Today the European Council discussed a proposal
drafted by the European Commission for the economic recovery in Europe in the aftermath of coronavirus.
The Recovery Plan is two-fold: (1) Next Generation EU is a new recovery
instrument of €750 billion which will boost the EU budget with new
financing raised on the financial markets for 2021-2024, an instrument
which is part of the larger (2) Multiannual Financial Framework
2021-2027 of more than €1 Trillion. But how does the European Commission want to realize this? And will it contribute to a better Europe or a bigger Europe? See here a critical analysis on this Proposal
The European Commission presented its plan for post COVID 19 recovery in the EU in the end of May.[1]
We identified three issues of particular concern. These are the proposal that the Commission itself would raise taxes, the proposals regarding support for companies and the general issue of the size of the budget.
The centerpiece of the proposal is the "Next Generation EU" financial instrument. It will have an emergency nature and will be funded through an increase in the amount of money the Commission itself can raise through different means. This will allow the Commission to use its credit rating to borrow €750 billion on the financial markets. Through this emergency instrument, the EU will provide €500 billion in grants to countries hit hardest by the pandemic, such as Spain and Italy, and make another €250 billion available as loans. Using the emergency instrument and an increased budget for the coming years, the Commission hopes to fuel a total amount of 3 trillion Euros to different recovery projects. This proposal comes after the Chancellor Merkel and President Macron presented their own plan earlier in May. It called for the creation of a 500 billion recovery fund.[2] Both plans were met with skepticism by some European Member States.
Discussions on the Commission proposal commenced today at the European Council video-conference. However, it is unlikely that a final decision will be reached in the coming weeks.
We strive for a European solution that will ensure that money will reach European societies. It must also be in line with the constitutional requirements of each Member State. As mentioned above, the Commission proposal calls for an increase to the “own resources ceiling” which is the amounts the Commission itself can raise through different means. The "own resources" is one of the pillars of EU's revenue (the other 2 being the previous year's surplus and other sources of revenue, mainly fines and taxes on salaries.). The Commission proposal asks for an amendment of the “own resources system” to include among others on new EU-wide tax on large companies.
The legal basis for the "own resources" system is the 2007 "Council Decision on the system of the European Communities’ own resources".[3] Article 2 Paragraph 2 of the 2007 Council Decision states that: "Revenue deriving from any new charges introduced within the framework of a common policy, in accordance with the EC Treaty or the Euratom Treaty, provided that the procedure laid down in Article 269 of the EC Treaty or in Article 173 of the Euratom Treaty has been followed, shall also constitute own resources entered in the general budget of the European Union". Article 269 of the EC treaty (the one referenced in the Article 2 of the Council Decision on "own resources") states that "The Council, acting unanimously on a proposal from the Commission and after consulting the European Parliament, shall lay down provisions relating to the system of own resources of the Community, which it shall recommend to the Member States for adoption in accordance with their respective constitutional requirements."[4]
This means that any change to the “own resources” system must be unanimously accepted at Council level. It then must be approved by the Member States in accordance with their constitutional requirements. The term constitutional is especially important here. It means that in some Member States it might even require a referendum (Denmark, Ireland), which is not a particularly good idea during a health crisis.
For this reason, We cannot support the proposal for taxation by the EU of large companies. The EU is not a state and is not seen as such by the peoples of Europe and should therefore not overtake this competence from the Member States. Moreover, the process of realizing this proposal will cause a significant delay in getting an agreement for the EU Budget. The current emergency does not allow for such a delay. we suggest that EU Member States cooperate in setting minimal taxation of multinationals at the national level and put together more energy in combating tax evasion by large companies.
The Commission has put forward a wide-ranging plan on how the money raised will be spent. There are measures to support European economies. For example, there is new Recovery and Resilience Facility which will be the centrepiece of the recovery plan. It will have a budget of 560 billion distributed in grants and loans. Member States will design their own tailored national recovery plans that will have to be approved. The Facility will ensure that these investments and reforms focus on the challenges and investment needs related to the green and digital transitions. Each plan will outline investment and reform priorities and present the investment packages to be financed under the facility. Financial support will be released in instalments based on projects in fulfilling predefined progress benchmarks.
