In order to respond to COVID-19 and the economic collapse that we are experiencing as a result of the lockdown measures, the European Commission has laid out an ambitious program to tackle the situation. During the European Council meeting on June 19, EU heads of state and government were not able to find common ground on the so-called “recovery fund”. They agreed to reach a conclusion during a special Council meeting next month.
There are two changing elements in the way the European Union would spend money, if the Commission plan were to be approved:
- Next Generation EU: also known as the recovery fund, it consists of €750 billion. €500 billion would be grants to member states, €250 billion would be available in loans. This recovery fund is exterior to the EU budget, meaning the Commission seeks to borrow the money, as well as raise it through special EU taxes.
- A “reinforced” EU budget (MFF — multi-annual financial framework): the upcoming 7-year budget of the EU would now have a total value of €1.1 trillion, making it the largest budget to date. This would significantly increase membership contributions.
The updated MFF seems to remain a story for another time, as the Council is most heavily invested in the recovery fund, which needs a broad common denominator to receive approval.
The “Frugal Four”, i.e. Denmark, Sweden, the Netherlands, and Austria, disagree on a range of things. Denmark and Sweden rightfully ask whether the fund ought to be mandatory for all EU-members, as opposed to only the 19 eurozone countries. The problem that the eurozone does have a common fiscal policy – yet unlike countries such as Germany, does not have mutualized obligations to settle deficits – is a criticism for the structure of the Eurozone, not the European Union as a whole.
Austria and the Netherlands contest the conditionality of loans and grants under Next Generation EU. Member states that find themselves in financial hardship, such as Italy or Spain, will be required to submit proposals to the European Commission to receive both grants and loans. However, it is difficult to see how Berlaymont would politically reject any grant, given the current situation. Also, what were to happen if the member state didn’t reach the self-set goals of the first tranche? Will the Commission under President Ursula von der Leyen withhold a second payment?
The Prime Minister of Luxembourg told my TV station that the fact that the recovery fund is to be partially funded through loans is not comparable with the concept of Eurobonds. One wonders how this proposal is manifestly different. The appeal of Eurobonds for its proponents is that this mutualized debt would benefit from the positive credit rating of member states with healthy public finances. Now that the European Commission wants to take up a loan, the credit rating also represents a combined average of EU member states.
Lastly, the proposal of EU taxes ought to worry anyone with an understanding of tax policy and government. In Switzerland, the cantons provide income tax levies to the confederal government, as opposed to Bern levying it by itself. Administrative detail? Hardly so. By being able to withhold funds from the capital, these regional governments continue to establish their importance in the nation. The same logic applies to the EU budget: through its dependence on contributions from member states, EU institutions were bound to cater towards the interest of national governments, as opposed to the ambitious ideological visions of a handful of Brussels insiders. With its own resources, Brussels could gain the independence it so desperately craves.
The proposals for new taxes aren’t new, consisting of a mix of environmental levies, as well as moves to attain “tax justice,” which is EU-speak for taxing American tech giants with something that we already know as the Digital Tax. It is fascinating how after now years of negotiations that have not led anywhere, the Commission tries to sneak it in through the backdoor by using the current crisis as an excuse. The concerns expressed against the introduction of this tax are just as valid as they were three years ago.
Denmark, Sweden, the Netherlands, and Austria need not only to keep up their opposition, but to gather additional support for the status quo. It is thoroughly irresponsible to condition southern European nations to continuous bailouts from the north in every crisis, while failing to pressure for any significant reforms in the absence of crises.
The “Frugal Four” are a blessing in this time of great irresponsibility.
This article was first published by the Austrian Economics Center.
Pictures are Creative Commons.
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