EP31 · Economy · first published 2020-08-12
The Stealth Federalization of the EU | Tuomas Malinen | Negotiator 31
An English-language episode in which Tuomas Malinen sets out the mechanics of the recovery fund for an international audience. A EUR 750 billion package split into EUR 390 billion of grants and EUR 360 billion of loans, allocated on population, GDP per capita and unemployment from 2015-2019 - variables with nothing to do with the pandemic. Malinen names two treaty articles he considers broken, sorts the euro countries into beneficiaries and losers by GDP per capita, and walks through GnS Economics' synthetic markka simulation, which suggests Finnish exports would have been some 40 per cent higher with an own currency. He closes with one concrete demand: a referendum on the recovery fund in every member state.
The Stealth Federalization of the EU | Tuomas Malinen | Negotiator 31
Summary: The channel’s second English-language episode, made for an international audience after the July 2020 recovery fund decision. Malinen presents two claims that can be checked and one that is a forecast.
Checkable claim one: the allocation criteria are population, GDP per capita and unemployment for 2015–2019. These are pre-pandemic variables. Seventy per cent of the funds are distributed on the basis of economic development before the coronavirus hit.
And the episode’s most concrete demand is a single sentence: every country should hold a referendum on the recovery fund.
A note on reading this. Malinen is the CEO of GnS Economics and the best-known EU critic on the channel; the interpretations are his. Three things have been separated here: the mechanics, which can be checked against the treaties and the decision documents; the interpretation of what those mechanics mean; and the forecast, which can be wrong. The episode was recorded in August 2020, so the forecasts should be assessed separately with hindsight. Miettinen states openly in the episode that Malinen is the channel’s most-watched guest — over 200,000 views across channels that year — which is worth knowing when judging the tone.
What it is: the mechanics
The fund agreed in early July 2020 operates through the European Union’s budget — something, on Malinen’s account, that has never been done before.
| item | amount |
|---|---|
| EU borrowing from international financial markets | EUR 750bn |
| Distributed as grants | EUR 390bn |
| Given as loans | EUR 360bn |
Two articles
Malinen names two provisions he believes the arrangement breaks. He flags his own uncertainty — I don’t know the actual laws, but they are in the treaties — which is honesty rather than weakness.
Article 310. In simple terms: the EU must operate a balanced budget. It does not now, since it is taking a massive deficit financed by borrowing.
Article 125 (Treaty on the Functioning of the European Union). In simple terms: the budget burden is not shared among member nations. When the EU borrows and gives out a grant, it goes directly into a member state’s budget — which makes it a fiscal transfer.
His conclusion about the mechanics: this is the transformation of the European Union into a fiscal transfer union, and that is a very fundamental change.
Criteria with nothing to do with the pandemic
This is the episode’s checkable core observation, and also its strongest argument.
Allocation is based on population, GDP per capita and unemployment between 2015 and 2019.
These have absolutely nothing to do with the coronavirus pandemic.
And the qualification that makes the observation numeric: 70 per cent of the funds will be distributed on criteria based on economic developments before the coronavirus hit.
Malinen cites here the Finnish economist Vesa Vihriälä, who has also worked at the Commission and observed when the fund was agreed that it seems the Commission first agreed the countries and the amounts it wanted to distribute, and then made up the criteria for it. Malinen’s own assessment: that is exactly how it looks.
His reasoning is logical rather than political: if the purpose really were to help countries fight the virus, these would be the worst possible principles for allocation. The distribution is skewed toward those who are poorer, who have lost GDP per capita growth, or who have high unemployment.
Who pays and who receives
Miettinen states the official rationale — a solidarity payment to kickstart investment after the humanitarian losses of COVID-19 — and notes that it does not compute.
The arrangement differs from the crises after 2008 in one decisive respect: the non-euro countries are paying. Denmark and Sweden pay transfers willingly. They ganged up with the Austrians and the Dutch in the frugal four, which tried to stop the transfer union; Finland was, in Miettinen’s words, a hang-around member of that club that did not quite dare do anything dangerous.
Three examples are raised among the recipients:
- Estonia, with one of the best COVID track records in the world, gets a surprise grant of several billion — pretty much exactly the amount Finland pays. They get our money.
- Sweden, with considerable COVID damage, pays a lot.
- Hungary and Poland, which do not figure much in that register, get the money because the criteria give it to them.
Miettinen’s summary: there does not seem to be any correlation with the systemic shock itself.
The euro: beneficiaries and losers
This is the episode’s most analytical passage. Miettinen asks the logical follow-up: if one criterion is GDP per capita, has the euro itself not affected that? Malinen confirms and takes it further — if we use these as criteria, we are in effect trying to fix the euro by stealth.
The GnS Economics analysis divides the euro countries in two:
Beneficiaries: Germany and Austria, which have grown strongly throughout their euro membership — and, surprisingly, Spain and Portugal, which have recovered from the 2008 crisis: their GDP per capita is higher than in 2007.
