EU leaders last July agreed on issuing hundreds of billions in joint debt and conveniently avoided the discussion on how that eye-watering figure would be repaid. As countries submit their national spending plans to Brussels ahead of a deadline on Friday — and urge quick approval to get the funds flowing — repayment isn’t on EU capitals’ minds.
But that’s about to end, as the European Commission readies a proposal to raise a host of new levies at the EU level to repay the hundreds of billions over the next three decades. The size of the EU recovery package was agreed at €750 billion in 2018 prices in budget negotiations; that’s about €800 billion in current prices.
Yet coming to an agreement on complex new taxes is going to be anything but easy, and it will entail years-long negotiations both at the EU and international levels.
“All member states have different views, different approaches,” acknowledged EU Budget Commissioner Johannes Hahn. “And that’s why the proposal [for new taxes] needs to be a balanced one which finally can be accepted by all member states.”
Should the push for new levies fail to gather consensus, the fallback options — to repay grants over the years through increased payouts to the EU budget, or alternatively, through budget cuts — are also highly unpalatable to many countries.
While the national leaders last summer called on the Commission to propose new revenue sources as a way to repay the debt, they won’t be eagerly handing more powers to Brussels.
“Politically I’m quite skeptical that there will be a lot of appetite on the side of member states to give significant tax resources to the EU level,” said Guntram Wolff, director of think tank Bruegel.
A taxing job
The Commission has said its preferred option to repay more than €400 billion in grants plus interest costs is to collect new taxes feeding into the EU’s budget, known as “own resources.” The other portion of the recovery fund, up to €386 billion in loans, should be repaid by EU countries.
“Our goal is to make already this year a proposal in the magnitude necessary, around €15 billion a year,” Commissioner Hahn said last week. That amount, the Commission estimates, should be sufficient to repay the borrowed funds by 2058.
The Commission is working on a proposal for three new levies, which it plans to unveil by the end of June. The proposal will likely include an extension of the bloc’s carbon-trading scheme, a carbon border adjustment mechanism, and a digital tax.
But each of these comes with potential pitfalls.
The proposed extension of the bloc’s cap-and-trade emissions trading system to the buildings and transport sectors is estimated to bring in about €10 billion a year, according to the Commission. But it is already facing resistance from a number of countries, ranging from Poland to Portugal, amid worries it will increase costs for industry and households. This is, however, the likeliest one to go ahead in some form.
Plans for an EU-wide tax targeting digital companies, expected to generate €1.5 billion a year, were called into question, as the U.S. earlier this month counter-pitched a global levy on the world’s largest companies. Brussels doesn’t want to give up, but its plan to nevertheless introduce a “soft” digital levy may not go down well in Washington and export-mindful EU capitals, who fear a parallel scheme would stoke the ire of key trading partners.
Finally, a plan to tax certain polluting imports, known as a carbon border adjustment mechanism, could bring in potential revenue of €5 billion to €14 billion a year, depending on the design of the levy. But the idea has so far received only limited buy-in within the EU, and backlash from abroad — and even the Commission seems unwilling to use it, rather than leveraging it as a threat to coax other large polluters into higher climate pledges.
If no agreement can be found among EU countries on these three options, the Commission could present a proposal for other new levies in 2024, Hahn said. Last summer, the Commission floated a number of ideas, including a proposal for a tax on large companies that “draw huge benefits from the EU’s single market,” but which it was at pains to explain.
“I would not exclude that in case we would not end up with sufficient amount of money, we could propose one or the other,” Hahn said.
The EU is also adamant that any new levy should remain in the EU’s budget, even after the recovery fund — which has been described as a one-off instrument — is repaid. “It would be desirable in any event if these new own resources would remain in place,” said an EU official.
There’s resistance among EU countries to letting the Commission raise its own taxes, as it would mean giving the EU executive a further attribute of a full-blown government: a treasury. That, observers say, would be a further step toward fiscal integration, which many countries aren’t keen to take lightly.
“Symbolically, and for the development of fiscal persona of the EU, the whole discussion of new own resources is very important,” said Lucas Guttenberg, deputy director of Jacques Delors Centre, a think tank. “But the real fight will be on the question of how the EU expenditure side of the budget will develop as of 2028,” when the current budget period ends, he said.
The EU’s budget is agreed every seven years by unanimity through years-long negotiations. The vast majority of revenues come from contributions from EU countries, plus some custom revenues and the value-added tax.
If no new source of income can be agreed on, the alternatives to repay the recovery fund are increased contributions by EU countries to future EU budgets, or decreased EU expenditure. Both of those options present their own share of problems. Net contributors to the EU budget, such as Germany, the Netherlands and Sweden, would be reluctant to cough up more money. On the other hand, net beneficiaries of the EU’s funding programs, such as Hungary and Poland, are likely to resist any cuts.
Before the current budget period ends, the 27 EU leaders would need to negotiate a new seven-year budget, including how to service the debt incurred by the recovery fund. “From 2028, the debt costs are driving a wedge into the budget. It changes the calculation because it will mean that more countries will have to become net contributors,” said Guttenberg.
Avoiding talk of repayment during already difficult negotiations on how the money should be spent and distributed was possibly a necessary move at the time, but the bill is large, and someone eventually has to pay up.
Or perhaps not — if countries agree on permanent EU-wide debt. That’s been a taboo subject, but recent calls, most notably by Italian Prime Minister Mario Draghi, for an EU safe asset have given new impetus to the debate. And even if the EU’s recovery fund has been explicitly construed as a one-off instrument, it’s widely considered as a test case for further fiscal integration.
“It’s an option which is explicitly excluded now, but of course that’s also a theoretical possibility,” said Guttenberg.