New EU debt? Conservative think-tank warns of NextGen ‘design flaws’

In the debate about a programme that could succeed the EU’s Recovery and Resilience Facility (RRF), a think tank close to the centre-right EPP has criticised “significant flaws” in the current scheme, including the lack of a plan for repaying the joint EU debt.

“NextGenerationEU has two significant design flaws,” Klaus Welle from the Wilfried Martens Centre for European Studies told Euractiv.

“The first one is that the search and finding of new EU own resources has not worked yet.”

At the height of the COVID crisis in 2020, EU leaders agreed on a €723 billion-worth fund – €338 billion in grants and €385 billion in loans – as the centrepiece of the NextGenerationEU joint borrowing scheme, to sustain the bloc’s economic recovery and direct EU funding to the hardest hit areas.

As the RRF will support EU-wide investments only until 2026, Economy Commissioner Paolo Gentiloni has recently called for the fund to become a “blueprint” for a permanent EU joint borrowing facility, but this idea is strictly opposed from the right side of the political spectrum as well as several member states.

As part of their discussion on how to finance NextGen disbursements, which are fully funded by debt issued by the European Commission on capital markets, EU institutions also agreed on establishing revenue streams from the EU budget.

In 2021, the Commission proposed that additional sources would come from tapping into 75% of the revenues produced by the bloc’s carbon border tax, known as CBAM, which will be phased in as of 2026, and 25% of its Emissions Trading System (ETS).

Additionally, some tax revenues from large corporations – meant to be reallocated at the level of the Organisation for Economic Cooperation and Development – should add to the finance avenues.

In June 2023, the EU executive further increased the proposed contribution to the budget from ETS revenues to 30%, alongside additional contributions from member states based on company profits.

However, such proposals have so far found no agreement among member states.

If there is no deal by 2026, the repayment of the NextGen EU debt would need to happen outside of the regular EU budget and could lead to cuts in other expenditure areas.

“Therefore, I believe that a mere repetition – thereby shifting debt from the national to the EU level without there being corresponding solid financing from [the EU’s ] own resources – in my view makes no sense,” Welle added.

The European Parliament’s Economy and Budget committees will hold a debate on Monday (22 April) evening, which will most likely focus on recently detected critical roadblocks for the RRF’s implementation.

‘No proper parliamentary scrutiny’

Welle also said the RRF lacks parliamentary oversight of how the money is spent, which he sees as the programme’s second design flaw.

“There is no proper parliamentary scrutiny at the European level. That means we are taking democratic steps backwards.”

“We cannot decide on massive additional debt without reasonable control at the European level [on] where the debt will ultimately end up, and without reasonable own resources,” he concluded.

His warning feeds into existing scepticism over the implementation of the RRF – with the president of the European Court of Auditors, Tony Murphy, warning that insufficient monitoring is poised to increase the likelihood of funds misuse and misappropriation.

Murphy’s warning came after arrests in Italy, Austria, Romania, and Slovakia over a €600 million alleged fraud scheme in Italy, which partly involved funds from the RRF.

Commission Vice President Valdis Dombrovskis, however, counter-argued earlier this month that “the very fact that [the case] has been uncovered and that the national authorities of Italy had been working closely together with the European Public Prosecutor’s Office shows that this system of controls is actually working”.

He emphasised that RRF funds would also only account for a “small fraction” of the overall €600 million affected.

EU ‘a giant sequoia with bonsai roots’  

The Martens Centre published its proposals for the next five-year legislative term on Monday (22 April).

Focusing on the green agenda set out by the outgoing Commission, the think tank called for broadening the definition of “sustainability” to account for aspects such as debt sustainability, defence investment, demographic changes, and geopolitical tensions.

While the paper acknowledged that “during the eurozone crisis, we learned that cutting expenditure on its own is not the answer, because the potential reduction in debt can be largely offset by a significant reduction in GDP as well,” it warned against the risks of excessive reliance on public funding for shoring up growth.

The think tank noted that the EU has, alongside other large economies such as the US and the UK, “entered a period of vulgar Keynesianism […], increasing the debt-to-GDP ratio in crisis times and in good times as well”.

“If this trend continues, it will not be very long before a debt crisis reoccurs and the independence of our political decision-making is threatened, together with the cohesion of the EU,” it warned.

For its publication, the think tank invited some economists and other experts to underscore its agenda.

“There is no need for a NextGenerationEU 2.0 or other common funds financed by EU debts on a regular basis,” wrote Jürgen Matthes of the German Economic Institute IW, which is close to the employers’ associations.

However, Alain Lamassoure, a former French minister for budget and EPP MEP, highlighted a problematic contrast he sees between the bloc’s big policy ambitions and its limited joint budget – comparing the EU to “a giant sequoia with bonsai roots.”  

“European decisions taken democratically must be funded democratically by European resources,” he wrote, proposing to create additional revenue streams for the EU budget, beyond the ETS, for instance, by creating “harmonised profit taxes that fully apply to multinational digital companies”.

[Edited by Anna Brunetti/Zoran Radosavljevic]

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