Macroeconomy

On the brink of historic change

The European Commission proposal is a first step toward fiscal union—in other words, a potential game changer for European integration.

Nadia Gharbi, Europe Economist

On the brink of historic change

In response to the pandemic, the European Commission (EC) unveiled its long-waited proposal for a €750bn Recovery Fund (including €500bn in grants and €250bn in loans) on 27 May. The fund is being sold by the Commission as the “Next Generation EU”. The money is set to be borrowed in financial markets and repaid from 2028-2058 through future EU budgets and resources raised from new taxes.

The EC funds will come with strings attached: grants and loans will be conditional on the implementation of reforms by recipient countries. Green investments and digital transformation will be prioritised. National plans would need to be approved by a qualified majority of member states.

To enable borrowing at the level envisaged, the Commission will increase its own resources ceiling (i.e. the maximum amount member states may be called upon to provide to finance EU expenditure) on an exceptional and temporary basis by 0.6 percentage points to 2.0% of member states’ gross national income (GNI, from the initially proposed 1.4%).

The funds raised will then be repaid through future EU budgets— not before 2028 and no later than 2058 and via certain new own resources: (for example, through an extension of the Emission Trading System (ETS); a carbon border-adjustment mechanism; a digital tax on companies with a global annual turnover of above €750 million and a tax on large companies that draw huge benefits from the EU single market).

The EC plan requires unanimous approval from the 27 EU governments and the legislative process will be long. The next key date will be June 11 when the Eurogroup of finance ministers meets and on June 18-19, when the EU Council convenes. Several aspects of the EC proposal are raising eyebrows in some EU capitals, but we believe that there is room for compromise.

While the amounts behind the Recovery Fund are not massive, the political signal is. The EC proposal, preceded by a similar Franco-German one, breaks taboos for some countries, notably Germany, regarding common debt issuance and transfers across countries. Even if taboos have not been fully scrapped (it is expected to be a ‘one-off’ proposal) it is nonetheless a first step toward fiscal union—in other words, a potential game changer for European integration.

Quoting Jean Monnet, “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” Past crises have highlighted some critical design flaws in the EU’s functioning. But they have also sparked progress towards more integration. Covid-19 may be no exception.

Read full report here

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