europe has missed the first wave of the personal data economy, dominated today by GAFAM and other BATX. However , it can still play a role in the Internet of Things, autonomous cars, connected health or even household appliances. Cybersecurity will be at the heart of these new markets, with the need for a “European cyber shield” to use the words of European Commissioner Thierry Breton. Finally, we must also play a role in 5G, with a European player to counter Chinese hegemony. These stakes of European sovereignty around industrial data, 5G, cybersecurity, and computing power must be ensured for future generations!
These are probably the three biggest areas that were mentioned above where it would be wise to concentrate our efforts. But there are others, such as the space sector, or the robotics sector, which remain too underdeveloped in Europe, but that are nevertheless very promising.
3. A change that will be enabled by a more integrated Europe
The question now is “How big are our investments”. Are they substantial enough? Do we have large enough budgets allocated to these different sectors to generate major players, able to compete with our American and Chinese counterparts, or even Japanese or Indian tomorrow? It is a bit early to answer them, but this plan symbolizes the birth of a stronger and more economically integrated Europe.
In addition, this plan will contribute to the deepening of European integration with a further step towards more federalism. A Europe, which, as an institution financed by its member states, will assist and guide, according to relevant investment directives, the Union’s economy in these key sectors for its future and its sovereignty. Therefore, this plan is a good start, in the sense that it facilitates convergence of the EU’s economies and that it is subject to EU’s control to validate the seriousness of the recovery plans of each country. But, we have seen that differences remain within the Union, especially between northern countries, known as “frugal” states, and southern countries, such as Spain, Italy, and even France. But one thing is certain, it is not by playing separately that we will be able to get away with it. And it is something that Germany has understood very well during these negotiations, by deciding to reorient its priorities until now, focused on export performance and international competitiveness towards a role of European locomotive to better sell its products. and its industrial goods to its neighbors in the South, in the East and in Northern Europe.
Thus, Europe must continue to plan investments beyond what is provided by this recovery plan, in a logic of “using the debt for productive purposes”, to use the words of Mario Draghi. History has taught us that the market does not completely regulate itself, so let’s steer it in the right direction! In this respect, perhaps we could go even further, by creating a European planning system for the next few years, which would formulate the investment guidelines in the various markets. Such a planning system could also itself be supported by the creation of an organization responsible for contracting mutualized debt at the best rates, to ensure even greater investments in the future, in order to support this transition over the long term.
In any case, this plan is unprecedented because it is financed partly by mutualized debt, guaranteed by the countries of the European Union and intended mainly for the countries most affected by the virus or the most fragile. It will become historic, if it is respected in its functioning with the use of funds for the purpose of recovery, but also for the transformation of the European economy. Solidarity and strengthening of European integration must be at the service of a new Europe, stronger, more united, more autonomous with respect to other major countries or powers, and more innovative.
Pierre MAURIN Partner Alhambra International