The Coronavirus pandemic plunged Europe into the deepest economic and social crisis in decades. The EU responded to the crisis quickly and vigorously with far-reaching measures. The Recovery and Resilience Facility is the central instrument of the temporary European recovery program.
(Federal Ministry of Finance, German Recovery and Resilience Plan, Executive Summary, Berlin April 2021, p 2)
The necessary fund will not be raised through the traditional revenues of the 27 EU countries. The relatively small European budget is currently financed through a small number of customs duties and mainly by contributions of the member states. They are calculated on the basis of the value-added tax (VAT) and Gross National Income (GNI) and amount to a little more than 1% of the total European national income. Thus in regard to a continent with a population of some 447 million people, it is very small considering the situation of the member countries like France, Sweden, Germany or the Netherlands with a share between 35 to 55%.
The new EU budget 2021 to 2027 is endowed and continued with a volume of 1,074 billion euros. In addition to this traditional multi-annual budget (7 years) with its commitments, there is the Corona Reconstruction Fund (“Next Generation EU”) with a total volume of 750 billion. The NGEU is the basis for financing the damage caused by the Covid-19. This huge amount (4 years) goes into different fields of action, as e.g. climate change (“The Green Deal”)1, asylum and migration, medical care, digital revolution and public security. In the center stands the repair of the damage caused by the Corona crisis”2.
Starting in 2021 the European Reconstruction Fund will be financed through debt from the money and capital markets. The debt sovereignty of the EU, organized through the European Commission, is a historical event and changes the Financing structure of the EU in the future considerably. For the first time in history the EU commission is authorized to raise funds on the worldwide capital market on behalf on the EU. Some experts regard the EU therefore no longer as a confederation but more as a new fiscal union. However, the length of this new situation is limited. But some groups wish an unlimited solution in the future. And as the end is at present limited at 2058 there is a lot of time for potential political changes. The topic will therefore stay on the academic and political agenda in the years to come.
The funds available through the sale of the EU bonds (2021-2026) will be invested in the first step via credits (loans) and via lost grants in the 27 EU countries with almost the same sum. The legal basis is the Next Generation EU Funding plan for the period June-December 2021 on the ground of the Recovery and Resilience Plans in the member states. In this second step, the available funds will be used in the individual member states according to the criteria of the EU Commission and the individual countries. Among other things, the use of funds raises the questions of what for, for how long and under what conditions.
Effectiveness and efficiency are in the foreground of the review by the European Court of Auditors, the European Semester and other forms of conditionality (e.g. rule of law). Peer reviews will be necessary to judge the quality of all the work accomplished in the different fields and countries by independent judges3. The allocation of resources, outcome and program quality is a difficult task. But ongoing monitoring and evaluation is an indispensable prerequisite. In this context, the principle of subsidiarity should not be disregarded.
Repayment (amortization) as the third step starts in 2028 and will be finished by 2058. There are different alternatives to repay all loans in time. One or several approaches at the time are available:
- an expansionary fiscal policy (Keynesian economics) stays in the center
- higher membership fees and cuts in expenditures are always possible
- new debt is expected in context with the first alternative and finally
- European taxes could be introduced as proposed in the special meeting of the European Council of July 17-21, 2020. (e. g. on plastic waste, a digital levy or a financial transaction tax4).
Given this background, many experts see the EU with debt (and tax) sovereignty on the way to a federal state and no longer as a mere confederation. In between these two legal frameworks, there is perhaps room for the “fiscal union” mentioned earlier. Therefore many economists see the EU on its way to a Liability and Transfer Union. Obligatory financing of lost grants through the EU budget and joint liability in case of non-payment of loans from single countries are the major arguments. Perhaps monitoring and control of EU finances by the EU Commission and the European Court of Auditors could help to keep the liability small. Finely a lot depends on the political decision about the length of time of the fiscal capacity: Will it be a permanent one or stay as a fixed period of time.
Result: new EU tasks and financing channels are the features of the EU future.
- European-wide tasks: pandemic control, climate change, digitalization, asylum and migration policy, security/defense policy with new responsibilities, human rights, cybersecurity and geopolitical objectives.
- New ways of financing (fiscal union) with temporary debt sovereignty, a budget right for the European Parliament and tax sovereignty in the very long run?
- European-wide cooperation in civil protection, know-how transfer in organizational questions, in tourism, through better cooperation of police, customs, tax authorities, universities, in traffic, in the media, in sports, etc. that can be perceived by European citizens.
- Decisions with a qualified majority (restriction of the right of veto by majority decisions) should be made possible.
Appendix. The EU: what it is, what it does
History in short:
- Start EEC (1958) with Belgium, Germany, France, Italy, Luxembourg and the Netherland.
- 2020 Withdrawal of the United Kingdom.
- Status EU (2021): 27 European states, total population: 447 million.
- EU activities in 35 policy areas.
- Free movement of people, services, goods and capital.
- 2012 Nobel Peace Prize for peace, democracy, reconciliation and human rights.
- Monetary union, common monetary policy, and national fiscal policy5.
New territory for the EU in the face of a global pandemic:
- approval of vaccines for Europe, patents, licenses;
- ordering the vaccines;
- payment/subsidization of production costs;
- vaccination strategies, requirements for testing, vaccination cards, etc.
Europe-wide public spending:
- CO2 emissions from coal, oil, gas (at 85%) vs. wind, solar, hydro, nuclear, geo-thermal and bioheat (at 15%), climate change;
- asylum and migration policy, human rights;
- geopolitical goals, foreign policy;
- cybersecurity, defense6.
1 Wissenschaftlicher Beirat beim Bundesministerium der Finanzen, Grüne Finanzierung und Grüne Staatsanleihen – Geeignete Instrumente für eine wirksame Umweltpolitik? Berlin, April 2021.
2 See in more detail Henke, Klaus-Dirk, Michael Broer, Financing the Corona Crisis in the EU, Wall Street International Magazine.
3 See in more details Broer, M., Henke, K.-D., Zimmermann, H., Neue Aufgaben und neue Finanzierungswege der EU in der Coronakrise, in: WiSt, Zeitschrift für Studium und Forschung, Heft5, 2021, S: 23-28.
4 Wissenschaftlicher Beirat beim Bundesministerium der Finanzen, Zur Sinnhaftigkeit einer Finanztransaktionsteuer, 01.2020.
5 Sources: The European Union. What it is and what it does.
6 Source: Schrötter, H.J., Europe. The Encyclopedia, 3rd edition, Baden-Baden, 2020.