The EU’s long-term budget: financial and corporate implications for the states

The Commission’s rescue plan – the Next Generation EU- together with the multi-annual budget, increases the total investment into perspective socio-economic growth in the states for the next seven years to € 1.850 bn, almost double the amount of the previous period. The investments are aimed at: a) tackling the pandemic crises’ damages with a focus on “green, digital and resilient recovery”, and b) effective transition to sustainable growth in the member states. Besides, these measures are expected to affect businesses and streamline entrepreneurship environment.

  The severity of the pandemic crisis justifies extraordinary and ambitious common responses based on solidarity among the EU-27and, at the same time, creating huge investments for numerous reforms and actions. The EU member states supported generally “green and digital” dimensions in the “next generation” priorities and regarded them as the main driving elements in the countries’ modernisation efforts.  

  However, the discussions at the July-summit on the two vital financial plans (and their formal approval) have shown mounting differences of opinion among the 27 leaders on various issues, i.e. including an overall size of “next generation” financial facility, the balance between grants and loans, the allocation procedures, as well as changing sizes of the EU’s “own new resources” and possible rebates for the states. 

 

  Initial reaction to the Commission’s proposals for the next Multiannual Financial Framework (MFF) and the Next Generation EU plan has been mixed showing the need to tackle the following issues: i.e. a) adapting perspective national growth strategies with the “European political priorities”; b) clarifying the total Commission’s investment package for the states to see how the “recovery package” is linked to the MFF-2027, and c) explaining the “effect” of the MFF’s “new own resources” for the entrepreneurship in general and for sustainable growth in the member states, in particular.

  Looking into the final agreement, one can only express hopes that the compromises reached would not only show solidarity among the EU states in dealing with the urgent European issues but also specify the ways to speed-up the transition efforts in the states.  

 

Budget’s new “own resources”

  The initial Commission’s proposal revealed at the end of May 2020, called the Next Generation EU, amounted to €750 billion and was aimed at “targeted reinforcements” of the EU’s long-term budget for 2021-2027; with the new “recovery addition”, the financial support for the member states in combating post-pandemic damages and general growth support would bring the total “financial firepower” through the EU budget to €1.85 trillion.

  The “next generation” program intends to raise necessary money by temporarily lifting the own resources ceiling to 2.00% of the EU’s aggregate GDP, allowing the Commission to use its strong credit rating in the global financial markets to borrow about €750 billion for states’ recovery efforts. This additional funding will be channeled through numerous EU programs and be repaid over a long period of time, approximately between 2028- 2058.

More in: https://ec.europa.eu/info/live-work-travel-eu/health/coronavirus-response-0/recovery-plan-europe_en

 

  In order to make the whole financial package, i.e. the “recovery’s” €750 bn and the MFF budget with € 1,1bn, feasible for “channeling” these resources in a fair and shared way, the Commission proposed some amendments to the EU’s “own financial resources” during 2021-27 period.

  So-called “own revenue resources” in the EU budget traditionally included: a) customs duties, b) contributions from the states based on value added tax, and c) contributions from the states’ gross national income. However, already in May 2018, the Commission proposed to retain these sources of financing and simplify them; now the proposal becomes a reality.

  The Commission’s new system of the budget’s “own resources” is to be diversified as to the sources of revenues and additional financial revenues. Suggested additions to the EU “new own resources” would include four new “contributions”, mainly operating through the so-called European “green deal”:

On “green deal” see: https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en

 

1. Resources from the “emissions trading system”, ETS would also include emissions from maritime and aviation sectors; this “resource” would generate about €10 billion a year.

The ETS, in general, puts a limit on overall emissions from all “installations”: i.e. within this limit, companies can buy and sell emission allowances, i.e. trade emissions’ volumes. This “cap-and-trade” approach gives companies the flexibility to cut their emissions in the most cost-effective way: e.g. sell or pay for the pollution. The EU ETS covers approximately 11,000 power stations and manufacturing plants, including Iceland, Liechtenstein and Norway, as well as aviation activities in these countries.

