The deal after the deal

The deal after the deal

Simon De Cesare, MBB President

This Opinion Piece featured on The Sunday Times of Malta, on 2nd August 2020

We did it! We have reached a deal, European Council president Charles Michel said at the conclusion a four-day marathon of negotiations on the long-term EU Budget and EU Recovery Plan among EU national leaders.

Negotiating a seven-year financial framework for an ambitious EU budget is always a complex process, considering the need to reconcile the EU’s medium- to long-term policy objectives with all 27 member states’ political and economic priorities. The fact that the original proposal had been under discussion since 2018 attests to this.

Adding to the mix an unprecedented health and economic crisis requiring EU leaders to go beyond the usual discussion on the level of member states’ contributions to consider mandating the European Commission to raise funds on the international markets and then collectively act as guarantor – a highly sensitive political move of debt mutualisation – made it all the more extraordinary.

The Recovery Fund, labelled as Next Generation EU, also required compromises on how EU funds will be disbursed, how they will be repaid, and what conditionality to attach for receiving funds and spending. Leaders had to also contend with filling an annual €10 billion hole in the EU budget left by Britain’s EU departure.

The question is what happens next in this excruciating process, which is not yet over. The deal agreed by national leaders needs to obtain consent by the European Parliament before it can be adopted. In a reaction expressed through a resolution a few days later, MEPs overwhelmingly considered the deal to be a positive step for recovery, but inadequate for the long term. Inter-institutional negotiations will therefore take place over the next weeks.

What has sparked this Parliament reaction to this ambitious deal? Primarily, that to make up for member states’ political compromises, insufficient funds will be attributed towards those future-oriented programmes designed to boost the EU’s commitment on long-term policy objectives, including digital transformation and fighting climate change. In this case, among others, programmes such as Horizon Europe and Digital Europe, have been impacted.

From a business perspective reductions in the InvestEU Programme and the removal of the Solvency Support Instrument are disappointing. Both aimed to leverage millions of euros in investment in the real economy that is most essential at present for a rapid economic recovery.

Parliament attributes part of the problem of cutting funds to the Council’s failure to sufficiently reform the EU’s own resources system, where it expects the EU to be able to increase more revenue through EU-wide taxes to support such essential programmes.

Negotiating a seven-year financial framework for an ambitious EU budget is always a complex process

How to get out of this impasse? To start with, member states remain the overall contributors of the long-term EU budget. It is natural that net contributors take a more conservative approach on spending while those member states in a weaker economic position do not afford to pitch in more. While bound by common EU objectives, member states and national leaders have their own political priorities that will be scrutinised at national level.

Therefore, if it is not possible to increase the overall size of the budget through direct member state contributions to meet the budget expectations for EU programmes by the other EU institutions, namely the Commission and Parliament, the only alternative would be to increase revenue through EU own-resources; in other words, EU-wide taxes.

The current deal already foresees such a mechanism, with the Council inviting the Commission to put forward proposals for a plastic tax, a digital tax, and a carbon border adjustment mechanism. While on a positive note, the deal discarded the bizarre idea of introducing a single market levy, it leaves the door open for revisiting the Financial Transaction Tax proposal.

How does all this play out from a Maltese perspective? First, it is positive to point out that the Maltese government managed to secure an important level of cohesion funding that is not less than the previous EU budget. This is the biggest source of EU funding injected directly into the Maltese economy in the form of modernising public infrastructure, supporting business competitiveness and investing in training and skills, as well as other important areas such as within the social and cultural fields.

But at the same time, as negotiations follow, Malta needs to safeguard its competitiveness first, which is far more important than the amounts of EU funding received in absolute terms. For long, the Maltese government and business representatives have agreed that the introduction of certain harmonised EU taxes, particularly relating to corporate and financial services, will have an adverse effect on Malta’s competitiveness. In this context, the Maltese government will require to be more resilient in the face of increased pressure on the Council to meet the European Commission and Parliament’s expectations to increase revenue through EU-wide taxes. One must also not forget the context whereby there is an increasing pressure at EU-level to modify the decision-making process of highly sensitive legislation that currently requires the unanimous approval of member states to one where it would only require a qualified majority.

In my view, fighting for one’s political objectives and priorities is admirable, and negotiations should surely focus on improving the allocation of funding towards EU programmes with most added value, however, within the current format. No deal can ever be perfect and there will be time for fine-tuning by the mid-term review in 2024 when hopefully the current crisis would be behind us.

But at this moment, as we face the deepest economic crisis in a century, beneficiaries of EU funding, particularly the private sector, which will be the core driver of economic recovery, should not be kept waiting. Hence, my appeal on the importance of achieving a swift agreement on the EU budget to be adopted before the start of the next programming period in 2021.