Rountable 2: European Recovery

The topic

Common debt

The first of the two main topic areas was that of the Common Debt. The focus of attention was on the fact the European response to the crisis (the so-called “Recovery plan”) and on the revolutionary instruments designed to achieve them.

The Recovery plan is a collection of different programs, the most important of which is Next Generation EU, worth €750 billions, aimed at helping repair the economic and social damage brought about by the pandemic. Other notable programs include: measures establishing a safety net for for workers, business and Member States, worth €540 billion; the European Central Bank’s new asset purchases program (Pandemic Emergency Purchase Program), worth €1850 billion and designed as a lifeline for MS’s public debt; and the new EU’s 7-year budget plan, also called Multiannual Financial Framework 2021-2017, worth €1074.3 billion.

Source: EU expenditure 2021-2027 by the European Commission is licensed under CC BY 4.0

Some of the measures listed above, such as the Next Generation EU and the SURE programs, will be financed by raising common European debt on financial markets, the aforementioned revolutionary instrument. This has been made possible by overcoming, in the spirit of solidarity, the “no-bailout” clause and the requirement for the EU budget to be balanced at all times, enshrined in the Treaties.

In practice, the European Commission has been given authority to issue bonds backed by the European annual budget. Some of the proceeds from these debt issuances will be spent by the EU directly, but most will be directed to Member States, either in the form of loans or in the form of grants, with advantages in terms of low interest rates and fiscal solidarity, respectively.

We encouraged participants to think long-term and formulate opinions on whether the EU should be allowed to finance expenditure through common debt issuance also in the future and, if so, under what conditions. Additionally, we exhorted them to formulate proposals concerning what expenditures the EU should finance with the proceeds and if common debt can play a role in strengthening solidarity among Member States.

Own resources

The second topic area was that of the EU’s fiscal capacity and own resources. The premise is that the amount borrowed will sooner or later have to be paid back to investors. Currently, the EU budget is financed through four main sources of income, also known as “own resources”: custom duties on imports; a share of each MS’s harmonized VAT base; the newly-introduced plastic own resource, a national contribution based on the per capita amount of non-recycled plastic waste; and a direct contribution made by each Member State in relation to their GNI, in an amount that is necessary to cover planned expenditures not already financed by the other own resources.

Source: based on Commission’s estimates from COM (2018) 325.

The fact that the majority of the EU budget funding is made of direct contributions from the Member States poses a political issue, as this implies that the EU has a very limited autonomous fiscal capacity, which makes it unable to finance itself for the majority of its needs and bound to receive resources directly from the Member States.

Therefore, the Commission has set a timeline by which it will propose new own resources that will, at the same time, reduce the relative weight of the GNI-based resource, and pursue some policy objectives, such as climate neutrality and social justice. In particular, the most notable will-be proposals are: a financial transaction tax; a tax on large companies’ profits and harmonization of each MS’s tax base; a digital levy; the Carbon Border Adjustment Mechanism, a tariff on goods produced in countries with less stringent environmental regulations; and the attribution of a share of the revenues of the EU emissions trading system (ETS), the EU “carbon emissions market”, to the EU budget.

We encouraged participants to express views on the Commission’s move to achieve higher fiscal capacity in the form of autonomous revenue raisings and to reflect on how these might impact the balance of power between Member States and the Commission itself. Additionally, participants were urged to evaluate the new own resources the Commission plans to introduce and the link to policy objectives.

Legitimacy issues

Finally, we thought it was very important that the participants also kept in mind the legitimacy issues that could rise when discussing these topics.

Related specifically to common debt and own resources, a first problem that emerged was the transfer of the power to tax from MS to the Union. The German Federal Constitutional Court (FCC), for example, has frequently insisted that German taxpayers’ money cannot be raised and spent by third parties beyond the control of German parliaments, with the classic principle “no taxation without representation”.

Other legitimacy debates are those related to the ECB’s policies, as these are accused of being a “blatant case of government financing”, which is prohibited by the Treaties. Another issue concerns the levels of solidarity and integration the Member States want to achieve. In this framework, we place the dispute around the ESM, which was seen by many countries as a subtle way to force them to adopt austerity measures, and the ever-present clash between so-called Frugal States and Southern MS, with the former advocating for stricter fiscal rules.

