Economics, EU – Baltic States, Modern EU

The expectations to reach the “deal” are actually quite high in all states, though with some reservations: the “calculations” have been in the press for a month and are familiar for the states’ leaders; hence at the end of the line we expect both “winners and losers”.

The first issue, i.e. Commission’s plan for a seven-year EU budget, MFF of €1.072 trillion has had already some differences in approaches: for example, The Netherlands stressed the need for a unanimous decision-making on the MFF budget (instead of qualified majority) and a “careful” budget’s disbursement, as it is about the EU taxpayers’ money.

Others stressed the need for a “swift decision-making”: e.g. Spain, Portugal and Greece; these countries were still holding daunting memories of rescue programs of 2008-crisis with strings attached. Also in this group, Italy has hold to an opinion that the austerity measures and shrinking public spending which were imposed on the states by the EU a decade ago as non-productive.

The MFF’s amounts at stake are really gigantic: some EU leaders cannot even comprehend such sums calculated in trillions: e.g. for Latvians with the yearly GDP of € 30 bn and state budget of € 10 bn it’s really hard to grasp. As well as the issue of the EU’s funds distribution: for countries with almost no industries and with the local consumption as a driving growth force it is becoming really a big issue.

Enlarging the MFF’ issue can have quite a plausible solution: to increase the EU’s “own resources” the states that have advantages of the “common market” have to deliver. The economic benefits of old EU-15 from the “common market” greatly outwait the costs of membership and states’ contribution to the budget: i.e. German GDP during first 5 years after “big enlargement” (2014-18) increased by over € 120 bn, while its contribution to the EU budget was about 10-15 bn/year.    

Not all the countries benefit from the “common market”: less than one-third of the EU states are having up to 5 per cent of their intra-EU trade share in their GDPs: only Germany has over 22 per cent, Netherlands with 13.5, France with about 9, Belgium with 8.4, Italy with about 8, Spain and Poland with about 5.7 per cent each and Czech Republic with 4.6 per cent. All other EU states are having much smaller share of trade in GDP, e.g. the Baltic States at the level of 0,5 per cent. Thus, the room for negotiations is really nasty…

https://securityconference.org/assets/02_Dokumente/01_Publikationen/MunichSecurityBrief_EN.pdf 

The rule of law is definitely vital too: Laura Codruța Kövesi, the head of the new European Public Prosecutor’s Office, EPPO (the EU body created to crack down on fraud and other crimes related to the EU budget) correctly underlined the “more money, more flexibility and less rules means a higher risk to have new crimes”.

https://podcasts.apple.com/us/podcast/id1244862657?i=1000483821134

European citizens are looking for a “real decision” by the leaders during the summit even if the rile-of-law shall be softening to reach a deal.

The second issue, the recovery fund (initiated by Germany and France) with €750 billion would probably be quite close to a final approval. But, here there are two issues to resolve: a) the loans from the fund, and b) grants for states’ recoveries. Differences abound, e.g. so-called, “frugal four” (Austria, Sweden, Denmark and The Netherland) generally against “donations” to states which suffered most. The argument is that the countries’ damages have been the result of inefficient national policies… Thus, grants with a fixed repayment would be more adequate!

 Hence, the member states’ governments want to get away from some abstract terms such as “solidarity” or “responsibility” and put a new blood into nasty words.

Besides, as the Commission has warned recently, that the grants (as well as loans) would not be granted to the member states (and their companies) involved in tax fraud, evasion, avoidance or money-laundering schemes, etc. In particular, companies with links to jurisdictions on the EU's list of non-cooperative tax jurisdictions (e.g. if a company is resident for tax purposes in such a jurisdiction) should not be granted public support.

Reference: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1332

A uniting feature for both issues

The MFF budget and the recovery fund are closely inter-connected and depend on adequately implemented reforms in the member states. Therefore, in order to ensure recovery, it is important to ensure that all EU states can have adequate financial means. 

At the same time, a long-standing debate reflecting views on the future of the EU’s financial package in “green post-coronavirus recovery” has shown at least four main “unified ingredients”. 

The following measures could be vital for both the MFF and the recovery fund providing additional resources of about € 27-35 bn for the former (as part of a “new EU’s own resources”) and stimulating the implementation of the latter:

 - emission trade system, ETS with about € 10 bn addition to the MFF finances;

- carbon border adjustment mechanisms, CBA with € 5-14 bn;

- digital tax (France has already approved one) with € 1,3 bn; and

– big companies’ tax (for those with a turnover of over € 750 mln), with about € 10 bn. Suffice to say, that a “green share” of additional support (i.e. ETS and CBA) accounts for about € 15-24 of the total sum.  

The leaders have to remember that the EU and the states’ future is based on sustainability and digital transformation.

A swift political agreement on the next multiannual financial framework and on the recovery package, so-called “Next Generation EU” is needed. In this regard, the member states’ leaders have to focus on European longer-term challenges, such as the green growth and digital transitions. However, if the extraordinary summit fails to find common solutions for these two and some other issues, a second is planned for the end of July.