Every now and then, you come across a particular claim used by Brexiteers to explain why it was good that we left the EU when we did. In this argument, they point to the EU’s post-pandemic recovery fund, known as NextGenerationEU (no spaces). The fund, worth about €800bn, and split between grants and loans, is a massive programme to pay for investment across the EU in order to repair the damage left by the pandemic. It is not a stimulus programme of the kind the US deployed, but rather a multi-year process of reforms and investments, where countries must implement reforms (which they designed) in order for sections of funding to be released.
The great innovation of this recovery fund was that it was created on the basis of jointly-issued EU debt. Compared to doing the same funding through purely national channels, this allowed for simply more borrowing than would have been possible for some countries and for borrowing at better interest rates for others.
While this is all quite sensible and logical, Brexiteers like to gleefully point out that the UK left before this was agreed and so did not take part in the joint borrowing. We therefore do not have any ‘share’ in this EU debt, which will eventually have to be paid off.
When faced with this argument, British pro-Europeans tend to just brush it off and move on. Yet we should be taking it on with full force. Not only did we not benefit in any meaningful way from being outside of NextGenerationEU, it will actively be in our interests to be a part of any similar programme in the future.
To understand why, we need to establish two things.
First, the UK’s fiscal situation is less than ideal. We have been racking up more and more debt over the last two decades, moving from around 34% of GDP in 2000, to over 100% today. Our deficit is also stubbornly high, running at 4.4% in 2023. As a result, we are one of the most indebted nations in Europe. This isn’t in any way surprising – a combination of successive economic and political crises and poor growth will do that to an economy. But that doesn’t make it any less of a challenge, particularly as a radical programme of cutting spending isn’t a viable option.
This brings us to the second point. The UK economy will need massive amounts of investment in the coming decades. Partly this has been a problem of our own making. Over the past two decades, Britain’s public services have steadily degraded. Our rail, water, health, social care, justice and education sectors are all creaking edifices, leaking in a dozen places and with cracks running up the walls. It will take lots of spending to get them all back on their feet, putting in place an efficient rail service, cutting the backlogs in hospitals and courts or rebuilding school facilities. However, this is only part of the picture. The UK’s particular challenges coincide with a pivotal moment in this century for much of the world as we embark on the twin, digital and green, transitions. Getting to net zero and making sure our societies are not left behind in the digital race will take major investments, including developing more clean energy, building out infrastructure for more electrification, upgrading or even introducing new IT systems and preparing for a world of ever more interconnected appliances and devices, from energy meters to your car.
This situation is not unique to the UK, it is repeated all over Europe. Although the exact balance of factors will vary from one country to another, all European states are grappling with these four major demands: fiscal constraints, military re-armament, fighting climate change and adapting to modern technology.
On the surface, it’s an impossible problem to solve. How can a country meet all these demands for investment when there is so little space to increase public spending? Europe doesn’t get the benefit of the United States, which can rack up large deficits without markets ever really questioning the viability of such a policy. Even as it is, a number of Europe’s economies have to keep looking over their shoulder to make sure ratings agencies and markets more broadly aren’t about to whack them for running a fiscal policy deemed irresponsible.
In this context, the argument on joint EU debt is inescapable. Much as more Eurosceptic and frugally minded governments don’t want to engage with the discussion, it will keep on returning in absence of any alternative solutions to Europe’s pressing needs.
The most recent formulation of this has been the call for a €100bn fund to spend on revitalising the EU’s militaries and the defence industry more broadly. Originally put forward by Estonian Prime Minister Kaja Kallas, it was also endorsed by France’s Emmanuel Macron.
Yet the idea is not limited to defence and more general conversations on expanding NextGenerationEU or issuing bonds to expand the size of the EU budget (to then pay for an expansion of various programmes dedicated to infrastructure investment) have been taking place in the background for many months now.
The big advantage of EU debt is that markets are not only less concerned than with national debt, they are hungry for more. Indeed, the main source of investment scepticism is precisely the uncertainty over when or if more debt will be issued, leaving the EU debt market too small to be optimal. Notably, the debt is given the top rating by all the big agencies. Allowed to continue to issue debt over a long period of time and with fixes to the financial plumbing, the EU can borrow more, more cheaply than national governments all acting individually. It is literally greater than the sum of its parts.
For the EU, the balance of costs and benefits, combined with the need to act, will make further joint debt reasonably likely in the future. It provides a way of resolving the contradictions in the current positions of many European countries; to make possible through collective action what would be impossible alone, creating a bridge to a future where Europe’s economies have maintained sustainable debt levels while also decarbonising their production, reaping the gains of increased digitalisation and enhancing security through a stronger defence sector.
For the UK, the question is simple: do we or do we not wish to be part of this process? It seems plain that any unideological assessment of our national interest would conclude that we do, for all the reasons applied to current EU states apply to us too. In short, far from being an argument for the success of Brexit, debt is merely another example of why Britain will need to rejoin.
Thoughtful and compelling argument, though those opposed to rejoining will not engage with it in good faith.
Though I'm strongly opposed to Brexit I totally reject your argument regarding fiscal and monetary integration. With its own fiscal currency and central bank the UK has far more flexibility than either the Labour or Tory parties are willing to acknowledge, and the boggeyman of the markets is just a myth designed to maintain policies based on economic orthodoxy.
You don't have to be a supporter of MMT to recognise that the fiscal and monetary conservatism of the Eurozone, dominated not by neoliberalidm but German ordoliberalism, has been a disaster for economic growth, and has imposed unnecessary pain. Without fiscal transfers, which Germany won't countenance, one size doesn't fit all.
Simon Wren-Lewis, not a proponent ofMMT, has however set out how governments could finance deficits by creating money.
https://mainlymacro.blogspot.com/2024/04/could-governments-finance-deficits-by.html