Lastly, the approval of the EU budget had another obstacle: the battle taken on by the Parliament to condition the disbursement of funding to MS on their compliance with the Rule of Law has been met with strong opposition from Poland and Hungary, who threatened to use their veto power.

We encouraged participants to think about these issues when discussing the first two topics, challenging them to face the complexity of the situation.

The Roundtable’s work

The participants started not without some initial shyness. After a brief introduction and a recap of the guidelines, we let them discuss freely for most of the afternoon. This brainstorming moment was important to warm up and set the tone for the rest of the debate. They started to know each other and we divided them into the two working groups in which they worked for the whole time. It was a pleasure to see how focused and dedicated they were, and so we decided to let them work in autonomy in the breakout rooms on Friday morning.

The proposals they had were commonly agreed also with the other working group, during the debriefing moments we planned. In the last afternoon, us chairs had the job of guiding them towards the final version of the document. Iacopo Andreone, a member of European Generation, was chosen by the group to present their work during the Plenary Assembly on the last day.

The final proposal

Our Roundtable’s final proposal has been structured as follows.

Common debt

Recognizing the necessity of European integration and the importance of common debt for robust economic recovery and as an insurance mechanism against national defaults, the participants strongly advocate in favor of institutionalizing common debt as a permanent tool. In particular, decisions concerning redistribution among MS should be based on the needs of the EU as a whole, without neglecting the values of solidarity and proportionality.

Decision-making and the division of powers

As regards the balance of powers between the Commission and the Parliament, our Roundtable believes that it should be skewed towards the Commission, as it expresses the interests of the Union rather than those of individual MS, and for reasons related to the required flexibility in managing common debt issuance.

Hence, participants suggest that the Commission should be the one to make the initial proposal on how to constitute the common debt, including amounts, distribution rules and timeline, general guidelines on how to spend the funds and requirements for projects to be funded with this money, a time schedule for issuance and repayment of debt, and proposals on new sources of funding to match the increased debt spending.

The Commission’s proposal should be then sent to the Council, who either approves it or send it back with suggestions on how to prove it.

Finally, to ensure stronger democratic legitimacy of decisions by European institutions, the participants felt it was appropriate to include the Parliament in the process of definition of conditionalities for national governments to access the funds.

Own resources

As far as proposals on new or existing own resources, participants at the Roundtable had some highly innovative ideas.

The first idea is derived from the fact that a large base of unpaid taxes exists in many MS, and that a measurable portion of them will be paid in the medium term. The Roundtable’s recommendation is that MS transfer their unpaid tax credits to the EU in exchange for their discounted cash value; through some financial manipulation these credits would then be resold on the market by the EU at a premium, which would constitute a new own resource for the Union.

The second proposal concerns Sovereign Direct Investments. According to the Roundtable, certain assets yielding stable income, such as terrains used for agriculture, should be “sovereignised” and offered in concession based on meritocratic criteria, aligned to the EU’s sustainability objectives. Moreover, participants recommend that the EU enter in sovereign-private partnerships to fund initiatives in the construction of infrastructures and renewable energy sources, both within the EU and outside of it.

Finally, a proposal related to the Carbon Border Adjustment mechanism that the Commission plans to introduce in the near future. The Roundtable suggests a gradual implementation of the measure, starting from finished goods and moving to semi-finished products, so as to avoid abrupt disruptions to the EU’s value chain. Then, participants suggest that the tariff be null for raw goods and lower for necessity goods, as price increases for these goods would disproportionately hurt manufacturing companies in the former case and disadvantaged citizens in the latter. Additionally, the recommendation is to exempt the least developed countries from this pricing adjustment, to avoid unnecessary burdens on their economies.

During the Plenary Assembly, we discovered that another Roundtable (EU: A Global Player) had also worked on a proposal concerning the Carbon Border Adjustment mechanism. Therefore, members of our two Roundtables discussed and an agreement was reached on merging the two proposals together, since they actually presented some elements of complementarity.

Chairs’ comments

We are very proud of the proposals that came out of our roundtables. The participants have worked well together, and we created a fun and friendly environment. Our table was not the most crowded, and we had some resignations. Nonetheless, the discussions were of high level, and we hardly had any comment during the Plenary Assembly. We even coined a new word, “sovereignise” (chapeau if you spotted it in this article)!