Swift agreement needed on next EU budget

Swift agreement needed on next EU budget

Simon De Cesare, MBB President

This Opinion Piece featured on The Sunday Times of Malta, on 7th July 2020

Following the European Commission’s new proposal to top-up the EU Budget with a Recovery Fund of €750 billion, EU leaders met the week before last but made little progress towards a swift agreement to establish the mechanisms by which EU funding is made available as early as possible in 2021, when the new seven-year Multiannual Financial Framework starts.

The main sticking point is on the distribution of these additional funds and what percentage of the disbursement should come in the form of grants versus loans. The commission’s proposal aims for two thirds of the amount as direct grants and one third as preferential loans. This approach is supported by the most economically hit, southern and central-eastern countries; less so by other fiscally-disciplined member states known as the Frugal countries, including The Netherlands, Austria, Denmark and Sweden, supported also by Finland, which expect a mechanism with a higher rate of financial support in repayable loans.

There also appears to be disagreement over the length of period over which the debt should be repaid. The commission suggests that this should be spread from 2027 to 2058, to postpone repayment to the aftermath of the crisis and to spread it over a longer period, so as to ease the pressure on the European economy. On the other hand, some countries have indicated a preference for this debt to be repaid in a shorter period.

With a new summit of EU leaders scheduled for mid-July, important decisions cannot be postponed any further. It would be counter-productive to kick the can down the road in lengthy political discussions when the fiscal stimulus and investment in the economy is most required now.

This is not to say that one should simply give in without assessing the overall implications of the financial package, which is not only about the disbursement of funding, but also on alternative ways of repaying the debt, for which the commission is proposing a framework of increasing EU-own resources. What this means is that the commission would be able to raise more revenue through EU-wide taxes. Suggestions have been made for the introduction of a string of environmental and corporate taxes that would contribute directly towards the EU budget.

With a new summit of EU leaders scheduled for mid-July, important decisions cannot be postponed any further

Some of these proposals have already been explored at EU-level multiple times. Others are new or recycled ideas that could be considered an offshoot of previously failed proposals. Some are controversial by nature such as the EU digital tax. Others are uncalled for, such as the proposal for a levy on businesses that use the single market. There is little information on the latter suggestion, but such a tax in any format would negatively impact business competitiveness at a time when business should be engineering a successful economic recovery.

These topics should therefore be addressed with caution, particularly by small and peripheral member states, including Malta, that have traditionally resisted moves towards this direction.

Looking back at the areas identified by the commission for investment, the approach to continue primarily prioritising the EU budget to leverage investment for the transition towards a more green and digital economy is welcome. These will undoubtedly be the deriving growth pillars for the future resilience and competitiveness of the European economy.

However, a balance is required between future-oriented investment and ensuring the viability of companies in distress at present. The economic and political fallout that will result from a deep recession that could exceed the last financial crisis should not be underestimated and must be avoided at all costs.

Beyond the funding directly linked to cohesion programmes of which member states would be tasked with implementation, the EU Recovery Fund includes other avenues of support, which Malta should be very proactive to tap into. Financial instruments such as the Solvency Support Instrument, which will be a temporary crisis instrument to help otherwise healthy companies survive the storm, is very opportune.

This will work in the classic case of guarantees provided by the European Investment Bank to financial intermediaries providing financing to beneficiaries, in this case companies. The private sector, particularly in sectors most hit by the crisis, could do with all the help they can get, and therefore entities such as Malta’s national development bank should explore the viability of this instrument for the benefit of Maltese businesses and the economy.

Experience shows how complex it is for all EU member states to agree on a seven-year EU budget programme. The fact that discussions for the next programme have been ongoing since 2018 is testament to this. However, in the current circumstances, we do not have the luxury to wait for the 11th hour for an agreement. Compromises within reason and a joint conviction of moving out of the crisis should be the guiding principles at the next EU summit to give the right signal that Europe is alive, continues being strong and united.