Totally, around 45% of the EU greenhouse gas emissions are presently regulated by the ETS. Commission presented in July 2015 a draft to revise the ETS for its next phase (2021-2030), in line with the EU-2030 climate and energy policy framework. According to the draft, the ETS emissions will be reduced by 43% compared to 2005.

However, the ETS will heavily affect businesses: the latter must constantly monitor and report their ETS emissions for each calendar year and have these emission reports checked by an accredited verifier. They must surrender enough allowances to cover their total emissions by 30 April of the following year. These allowances are then cancelled so they cannot be used again. A business is penalized if it does not surrender enough allowances. It has to buy allowances to make up the shortfall; otherwise a business is “named and shamed” by having its name published, and must pay a fine for each excess tonne of greenhouse gas emitted. In 2013, the fine amounted to €100 per tonne of CO2 (or the equivalent amount of N2O or PFCs); the penalty rises annually in line with the European consumer price index.

More in: https://ec.europa.eu/clima/sites/clima/files/factsheet_ets_en.pdf

 

2. Carbon border adjustment mechanism, which would rise from €5 billion to €14 billion a year. European efforts towards being “climate-neutral” by 2050 are supposed to involve adequate actions from all countries around the world; otherwise the whole idea would hit the risks of “carbon leakage” and would need carbon border adjustments. This occurs when companies transfer production to countries that are less strict about pollution and emissions; in such circumstances global and European emissions would not be reduced.

The new mechanism would counteract this risk by putting a carbon price on imports of certain goods and commodities from outside the EU. There is already an international carbon market; besides, national or regional systems are already operating in China, South Korea, Canada, Japan, New Zealand, Switzerland, and the United States.

Source: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

Other references:  Communication on the European green deal;, Inception impact assessment for the carbon border adjustment mechanism, 4 March 2020

 

3. Tax on operations of companies that draw benefits in trade in goods and service from the EU single market; the taxation system would yield, depending on the system’s design, around €10 billion a year.

 

4. Digital tax on companies with a global annual turnover of above €750 million is expected to generate up to €1.3 billion per year. The initial proposal for a directive dates back to March 2013, but it was difficult to get a unanimous vote by all EU states in the Council. The problem is still two-fold: first, taxes shall be collected on gross remittances, thereby eliminating the need to calculate net profits. Second, those taxes would be withheld at sources, leaving the burden of collection and payment of taxes to foreigners.

In 2019, France approved a 3% tax on revenues generated by large digital companies in its territory, a move that was investigated as a potentially unfair trade practice by the U.S. government. The businesses are increasingly getting concentrated in the hands of a few tech giants that can easily shift income and taxes around the world. Therefore, national and local governments need to become more creative while ensuring fair and effective taxation and compliance with bilateral tax treaties.

Source: https://hbr.org/2019/07/the-problem-with-frances-plan-to-tax-digital-companies

 

In this way, the EU “own resources” in a new model would make about 27-35 bn a year of additional financing. The Commission intends to quickly amend the current multiannual financial framework 2014-2020 to make an additional €11.5 billion in funding available already by the end of 2020. However, these proposals for new contributions shall be first agreed upon and ratified by the EU member states.

Source: https://ec.europa.eu/info/sites/info/files/factsheet_3_04.06.pdf

 

  Unprecedented amount of financial resources from the EU budget, “own resources” and that of the EIB (as the Union’s “climate bank”) are regarded as an opportunity to ensure that public support would activate private funding to make the green and digital transition feasible. However, amidst the pandemic crisis and in aftermath, there is a serious risk that pressure to support existing sectors and practices will increase at the cost of efforts to combat the climate changes and environmental protection. In general, it would be a test for all the EU’s plans to align perspective new financing activities with the sustainability principles (UN Agenda-2030), the climate goals (Paris-2015) agreement and increased funding to support a just transition in the EU member states.

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