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The EU presses on with budgetary union

After much disagreement, the EU made an important move towards a bigger budget, with shared financing and transfers to the poorer countries.

The European Union has been benefitting from the retreat of the virus and from the pick-up in business activity after the lockdowns.

by
Charles Stanley

in Features

21.07.2020

After much disagreement, the EU made an important move towards a bigger budget, with shared financing and transfers to the poorer countries. The main core of the Euro 750bn package is the Recovery and Resilience Facility, valued at Euro 560bn. Euro 310bn will be in the form of grants, and Euro 250bn available as loans. The Euro 750bn will be raised by the EU itself. The grants and loans will be awarded to member states if they file a National Recovery and Resilience Plan, which is approved by the EU Commission. Money under both grant and loan schemes will be released in tranches against performance. The Commission will expect targets, assessment periods and performance reporting.

The balance of the Euro 750bn will be spent as additions to various existing EU programmes, including the cohesion and transition policies. The big theme is Green growth. The one illustration of the kind of project they have in mind is an EU ambition to put in 1 million electric vehicle charging points around the Union. On May 28, the draft Regulation for the Recovery and Resilience fund set out a possible cash flow under the then scheme, which proposed  Euro 335bn of grants and Euro 268bn of loans. Both these totals were reduced a little by negotiation, to get consent from worried prudent northern nations. The May forecast thought none of this money would be spent this year, around Euro 60bn next year and Euro 127bn in 2022. The rest would follow thereafter. The aim of the plans is to spend and invest in the first four years, with a total seven-year horizon on the schemes. This timeline means the Recovery and Resilience plans run alongside the seven-year budget plans of the EU.

The Fund has twin themes - the digital as well as the Green revolution. The EU tends to define its digital actions in terms of extra taxes and regulations, recognising that much of the new technology is supplied by US corporations. Much of the EU runs on US software, goes shopping with Amazon, depends on Google, uses Apple products and is entertained by Netflix and Disney. As a result, the EU is looking to impose a digital tax to help fund the new large borrowings, with the aim of taking some of the profits from the US companies. There could also be some knock-on to service prices in the EU from such a development. The EU plans new data legislation as it puzzles over what limits to impose on free speech on the internet in the name of decency, controlling libels, tackling false information and defeating organised crime and terrorism.

The Green policy is likely to command most of the investment money as the EU seeks to drive a faster transition to electric vehicles, renewable energy, sustainable farming and dramatic changes in home heating. There is also more emphasis on a carbon border tax, to charge more for products EU citizens might otherwise like to import where they have been made using too much carbon-based energy and raw material.

This development is significant in the evolution of the finances of the Union and will serve to strengthen it in the longer-term as the idea develops of bigger Union budgets with transfers from richer to poorer areas and countries. It is not such an important event in its own terms. The delays in spending the money mean this Fund will have no impact this year and little impact next year. The conditionality will also restrict its use, and may lead to further rows over the degree of surveillance and intrusion in member state budgets, implied by applications for the cash.

The big take-away is the commitment of the EU to green policies, which confirms the need for large new investment in alternative technologies, and the large amount of capital still to be written off with plants closed down, as they bring everything from car making to energy production under the carbon control they seek.

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