At the special meeting of the European Council of July 17-21, 2020, the heads of state and governments of the European Union (EU) agreed in principle for all 27 member states on the "Next Generation EU" (NGEU) recovery package and the EU's Multiannual Financial Framework (MFF), which sets out the EU's revenues and expenditures for the years 2021 – 2027. The European Parliament and all the national parliaments adopted the bills on Dec. 17, 2020.

In the Official Journal of the European Union, L 433 I, Legislation, Volume 63, of 22 December 2020 you will find “the international Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission:

  • on budgetary discipline;
  • on cooperation in budgetary matters;
  • on sound financial management;
  • on new own resources;
  • including roadmap towards;
  • the introduction of new own resources.

This is the legal background and a general regime of conditionality for the protection of the Union budget. This Regulation establishes the rules necessary for the protection of the Union budget in the case of breaches of the principles of the rule of law in the Member States. This Regulation shall enter into force on the third day following that of its publication in the Official Journal of the European Union. It shall apply from 1 January 2021 (ibid).

Next Generation EU

To this end, the MFF will be linked to the reconstruction pact. The accordance of the timing of the two decisions is a coincidence in that the old multi-annual financial framework had just expired in 2020 and the Corona crisis changed the world at the beginning of the same year. However, these decisions were intended not only to strengthen the traditional tasks of the EU after the Corona pandemic but at the same time to embark on new ways of financing the desirable ecological and digital transformation in the member states.

The EU budget 2021 to 2027 is endowed and continued with a volume of 1,074 billion euros. In addition to the traditional 2021-2027 multi-annual budget with its commitments there is the Corona Reconstruction Fund ("Next Generation EU") with a total volume of €750 billion (table 1).
China

The NGEU serves primarily to finance the damage caused by the Covid-19 pandemic. These funds are to be used for new tasks of the EU, especially in these fields of action: climate policy (the “Green Deal”), public security, asylum, medical care and the digital revolution. The reconstruction assistance is intended to repair the damage caused by the Corona crisis.

To this end, the EU Commission is authorized for the first time in history to raise funds on the capital and money markets on behalf of the EU. The 750 billion euros will be given in credits (360 Euro) and grants (table 1). The credit has to be payback by the end of 2058. Whether the means will come from increased membership dues (the contribution paid by the member states), a cut in future public spending (expenditures), or from new (quasi-tax) revenue sources is still on the agenda for the near future, i.e. 2021/2022. Of course, a mixture of these different approaches is also conceivable and likely.

More financial autonomy for the EU Commission

The new revenue autonomy does not include so far tax sovereignty. Until now, a plastic tax has been proposed, depending on the amount of non-recycled plastic waste. In addition the experts in the EU Commission are discussing a CO2 boundary equalisation mechanism (see Kafsack 2020), a digital levy (from the beginning of 2023), a revision of the Emissions Trading System (ETS) and possibly its extension to air and sea transport with additional revenue for the EU budget, and a financial transaction tax whose usefulness can be discussed (Advisory Board to the German Federal Ministry of Finance, 2020).

In view of this background it cannot be ruled out that, perhaps only temporarily, partial tax sovereignty will come into play to finance the EU's debts. However, a European tax would only be possible by amending the European treaties. The proposals under discussion may perhaps remain within the framework of the own resources system, so far the major way of financing the EU on the basis of the GNP of the member states. Thus, an own tax sovereignty of the EU is not connected with it.

The reconstruction plans are to be reviewed in 2022 and adjusted if necessary. The grants are to be disbursed only if the targets and milestones are achieved. Repayment of the debt is to begin as early as 2021.

The use of funds

The EU commission uses the borrowed funds for expenditures foreseen under the "New Generation EU" reconstruction assistance. At the same time, this marks the beginning of the use of the grants given to the member countries. Among other things, this raises the questions of what for, for how long and under what conditions? Or even more concretely for the use of funds including grants and credits. The following questions arise (Kafsack, Mussler, 2020):

  • How will aid from the reconstruction plan be distributed?
  • What is the money from the reconstruction plan used for?
  • How much money do states get?
  • Are there conditions attached to the allocation of the money? How "green" is the fund?
  • To what extent can other member states control the recipient countries' reform plans?
  • Should the funds be conditional on compliance with EU rule of law standards?
  • Should the EU get new direct sources of revenue?
  • What about national contributions? Will there continue to be rebates?
  • Will the 2021 to 2027 budget framework be modernized as originally envisaged?

The so-called "European Semester" could be used to examine whether the funds are spent wisely (Kafsack, Mussler, 2020 as well as Mussler, 2020). The semester approach was introduced in 2011 with the aim of not only issuing "country-specific recommendations" but also monitoring their compliance, e.g. by the European Court of Auditors. Thus more conditionality is demanded. Regardless of the specific answers to these many questions, the overarching problem is the final responsibility for these decisions, their implementation and monitoring (Wolff, 2020).

