View from Brussels - July 2020

Earlier this week EU leaders agreed a budget for 2021-2027, the first time the Multi-annual Financial Framework has excluded the UK. In one of the longest set of negotiations lasting over 90 hours (falling 25 minutes short of the record-breaking Treaty of Nice deliberations), a budget settlement of €1,074 billion plus a €750 billion recovery fund was agreed by the EU-27.

The principal bone of contention was the EU’s approach to coronavirus recovery. The “Frugal Four” consisting of Austria, Denmark, the Netherlands and Sweden, and belatedly joined by Finland, initially opposed the creation of a fund to, in effect pool debt, and later, argued against direct transfer to specific economies.Those hardest hit by the pandemic, notably Italy and Spain, see the support as the EU’s version of the post-war Marshall Plan. The €750bn will consist of €390 billion in grants and €360 billion in loans. This was a minor triumph for the Northern Member States given the original plan for twice as much in handouts (€500 billion) than loans (€250 billion). The biggest winner is Italy which is set to draw on €127 billion in loans and more than €82 billion in grants.

The compromise includes rebates – the mechanism established to placate the UK in the 1980s – for Germany and the Frugal Four. At Dutch insistence, the European Commission will assess whether applications for funding comply with European Semester recommendations (country-specific measures to ensure consistent EU-wide approaches to economic policy). Attempts to link the package to respect for the rule of law were largely defeated as Hungary and Poland stood firm.

As for the general budget, the big winner was for environmental campaigners who ensured that 30% would be set aside for climate objectives. A new Just Transition Fund will help polluting regions fund a shift to cleaner industries. Digital investment also benefited from an increase in investment (but it was not regarded as sufficient by the tech lobby). The biggest losers were research and innovation funding and to a lesser extent, the Common Agricultural Policy. Much to Ireland’s delight, €5 billion was set aside for a special Brexit Adjustment Reserve that will go to countries and industries “that are worst affected.”

The EU is taking baby steps towards collecting income directly with a levy based on non-recycled plastic waste to be applied as of 1 January 2021. Proposals for a carbon border tax and digital tax should come early next year – with the aim of introducing the taxes by 2023. Leaders promised to “work towards” other levies “which may include a Financial Transaction Tax.”

The success of the recovery fund and new taxes levied at EU level will be a litmus test for the future pooling of sovereignty in fiscal matters.

Published 24 Jul 2020

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