The Commission is also proposing to strengthen Invest EU to mobilise private investment in strategic projects across the Union. They are proposing a new Solvency Support Instrument to provide urgent support to sound companies put at risk by the crisis. This instrument will help mobilise private resources to provide urgent support to European companies. Another element of the proposal is the Strategic Investment Facility. It will support projects contributing to building value chains across the EU and enhancing the autonomy of the Union’s single market. There are also measures to strengthen the Single Market and make sure the EU deals with future emergencies.
Some of the above mentioned proposals are in the right direction. Especially, the Strategic Investment Facility and the focus on green technologies. It is also good that the Commission proposes that money will go to “sound” companies. One must wonder however, why even so – called “sound” companies are so vulnerable. We believe that we must examine the whole architecture of our system and ask ourselves where money given through the ECB since 2012 went. We do not only need to limit support to sound companies but also ensure that support will contribute to a healthier economy and sound business practice.
The current situation exposed a vulnerable system[5]. The Eurozone banks had not been tested for such extreme scenarios. Bail outs of large companies are bailing out the shareholders and bond holders. We have currently a system where we must make more and more debt to keep it afloat. The ECB has recently decided to buy an additional 870 billion of assets. However, the more assets the ECB is purchasing, the more it is assuming bigger risks. Moreover, either the Merkel-Macron plan or the Commission proposal call for the creation of new debt and its eventual distribution among European countries (even if payment will be in the coming decades).
But even if the Commission proposals go through, we must ensure that the money reaches companies that need it and have a positive effect on societies. Since 2012 the ECB has been spending large amounts through quantitative easing to help European economies. However, not all this money reached companies that needed it. A lot was absorbed by banks to offset their own balances.
In addition, there has been a continuing development in which profits of large companies were not invested in the real economy but were extracted by actors in the financial sector. Even more, hedge funds and venture capital investors took a lot of capital out of companies and left many companies indebted regardless of whether they had healthy turnovers or not. A lot of capital and profits was slushed out of Europe to offshore tax havens in this development. CEO’s were rewarded for enacting these policies with disproportionate bonuses.
This means that ECB programs did not reach the real economy and that simultaneously a lot of capital was extracted from the real economy. This dual development contributed to the vulnerability of our societies that manifested itself during the health crisis. Therefore, this time, we need to ensure that the money will not disappear from Europe through outsourcing. This will strengthen the strategic capacity of the EU. Companies that receive investment through EU instruments need to meet clear benchmarks so that only companies that work in a decent manner are eligible for this support. These companies should have good and family-friendly employment practices, just salaries, sound finances and protect the environment. Additionally, these companies should not be allowed to distribute their dividends or buy back their own shares in times of crisis[6]. SME’s need therefore to be prioritised in EU investment programs.
We believe that it is vital to raise this issue now. If this time, the money invested will not reach European societies, more will be needed in the future. And the next time money is asked, many Member States may face an unwilling electorate that refuses to contribute. This will have certainly many negative implications for the future of the European project. Which brings us to our final concern regarding the total size of the package.
It is obvious that there is need for European solidarity and that a compromise must be found that will have the support from all EU Member States. We cannot ignore the serious challenge that southern European countries face. Ignoring the pain of these societies will endanger the support for the EU. Simultaneously we need to ensure that the political support in northern Europe for the EU does not erode either to such an extent that it endangers the public support of EU membership. The right balance must be struck in the size and shape and general conditions that underpin the final agreed package as well in how the package will be financed.
We have noted that in European societies there are serious emotions flaring up. This can be seen in opinion polling as well as in public and parliamentary debates. Sometimes these emotions are fed by cultural prejudices and factual misconceptions. The coronacrisis and the subsequent emotional debates on the EU budget underline the need to find more ways for real conversations between our societies. The EU stands out globally by emphasizing our common human dignity. We believe that this is in essence a Christian notion that has defined Europe and the EU. This notion has only become more relevant and important in this crisis. Our common human dignity should be guiding our debates on the budget and we should aim for a budget that will lead to an economy that reflects this notion better and will lead to a more humane Europe.
[5] More details on this vulnerability and what created it can be found in
this Sallux webinar on ‘Business and Financial Markets Post-Corona’: : https://www.youtube.com/watch?v=L-PjJm5xiw4
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