Losers: Finland, Italy and Greece.
| GDP per capita | |
|---|---|
| Greece | around 20 % lower than when she joined the euro in 2001 |
| Italy | at the end of 2019, slightly below its earlier level |
| Finland | roughly at the 2007–2008 level |
The difference between the groups is not growth but recovery: Italy and Greece have lost welfare during euro membership, and Finland has not recovered from the 2008 financial crisis.
Malinen’s explanation for Finland is structural: a narrow export sector based on investment goods. Finland has flourished with its own currency and stagnated whenever the currency has been tied to another.
We need a currency that follows the economic realities of Finland. The euro does not do that. It follows mostly Germany’s economic development and maybe even France. The euro can be argued to be cheap for Germany, but very expensive for Finland.
Why this couples the euro and the EU
Miettinen raises a structural consequence that is the easiest part of the episode to skip past and possibly its most important.
Previously the non-euro countries did not take part in the payments. They stayed outside all the earlier mechanisms — the European Stability Mechanism, for instance, which operated on a loan basis.
Now, crucially, for the first time we couple the future of the euro and the EU.
And from that follows what makes reversal hard. If member states back the EU’s borrowing, they are locked into the system: the only way out of the recovery fund would be to leave the EU and default as well. As Miettinen puts it, backing down no longer means a benign switch to an own currency but the British route out — plus breaking the euro at the same time.
The synthetic markka
The episode’s second half is the GnS Economics simulation, and it answers the two commonest defences of the euro.
Defence 1: interest rates would be high with an own currency. Malinen shows ten-year government bond yields for Finland, Sweden and the eurozone. Rates have fallen in all of them. Sweden has stayed with a floating krona since the crisis of the early 1990s — and its rate path does not differ. Rates have fallen globally, so no argument can be built on this.
Defence 2: an own currency would be too volatile, a rubbish currency. Here Malinen presents the synthetic markka. The construction is spelled out, which makes the result assessable: the long-run dependency relationship between the Swedish krona and the Finnish markka across previous decades, plus interest rate differentials and world economic developments, are used to construct a theoretical value for the markka.
The result is the episode’s most surprising single claim:
In our theoretical simulations, the value of the markka fluctuates less than the value of the euro against the dollar.
But what an own currency would have done matters more than its volatility: it would have helped during a crisis such as 2008 and would also have depreciated over recent years. The simulated effect on exports:
- Finnish exports would have been some 40 per cent higher in the first quarter of that year.
- On a rough estimate, GDP would be about 10 per cent higher.
Malinen marks the uncertainty himself when Miettinen asks whether Finland would have recovered better in the Swedish system: we cannot say that for sure, but that is highly likely.
What he demands
At the end Malinen does two things that should be kept apart.
A forecast. The process has run since 2010 and the Greek debt crisis, and this is the final stage of stealth federalization. And if this path is followed, there is on his account a very high likelihood that it leads to the demise of the European Union altogether at some point.
A demand that is concrete and assessable:
Before we go into this — and because the changes it brings to the EU are so drastic — every country should have a referendum on the recovery fund. That is the only way to know for sure that the citizens of Europe really back this, and that this is not some stealth project of the European elite.
Miettinen’s addition names the precedent risk: if this goes through, there is a case study of how the European Union’s articles don’t mean anything — and it can be repeated as many times as politicians wish, under any declared economic emergency. Malinen’s answer on the disappearance of the national vote: or at least it will be so much harder.
And what he offers as the alternative is not leaving the EU:
We have to stop it now and return to the idea of a free European Union, a kind of league of nations. It is not the federation. We have never agreed to go into the federation.
What the episode leaves you with
- The criteria argument is checkable and requires no opinion about the euro. If 70 per cent of the funds are allocated on 2015–2019 figures, the pandemic-repair rationale does not carry — and Vihriälä’s observation about the order (countries and amounts first, criteria afterwards) can be checked against the timeline.
- The synthetic markka is presented so that it can be assessed. The construction is stated; the figures are simulation outputs rather than observations, and Malinen says so himself.
- The referendum demand is the episode’s only call to action — and it is independent of whether the reader agrees about the fund’s economics.
What remains a forecast is the assessment about the EU’s demise. In August 2020 that was a prediction, and it should be read as one.
Related episodes
- The EU recovery fund and fiscal transfers | Tuomas Malinen | Negotiator 30 — the same subject in Finnish and at greater length.
- The EU’s opposition | Sari Essayah | Negotiator 50 — the recovery fund’s handling in the Finnish parliament and its Constitutional Law Committee.
- The Markka and the Coming Federation | Tuomas Malinen | Neuvottelija 25 — the markka argument in full.
- Euro, ECU2 and Hamilton | Sami Miettinen | Negotiator 347 — Miettinen’s own alternative for unwinding the euro.