View from Brussels: Virus warchest unveiled to help economy recover

The European Union finally delivered a virus recovery programme on Wednesday (27 May) that is on track to be worth more than €1.5 trillion over the next seven years. Brussels hopes to bet big on research and innovation to stimulate the economy.

Every one of the EU’s 27 members - as well as the United Kingdom - will see a dip in GDP this year due to the stagnating impact of the coronavirus outbreak. In an attempt to combat this and launch a recovery, the bloc’s executive branch has unveiled a stimulus package.

For the first time in history, the European Commission wants to use its unblemished financial record to borrow big on the capital markets - up to €750 billion - that would then be distributed to governments, depending on need, in the form of grants and loans.

National leaders still have to sign off on the plan, but the idea as it stands is to offer countries money to invest in transport, communication networks, renewable energy, aerospace and many more sectors.

“The recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: the European Green Deal and digitialisation,” said Ursula von der Leyen, Commission President.

As part of its proposal, the EU would pledge to repay the €750bn by 2058 at the latest and has suggested a number of new innovations to prevent governments from taking on new debt.

The plan would be to rely on so-called own-resources, which could include a digital tax on Big Data companies; a plastic tax, and new revenues from the EU’s carbon market, which would be extended to include ships and aviation.

Own-resources are a tricky subject in Brussels: profits from the carbon market flow directly into national coffers, while the notion of EU officials collecting tax - traditionally a taboo subject - is already giving diplomats sleepless nights.

The Commission insists that the unprecedented nature of the virus means that the way things are done needs to change in order to keep pace. To sweeten the deal, the new measures would cover all the debt repayments, according to its own number-crunching calculations.

In addition to its recovery fund - already given a typical Brussels-jargon title, ‘Next Generation EU’ - the Commission also had a fresh stab at proposing an overall budget for the next seven years, which brings the total warchest to €1.85tn.

The numbers needed a great deal of massaging, as EU countries have failed to reach an agreement on a budget over the last few months. The majority want a bigger money-pot, while a minority want a stripped-down ledger. Unanimous approval is needed.

This time around, the Commission has tried to appeal to everyone’s spending desires by pumping more money into research and green projects, in order to appeal to the climate-minded financial hawks.

Horizon Europe, the EU’s research and innovation programme, is set to increase by €13bn to just under €95bn. Part of that money will come from the recovery fund’s mixture of loans and grants.

The UK’s future involvement in Horizon is still unclear. Innovation Commission Mariya Gabriel recently said that there "should be no cherry-picking", adding that "I don’t want research and innovation, where we have a strong cooperation already established, which could be used to weaken other elements of UK-EU relations."

Environmental groups and lower income countries in Central and Eastern Europe were also pleased to see the bloc’s Just Transition Fund increase from €7.5bn to €40bn. The fund is meant to help the likes of Poland and Romania ditch coal and invest in cleaner energy sources.

Other areas of the EU budget suffered cuts.

Military spending will drop from €13bn to €8bn, while space policies also haemorrhaged nearly €3bn. The latter cut was particularly ironic given that ‘Next Generation EU’ immediately conjures up images of Captain Jean-Luc Picard and the Starship Enterprise from Star Trek.

The EU wants a deal on the budget signed and sealed in time for it to come into force at the beginning of 2021, just as the UK is set to sever most of its remaining ties with Brussels, given the lack of movement in the latest rounds of Brexit talks.

Plenty of negotiating - probably by Zoom or Skype - is still left to be done.

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