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View from Brussels: How the EU’s virus fund affects the UK

The EU’s €750bn coronavirus recovery plan is aimed at helping battered economies pull through the crisis. This will affect the UK, despite Brexit.

Every one of the EU’s now-27 members is due to see a dip in GDP this year because of the Covid-19’s huge impact on productivity. That is why the bloc has scrambled to chart a course out of the pandemic-induced slump.

In addition to a new budget worth more than €1tn over the next seven years, a €750bn recovery fund – made up of grants and loans – will be deployed to try and shore up the worst-hit economies and sectors.

The bloc’s executive branch, the Commission, has identified which countries will be able to tap into the lion’s share of the war chest, as well as the policy areas that will have the biggest funding gap.

Although the UK ceased to be an EU member earlier this year and, as such, will not be entitled to a slice of the fund, Britain is still set to feel the impact of the extra spending, either directly or indirectly.

The main knock-on will be when it comes to repaying the €750bn, which the Commission’s bean-counters insist could be covered by a new raft of so-called ‘own resources’. They would include new or existing taxes and levies, the revenues of which would be funnelled directly or partly into the EU’s own coffers, instead of into government balance sheets. Most of them are technology-related.

For example, profits derived from the bloc’s emissions trading system (ETS) currently bypass the EU’s budget completely. The Commission reckons that it could harness a €10bn bump for its repayment plan if the market was expanded to fully include shipping and aviation.

The UK announced in early June that a domestic ETS is in the works, but full details have yet to be ironed out and the government is still coy on whether it would be linked to the EU market, only saying it would happen “if it suits both sides’ interests”.

The inclusion of shipping in the equation, which members of the European Parliament are trying to get done as quickly as possible, complicates the issue, given the UK’s geographical proximity and its location on the other side of the globe’s busiest shipping channel.

How to actually fold the sector into emissions trading is still very much an open question. Some experts advocate an ‘everything in, everything out’ approach, where all vessels would be levied, while more conservative voices want charges linked to which flag ships fly or just a fuel tax.

Climate analysts have warned that a mismanaged expansion of the ETS could see the UK emerge as a maritime haven for companies that do not want to pay to pollute and the issue could yet be used as a trump card in the deadlocked Brexit talks.

Another ‘own resource’ is the idea of a carbon border tax, which would be deployed on imported products manufactured outside of the EU that do not adhere to strict environmental criteria, such as how much clean energy was used to build or make them.

MEPs have threatened to use the tax against the UK if a gulf between their green ambitions opens up. The prospect of linking their two carbon markets mitigates that risk but EU officials are already worried about the possibility of a ‘climate trade war’ if relations deteriorate.

When E&T went to print, both the EU and UK’s chief negotiators had warned that little progress had been made during the latest round of talks. A final deadline in December is swiftly approaching, after which the two sides’ commercial relationship would revert to World Trade Organisation terms without a deal.

The other ‘own resource’ that Brussels is thinking of tapping into could well be the most controversial and most difficult to roll out: a digital tax targeted at large multi­nationals with greater than €750 million in annual turnover.

OECD talks are still ongoing on a global solution but the EU is “ready to go it alone” if no agreement is reached. As the UK started levying a 2 per cent digital services tax in May, Brussels and London are largely singing from the same hymn sheet, but the scope of the EU plan is still an open question.

Essentially, if the Commission’s ideas on how to pay for the recovery fund are given the go-ahead, the UK could end up paying out in whole new ways to maintain its cross-Channel business ties.

 

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