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New own resources for the EU: Don't kick the can down the road

European Council / COMMENTARY
Marta Pilati

Date: 16/07/2020
Although EU leaders already have a lot on their plate at the upcoming summit, they cannot afford to sidestep the discussion on new own resources. Given that the EU will have to pay back the debt issued to finance Next Generation EU and member states are reluctant to increase their contributions, new sources of EU revenue are the only way to prevent severely underfunded EU budgets in the future.

EU leaders are meeting on 17 and 18 July to discuss the next Multiannual Financial Framework (MFF) and the proposed COVID-19 recovery package, Next Generation EU, for which the EU will jointly borrow funding from the financial markets.

However, issues related to the schedule and modalities of debt repayment have been put aside. The main contentious points of the negotiations relate to the overall size of the package, the ratio of grants to loans, the conditions attached, and questions related to the governance of the recovery package.

Although the subject of new own resources will probably be on the table, there is a considerable risk that a detailed discussion and decision on the matter will be postponed. This must be avoided. There is a strong need for a political commitment to the development of new sources of EU revenue. EU leaders cannot afford to squander yet another opportunity at the upcoming summit.

New own resources: A sensitive issue

For years, member states have shot down proposals of introducing new forms of gathering revenue at the EU level. Today, the options include an extension of the Emission Trading System to the maritime and aviation sectors, a levy on non-recycled plastic, a carbon border adjustment mechanism, a digital levy on multinationals, a ‘Single Market levy’ on large firms and a financial transactions tax. Some are politically more welcomed than others: the levy on non-recycled plastic is on its way to being implemented next year.

For the sake of finding a compromise, there has been a tendency in the European Council to sidestep delicate matters, including decisions on own resources and rule of law conditionality. History might repeat itself: the introduction of new own resources to repay the common debt issued to finance Next Generation EU might be left out from the conversation. However, the strategy of omitting potentially controversial, seemingly less urgent issues so as to not endanger an overall compromise on the MFF and Next Generation EU is flawed for two reasons.

Why now?

First, the timing is right. The urgency of needing to approve the MFF and recovery package would actually help the own resources proposal get adopted, if member states in favour of it were to endorse it until the bitter end. The commitment to introduce new own resources would be easier to accept if it were part of a package and the overall debate. Reopening the discussion without a clear starting point in three or four years – when negotiations for the next MFF (2028-2034) will begin – would open Pandora’s box and restart the political debate from scratch.

Additionally, there is growing momentum for a digital levy. The international efforts made by the Organisation for Economic Co-operation and Development (OECD) in this field have gained resonance, and many member states have (publicly) committed to this type of taxation. The US abandoning the OECD’s work has created even more rationale for EU action, given that an OECD-wide initiative is now unlikely. As a consequence, however, the EU must prepare to defend its choice internationally and expect potential retaliation.

Second, a lack of EU own resources will have significant consequences once the first tranches of debt come to maturity. Debt repayment will inevitably burden the 2028-2034 MFF and many other future budgets. For illustration purposes only, if the €750 billion borrowed by the European Commission for Next Generation EU is repaid yearly in equal amounts (which will not be the case) over 30 years, this would amount to the EU paying €25 billion per year. For a seven-year MFF, the burden would thus equal around €175 billion. While this is only a hypothetical scenario and does not account for interest payments, it does indicate the magnitude of the challenge of debt repayment.

The alternative to using own resources to meet future repayment requirements is often presented as increasing member states’ gross national income-based contributions to the EU budget. There is, however, another more worrying option that looms: cutting future expenditures on EU policies. This alternative is, in reality, more likely. Past MFF negotiations have shown how reluctant member states are to increase their contributions to the common budget; sometimes even at the expense of the very priorities they themselves put at the top of the political agenda.

Additionally, one could expect countries that use a smaller amount of the Next Generation EU funding to try to obtain a discount on the additional contributions, increasing the burden on others and thereby reducing the redistributive nature of the recovery package. Experience shows that there is a propensity among member states to cut EU policy budgets, especially if the alternative is higher contributions. The consequence will be a much-diminished EU budget from 2028 onwards, which will be increasingly unfit for investing in future priorities.

A political commitment

A decision encompassing all technical details is not needed at this stage since they can be ironed out over the next few years. What is required now is a firm political commitment from the EU27 to introduce new EU sources of revenue in the next few years. The commitment should already indicate an approximation of the minimum amount these revenue mechanisms should collect, to avoid token measures in the future.

There is a significant risk that the future EU budget will have an outdated structure and limited investment capacity. Forthcoming MFF negotiations are likely to be a race to the bottom, with member states trying to reduce their contributions as much as possible and EU investment waning. This tendency already exists today, but will likely exacerbate once the common debt comes to maturity. The introduction of new own resources is the only way to prevent this development.

Marta Pilati is a Policy Analyst of the Europe’s Political Economy programme.

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