SUMMARY
The Next Generation EU Programme is designed as a one-off, temporary recovery instrument. Will more funds be needed after 2026 to finance the large investments in the digital and energy transition? In any case, this would always result in higher borrowing and thus higher contributions from the Member States.
Enrique Viguera
Few days ago, Paul Krugman, asked (“What’s the Matter With Europe?” NYT 30.01.24) why there are differences in growth between the US and Europe after the pandemic, after 2019. And he comes to the conclusion that the lower European growth rate has nothing to do with some of the causes that many Americans have thought they saw in the past: high taxes and generous social benefits, immigration, etc. The real reason is that, according to the American Nobel laureate in economics, Europe is more concerned with controlling inflation and spending than with actually promoting economic recovery.
It is true that controlling inflation has been and is, as in the US, a European priority. The ECB has been very effective, with rate hikes bringing inflation in the euro area down from no less than 10.6% in October 2022 to 2.8% now. The necessary rate hikes may have dampened the prospects for economic growth, but the ECB has also contributed to the expansion of spending in member states by purchasing a large part of their debt issuance, including that of the most indebted ones.
Furthermore, to boost investment in the EU, the largest spending programme in EU history, the “Next Generation EU”, has been implemented in 2020 in response to the economic crisis and endowed with €750 billion, at 2018 prices, similar to the American Inflation Reduction Act (IRA), which is one of the key historical milestones of the EU financial system, financed by Commission issues and guaranteed by the EU budget.
It is true that the EU intends to gradually reduce public debt and public deficits in the states after the adoption of the new fiscal rules, but their effect will not really be felt until the reformed Stability Pact is put back in place in 2025.
In his article, Krugman therefore seems to ignore the European reality of the last few years, where the previous trend of austerity seems to have been broken with greater monetary and fiscal flexibility.
The bad news is that, apart from the risk of not spending 100% of the Programme’s investments by its expiry date in 2026, the “Next Generation EU” is conceived as a one-off and therefore temporary recovery instrument.
What are the chances that the Next Generation will be extended in size or time? Although theoretically always possible, it is politically quite difficult because any extension or extension of the Programme or the creation of another similar instrument, whatever the formula used to finance it, would always necessarily result in greater Community indebtedness and, therefore, in greater contributions from the Member States to the Community budget, either directly or through new own resources.
Will more European funds be needed to finance the substantial investments that will still be required after 2026 to finance, among other things, the digital and energy transition?
The next Commission will have to present proposals for new own resources which, in principle, as currently envisaged – although discussion has not yet started in the Council – could amount to an increase of up to 20% of current revenues, which would theoretically be sufficient to finance the expenditure of the next Multiannual Financial Framework, starting in 2029, including the cost of Commission issues to finance the Next Generation Funds (about €15 billion per year until 2058). The resulting slack, if any, should be used to finance an eventual enlargement of the EU (to some Western Balkan countries, but not enough for Turkey or Ukraine) or, failing that, as some member states want, to decrease direct contributions to the EU budget – the so-called GNP resource (GNI), currently by far the most important own resource – which represents around 70% of the total at the moment.
But is it realistic to expect a further increase in extraordinary expenditure in the EU when new own resources still have to be approved in order to cover the Commission’s emissions to finance the Next Generation? Of course, if there is a real political will to do so, it is always possible to raise more revenue (e.g. by simply increasing the percentages currently being considered for new own resources). Unfortunately, however, if the idea of a new “Next Generation” type extraordinary expenditure programme does not seem realistic, neither does a disproportionate increase in Community revenue.
It should not be forgotten that the procedure for adopting the Own Resources Decision is the same as for amending the Treaties: unanimity in the Council and ratification by all the national parliaments. And 2028 would be the deadline for its approval in view of the next multiannual financial framework. It will be an extremely difficult discussion where the room for manoeuvre is very narrow.
Moreover, ‘the frugal’ will be there, not only to oppose a new ‘Next Generation’ or even its extension beyond 2026, or to object to any increase in the EU budget in the negotiations on the next Multiannual Financial Framework – with which the ‘paymasters’ would be those who benefit most from the EU’s current major spending policies, Spain among them – but to demand the continuation of the ‘cheques’ that are being paid to them in compensation for their excessive contribution to the budget – another of the UK’s nefarious legacies to the EU that will be very difficult to get rid of.
So, although the past few years have been an exception to the previous policy of austerity, it remains to be seen how European leaders will approach the future of EU revenue and expenditure in the future. Much will depend on the economic situation. But if it does not seem realistic to expect large amounts of additional European funds, neither extraordinary nor ordinary, we will have to see how flexibly the new fiscal rules are applied, especially when it comes to deducting from the deficit and debt some of the national investments necessary to ensure the digital and climate transition, while preserving the social pillar that characterises us. Because without many more European funds and without flexibility in the application of the new fiscal rules, we will return to the same as before 2019….. and Krugman would end up being right.
ENRIQUE VIGUERA
Ambassador of Spain
Born on 6 April 1953, Enrique Viguera holds a degree in Law from the University of Seville and entered the diplomatic service in 1982. He was posted to Ethiopia and Canada and was Deputy Director General for Sub-Saharan Africa, but much of his career has been spent in posts related to the European Union. He was posted as Counsellor in the Permanent Representation of Spain in Brussels, was Deputy Director General of General Affairs for the EU and, later, between 2004 and 2006, Director General of Coordination of General and Technical Affairs of the EU and Director General of Integration and Coordination of General and Economic Affairs of the EU.
He has also been Spanish Ambassador to Sweden (2006-2010), to Australia (2011-2015) and to Greece (2017-2021), as well as Ambassador-at-Large for Energy Affairs. Between 2015 and 2017 he was Director of the Diplomatic School and, in February 2023, he was promoted to the professional category of Ambassador.
