More likely than no agreement on a recovery fund is a disappointing one

Too often in public debates on major policies in the EU the positions of member states become caricatured. The southern member states are fiscally irresponsible and refuse necessary reforms. The northern member states are selfish, lack solidarity and see the EU only in narrow, transactional terms. This is not a helpful basis on which to discuss the EU budget and recovery fund.

As I said in a recent blog, EU member states are not divided on everything when it comes to the recovery fund and EU budget, and they are irreconcilably divided on anything. There is much more nuance in the debate than simply for and against, and the details of member states’ positions are important to recognise.

First of all, there is agreement on some basic principles, which has been there since the start of the Covid-19 outbreak. All member states recognise that this is an unprecedented situation that requires a major EU-level response. Most member states also now recognise that this will have to be financed by European Commission borrowing on financial markets.

As I set out elsewhere, there are many questions left to answer, not least the overall size of the EU budget and recovery fund. Without agreement first on the need to raise the EU’s own resources ceiling – the legal maximum amount of money that the EU is allowed to raise – there is quite literally a cap on what can be done. Then there is the size of any increase: it currently stands at 1.2% of the EU economy and the Commission has proposed raising it temporarily to 2%. There is disagreement on whether and how high it needs raising.

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The crux of the debate on the Recovery Fund comes down to what are called new own resources – new sources of EU funding from things like EU –level taxes and levies. This is important because the Recovery Fund is premised on these new sources of income paying for it. That would avoid a huge increase in direct member state contributions, but if any of the six proposed new sources do not fly then that creates a hole in its financing.

Then there is the question of how these funds are distributed, either by loans to member states or as grants, which would not need to be repaid directly. The Commission has proposed a ratio of 2:1, with €500bn in grants and €250bn in loans. There is disagreement over the use of grants and the ratio.

The divide on these issues is broadly speaking between those who can at least put up with the Commission proposal (including France, Germany, Spain and Italy) and the so-called Frugal Four (Austria, Denmark, the Netherlands and Sweden) plus Finland, who have serious concerns.

It is important not to dismiss either side out of hand. The Frugals point out some obvious inconsistencies: the Commission recently said the debt of all eurozone countries was sustainable, with interest rates at historically low levels. Are these not, then, perfect conditions in which to finance spending through loans rather than grants? Equally, the Commission assessment is that €1.7trn of public investment is needed at EU and national level in 2020-21. Yet, the €750bn figure for the Recovery Fund appears plucked out of thin air. Ultimately, they argue it is too early in the crisis to assess precisely what the financing needs are.

[Escuche el ‘podcast’ de Agenda Pública: ¿Qué pasa con la solidaridad en la Unión Europea?]

The Commission has tried to sugar the pill of a higher own resources ceiling, new sources of income and sizeable grant funding by proposing a smaller overall EU budget (-3%) than previously, as well as dropping its call for rebates to be scrapped and instead suggesting phasing them out slowly.

Yet there are also contradictions on that side of the argument. The ‘Frugals’ want highly indebted member states to reduce their debt but at the same time want Covid-related economic relief to be exclusively provided in loans, i.e. more debt. They also fail to recognise the growth-generating potential of the EU budget and Recovery Fund. Of the latter especially, these are not just costs but have a multiplier effect: a one euro investment returns more than one euro. Commission modelling of the proposal suggests the Recovery Fund would reduce debt burdens across the EU and increase growth.

Nevertheless, the Commission proposal puts the Frugals in a difficult position. They do not agree with all of the new sources of EU funding although they could accept some. The Netherlands, for instance, opposes an EU corporate tax but it does support some climate-related income streams. Yet, if any of the new income sources is not approved this creates a hole in the financing of the Recovery Fund that would need to be made up by member states. Yet the Frugals want to limit any increase in member state contributions as well, especially if the Recovery Fund involves grants, which they would see as transfers of their taxpayers’ money to others.

So will there be an agreement? In the end (whenever that might be), it seems more likely than not. The Frugals recognise the difficulty of the situation and the need for EU-level action. It would be difficult for them to accept this and then refuse any compromise. Yet, ultimately, the increase in the own resources ceiling requires national ratification, so domestic politics in these member states cannot be ignored. Some conditionality for the Recovery Fund, safeguards on their use, and bomb-proof time-limits could be crucial political cover.

Ultimately, the own resources ceiling might end up below 2%, the grant to loan ratio might be less than the current 2:1 and some but not all new own resources might only be agreed.

Thus, more likely than no agreement is one that disappoints. Most will probably go away unsatisfied to some extent. But the difficulties the Recovery Fund creates for the ‘Frugal’ countries should not be dismissed simply as selfishness and narrow thinking. All countries have core interests to protect and just as it is dangerous to fail to act decisively enough, it would also be dangerous to try to over-ride them.

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