In the allocation of resources, outcome or program quality is often pitted against procedural or administrative efficiency. Procedural efficiency deserves special attention within the many institutions of the EU. Of course, the best possible outcome would be simultaneously a high program efficiency and very good management or administrative efficiency (Zimmermann, Henke, Broer, 2021, chapter 6). This requires ongoing monitoring and evaluation by the European Court of Auditors of the different allocation mechanisms used by the member countries. Given the size of the sums involved, it is a matter of providing the necessary transparency and ongoing scrutiny of how funds are raised on the capital markets and how they are used for the various tasks and expenditures by different institutions at the European and national levels. In this context the principle of subsidiarity should not be disregarded (Henke 2006).

Summary

The Covid-19-pandemic was the starting point for the analysis of the conventional EU-Budget and the supplementary reconstruction Pact (Next Generation EU). The financial autonomy for the EU Commission with debt and one day in the future perhaps taxation power are new steps in the direction of a European fiscal union (Broer, Henke, Zimmermann (2020).

It examines the extent to which more power for the EU can become a reality in various fields of action such as climate policy, public security, asylum, migration and medicine (European public goods). After all, the reconstruction program amounts to € 750 billion. It is also necessary to examine for whom, for how long and under what conditions these funds may be used. Since the EU's credits do not have to be repaid until 2058, it is necessary to clarify, whether - in order to balance the long-term EU budgets - the necessary debt service payments will lead to spending cuts, more and more public debt, or perhaps even a tax for the EU.

Whether the fight of the corona crisis and the supplementary reconstruction Pact (next generation EU) will go together with strengthening the European Parliament is an important additional open question. History will finally show us whether “The international Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission” will fulfill our expectations.

(Article by Klaus-Dirk Henke, Technische Universität Berlin and Michael Broer, Ostfalia – University of Applied Sciences Wolfsburg, Professor in Economics, Research Interests: Taxation, Fiscal Federalism).

References

Advisory Board to the Federal Ministry of Finance (2020), Zur Sinnhaftigkeit einer Finanztransaktionsteuer (The usefulness of the financial transaction tax), Berlin 01/2020.
Broer, M. (2013) Der europäische Haushalt bis 2020: Anspruch und Wirklichkeit (The European budget by 2020: aspiration and reality), in Wirtschaftsdienst, 93° volume, S. 39-45.
Broer, M., Henke, K.-D., Zimmermann, H.,(2021), Neue Aufgaben und neue Finanzierungswege der EU in der Coronakrise, (New tasks and new ways of financing the EU corona crisis), to be published in WiSt – Wirtschaftswissenschaftliches Studium, in print.
Fuest, C. and Jean Pisani-Ferry (2019), Über die Zukunft Europas: Es ist an der Zeit, mehrveuropäische öffentliche Güter bereitzustellen (On the future of Europe: the time has come to provide more European public goods), in Ifo STANDPUNKTE 2019, p. 28ff.
Henke, K.-D. (2020), Das EU-Budget in der Corona-Krise ( The EU budget in the Corona crisis), Wirtschaftsdienst, 100 Jg., p. 407ff.
Henke, K.-D., Ettelt, S., (2020), Coping with Covid-19, Health care capacity in Germany, Wall Street International Magazine, 18.4.2020).
Henke, K.-D., (2006), Soft co-ordination and hard rules in European economic policy. Managing Subsidiarity from an economic point of view, in: Tomann, H. (ed.), The role of European institutions in economic policy, Europäische Schriften zu Staat und Wirtschaft, vol. 20, Baden-Baden, pp. 59-76.
Kafsack, H. (2020), Die verflixte Sache mit der CO2-Grenzsteuer, (The fizzy thing about the CO2 border tax) in: Frankfurter Allgemeine Zeitung, 28.07.2020, p. 17.
Müller-Jung, J. (2021), Zufall und Notwendigkeit (Chance and necessity), in: Frankfurter Allgemeine Zeitung, 13.01.2021, p. N 1.
Mussler, W. (2021), Europas Schuldenillusion, (Europe's debt illusion), in: Frankfurter Allgemeine Zeitung, 13.01.2021, p. 10.
Mussler, W (2020), Die EU-Staaten scheren sich kaum um Brüssel, EU states hardly give a damn about Brussels, in: Frankfurter Allgemeine Zeitung, 04.09.2020, p. 16.
Neheider, S. (2010), Die Kompensationsfunktion der EU-Finanzen (The compensation function of EU finances), Schriften zu Staat und Wirtschaft, Baden- Baden.
Müller, H. und W. Richter (2017), Europa am Scheideweg – ein Vorschlag zur politischen Weiterentwicklung, Wirtschaftsdienst (Europe at a crossroads - a proposal for political development), 97(7), 484-489.
Official Journal of the European Union, L433 I, Legislation, Volume 63, 22 December 2020.
Wolff, G. B. (2020), EU-Fonds: Es fehlt an Kontrolle und Rechenschaftspflicht, (There is a lack of control and accountability) in: Frankfurter Allgemeine Zeitung, 23.09.2020, p. 7.
Zimmermann, H., Henke, K.-D., Broer, M. (2021), Finanzwissenschaft - Eine Einführung in die Staatsfinanzen, 13th edition, (Public Finance – An introduction to state finances).
Zimmermann, H. (2015), The deep roots of the government debt crisis, (Die tiefen Wurzeln der Staatsschuldenkrise, in: The Journal of Financial perspectives, Vol. 3, pp 41-58.