Nothing new under the recovery fund

Tim King writes POLITICO‘s Brussels Sketch.

The genius of the European Commission’s potentially revolutionary recovery fund is that it is so conservative.

What makes the proposals put forward by Commission President Ursula von der Leyen potentially transformative is their scale and speed. But in their form and structure, most of its elements are — for those who know the European Union — reassuringly familiar, if also characteristically complicated.

As she set out her proposals to the European Parliament, von der Leyen spoke of a defining moment for the EU. She was right in the sense that how the bloc’s countries respond to her proposal will shape the Union for years to come. But she downplayed the extent to which the EU is already defined: Her proposals are shaped and constrained by what has gone before.

The driving mechanism of the €750 billion Recovery Instrument is that the legally agreed limit on the size of the EU budget is to be raised. The gap between the actual size of the EU’s budgeted spending and this legal limit sets the EU’s borrowing power, because the EU must always be in a position to honor its obligations in the unlikely event that all beneficiaries of its loans were to default at once. Increasing the margin between the actual budget and its theoretical limit gives the EU more room to borrow money, which the Commission now proposes should be distributed to member countries as a combination of grants and loans.

The Commission and Parliament are frustrated that the arguments over gross national income make expansion of the EU budget impossible.

This increase in EU borrowing is perceived by some as a mutualization of debt and has prompted a rash of comparisons with the creation of the First Bank of the United States — from some who would like it to be so, and from others who consider the idea anathema.

The Commission, on the other hand, is at pains to point out that each member country will be held individually liable for a delineated share of the total debt — and that this does not constitute debt mutualization.

Whatever the label might be, the mechanism is not new. The European Financial Stability Mechanism, which came into effect in 2010, saw the Commission using the EU budget as a guarantee to raise money on the financial markets — up to €60 billion. Under the European Financial Stability Facility, also set up in 2010 in response to the banking and sovereign debt crises, bonds can be issued using guarantees from the eurozone member countries with liability apportioned according to their paid-up share in the European Central Bank. At its launch, the total guarantee was €440 billion, which has since been raised to €780 billion.

Of much longer standing — dating back to 1969 — is the possibility for the EU to provide financial assistance to a member country facing difficulty with its balance of payments. The explanation given in the 2002 revision of that 1969 law was: “In order to finance assistance that has been granted, the Community needs to be able to use its creditworthiness to borrow resources that will be placed at the disposal of the member states concerned in the form of loans.”

More recently, when Jean-Claude Juncker was president of the Commission (2014-2019) a flagship policy was the Investment Plan for Europe, which used an EU guarantee to mobilize private investment in infrastructure and innovation.

Own resources

Likewise, the proposals made by the Commission to raise revenue to repay the loans are not in their structure radical. For many years, the Commission — backed up by the European Parliament — has been urging member countries to give it new sources of revenue that go directly to the EU, unmediated by further decisions from national governments.

The earliest form of these so-called own resources — customs duties, agricultural duties, sugar levies — long ago became inadequate to the task of funding the EU’s activities. In 1970, another source of revenue — based on each member country’s VAT receipts — was approved. When that too proved inadequate and its equity questioned, another source was added: a call upon a proportion of each country’s gross national income so as to make up the revenue required to balance the projected spending (the EU is not allowed to run a deficit).

The proportion of gross national income that is to be drawn down has historically been a little over 1 percent —and the precise rate has been the subject of interminable squabbling between member countries at each budgetary cycle and has been successively reduced.

The Commission and Parliament are frustrated that the arguments over gross national income make expansion of the EU budget impossible, but the Commission’s response is hardly revolutionary: It is simply seeking the modern equivalents of those sugar levies and agricultural duties.

This idea has been kicking around for more than a decade. Ahead of the negotiations for the EU’s 2014-2020 budget, the Commission proposed reducing the reliance on gross national income, by introducing a financial transaction tax and modernizing the way the VAT revenue was calculated.

The member countries quashed the proposal, and the 2014-2020 budget was agreed without any reform of the revenue streams. But the final deal did include an agreement that there should be a review, headed by Mario Monti, a former prime minister of Italy and former European commissioner, of possible reform of EU revenue.

What von der Leyen and the Commissioner for Budget Johannes Hahn have floated as possible sources of revenue — including more revenue from the Emissions Trading System, a digital tax, a duty to guard against carbon leakage — are consistent with the ideas in the Monti review.

Incentives for ambition

Wherever you look in the Commission’s proposals, you recognize features from elsewhere in the EU’s constellation. The conditionality that is to be attached to the grants and loans, while it could be highly controversial — because some countries fear it will be used to deny them money — is not new. Conditionality has long been a feature of regional aid and other reform programs, albeit sometimes badly policed.

Yet for all the familiarity of individual elements, when they are put together, the Recovery Instrument, Next Generation EU and the 2021-2027 budget of €1.1 trillion do amount to something new and potentially revolutionary. If the Commission were to win the unconditional consent of the member countries, then in just a few years the EU would be transformed.

How? Because the EU would be pushing out a large amount of money in a short space of time. The emphasis on particular policy objectives — notably digital infrastructure and combating climate change — would represent a swift shift of emphasis unthinkable a few months ago.

Although the recovery fund is supposed to be just temporary, if it were to achieve its aims, it would change people’s perceptions of what the EU could do. If new forms of revenue were introduced, and administered without controversy, and the trend to contract the EU budget were reversed, then some of the poison would drain from the EU’s budget negotiations.

Above all, the Commission would have strengthened its position and recovered much of the legitimacy that it lost during the banking and sovereign debt crises.

The continued commercial belligerence of U.S. President Donald Trump is an incentive for the EU to stand together — and a disincentive to look elsewhere for multilateral solutions.

All of these are reasons why some member countries will hesitate to fall in line with von der Leyen’s proposals and with the Franco-German initiative that preceded them. Whatever the short-term pain of the coronavirus crisis, they may not consider that Europe’s economic recovery necessitates giving the Commission a shot of growth-hormone.

They may prefer to maintain their jealous controls of the EU’s purse-strings rather than set a precedent for new own resources. The habit of the European Council is to scale back ambition — to dilute and delay.

That said, some circumstances are in the Commission’s favor. The fragility of the European economy is an incentive to be ambitious: Governments, industrial sectors and individuals are desperate for help.

The continued commercial belligerence of U.S. President Donald Trump is an incentive for the EU to stand together — and a disincentive to look elsewhere for multilateral solutions. The departure of the United Kingdom is a clear blessing: Much of this would not even have been attempted if a British veto were possible.

If von der Leyen can maintain the support of French President Emmanuel Macron and German Chancellor Angela Merkel, then she has a chance of achieving a revolution by conservative means.



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