The EU Corona Budget And The Long Path To Recovery

By Stefano Sciandra

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Being a political and economic entity highly reliable on services, it comes with no surprise how the EU has been affected by the COVID-19 crisis. Long and painful lockdowns and restrictions on the nation, alongside almost all non-essential travel, has caused the retail sector to suffer huge losses. As well as having caused a contraction of the EU economy by 7.8%.

As a result of this, the need to support the recovery of the 27 Member States is as important as ever to the stability of the union, however, support comes with a hefty price and the union doesn’t seem to be united at all.

The long path to establishing support for the Union started on April 23rd when the European Commission proposed a €300 billion Recovery Fund (also called Next Generation EU) for the emergency, which is soon to be added to the EU’s 2021-2027 budget. France and Germany have proposed a recovery package of €500 billion in non-repayable grants, which came as a surprise given Germany’s renowned support for frugality and austerity.

The process of finding common support stumbled upon the opposition to the plan by the Frugal Four countries, which loudly voiced their concern over the lack of requirements to access the money. On July 21st, the 27 finally agreed on a €750 billion recovery package, made of €390 billion in non-repayable grants and €360 billion in repayable grants. As stated above it will be added to 2021-2027 €1,8 trillion EU-financed budget and other smaller funds, for a grand total of €2,4 trillion.

This huge “Corona budget” has found its ride to approval quite bumpy. For instance, in regards to the Next Generation EU recovery package, the single Member States have to agree with the European Commission on how and when they will spend the money (deadlines are tight), and provide clear roadmaps on their reforms strategies (the EU is very strict on this).

Not only some Members of the Union raised issues on the nature of the repayable side of the Recovery Fund, financed by the market in forms of bonds (debt), but also a huge part of the debate has been centred on the European Stability Mechanism funds (ESM). The ESM is an intergovernmental organisation established in 2012 to grant loans to the 19 Eurozone Members to maintain monetary stability.

Some states have expressed their opposition to the use of these loans for the COVID-19 crisis, while others worry these loans, if granted, might be used as a sort of tight financial control. The EU has laid out roadmaps to help the 27 find new sources of revenue to help repay the borrowing, including a digital tax applied to high revenue companies. This could help generate a staggering €1.3 billion per year, for the EU Emissions Trading System, a key tool for reducing greenhouse gas emissions in a cost-effective way, new corporate taxes and a new financial transaction tax.

Single Members can then decide to implement their own ways to repay their debts; for example, Spain has introduced a new wealth tax and Italy will follow soon, however, these measures can backfire and push out of the country much-needed investors. If the long-term EU budget for 2021-2027, financed through the resources of the Union, doesn’t get approved by early December (the clock is ticking), an emergency spending program will kick in. So, what are the benefits of this budget and why are we experiencing yet another stand-off between the 27?

The EU has clearly stated what it wants its members to invest the budget money on, specifically research and innovation, digital transition, tackling climate change, implementing a new common health plan, supporting common agricultural policies and promoting gender equality. The stand-off is caused by the European Union wanting to implement the Rule of Law mechanism to direct the funds to the Member States.

Petri Sarvamaa, a key MEP of the budget talks, says that the money can be stopped, not only in cases of financial and legal uncertainties but also in case of potential future risks to the economy and core values of the Union, were a given State to implement adverse policies. In particular, Poland and Hungary think it’s a mistake to link very important financial decisions to political debates, and feel as if the EU is using the Rule of Law mechanisms as a mean to impose its liberal views upon them.

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