EU reconstruction fund: Finance ministers wrestle for EU revenue

Berlin The European finance ministers haven’t seen each other in person for a long time. Because of Corona, all meetings in the past few months have only been held virtually.

When the ministers were able to look each other in the face for the first time in Berlin, that alone lifted the mood. “It’s good to get together again,” said Federal Finance Minister Olaf Scholz (SPD), who led the meeting because of the German EU Council Presidency. “Finally real people,” said another minister.

In the few virtual meetings of the past few weeks, however, the EU has got more things going than in the many personal meetings before. The finance ministers have launched an EU development fund worth EUR 750 billion to combat the corona crisis. And for the first time the EU is allowed to take on large amounts of its own debt to finance it.

But now that the ministers are seeing each other again, the tough struggle is only beginning. Everything revolves around the question: What new revenue should the EU use to repay the debt?

Federal Finance Minister Scholz said after the meeting that the EU had been discussing its own revenues for decades and that the crisis was now making this big step possible. “The result will be that we will have to make a decision on own resources relatively soon.” That is a good sign for Europe.

But although the EU only needs a low double-digit billion amount of its own revenue to finance the construction fund, there are differences between the member states as to where the revenue should come from. “The debate about own funds was a bit more chaotic than Scholz portrays it,” says one who was at the meeting.

As is so often the case, there are disagreements about institutional responsibilities within Europe. But above all it is about how the negative consequences of possible new taxes and duties for the EU can be contained.

After the meeting, Scholz listed a whole range of possible income for the EU. For example, the proceeds from emissions trading could be used in particular for shipping and aviation, and it could also receive its own income from an EU digital tax or an EU financial transaction tax.

When looking for new financing options, all those “who benefit most from the EU internal market” should be consulted, according to a paper by the Federal Ministry of Finance. These mainly included large corporations and financial institutions.

But that is easier said than done. The financial transaction tax has been negotiated unsuccessfully within the EU for many years. Scholz too failed with a recent advance due to resistance from other member states, especially Austria.

Lots of open questions

The introduction of a CO2 border tax planned by the EU Commission for 2023 is an almost difficult matter. The border tax should apply to imports into the Union, the levy is based on the Co2 values ​​that arise in the production of the imported goods. The EU Commission wants to raise around five to 14 billion euros annually.

But there are many unanswered questions: How can the EU determine how much Co2 was used for the production of an imported product and how high the climate requirements were for it? And how can taxes be reconciled with the rules of the World Trade Organization?

Other countries could also see the introduction of an EU digital tax as protectionist. Actually, such a tax, which taxes digital business of larger companies worldwide, should be decided at international level within the framework of the industrialized countries organization OECD.

But the US recently put the talks on hold because it sees its internet giants at a disadvantage. Should the negotiations fail, the EU wants to introduce its own digital tax. But then she has to expect tough sanctions from the USA. Even France, when it introduced a corresponding tax, was covered with tariff threats from US President Donald Trump.

“I hope that everyone involved will come to the conclusion that a global trade war will not be brought under control because of a few billion euros in revenue from a digital tax,” says an EU diplomat.

Scholz, too, continues to be “confident” that a solution can be found at the international level with the involvement of the USA. There will soon be basic papers for both global minimum taxation and digital tax, which will then be discussed within the EU, the OECD and the G20. “We are not always allowed to just talk, things also have to be implemented,” warned Scholz.

Implementation problems

But that is precisely why the EU has often failed recently, unless a historical crisis brought the Union to the brink of collapse. Italy has been blocking the planned reform of the ESM euro rescue fund for over a year because the government fears that it will disadvantage its own public financing.

The creation of a so-called last security line (backstop) for the bank resolution mechanism is therefore also in the balance. The latter is the bloc’s rescue reserve to support banks in financial difficulties and is to be provided with funds amounting to around 55 billion euros.

Scholz tried to blur the impression that an agreement could be a long time coming. “I am confident that with the ESM reform things will turn out in the course of the year.”

While Italy is blocking the ESM reform, the newly formed group of the “thrifty four” from Austria, the Netherlands, Denmark and Sweden is resisting many other issues.

These countries fear that if the EU’s own income is too generous, transfers within Europe, such as are now available for a limited time during the crisis due to the construction fund, could become permanent.

At the meeting of finance ministers, the first differences between the thrifty four and the other finance ministers arose as to when the time has come to cut back on the expansive financial and monetary policy.

Most EU finance ministers do not see the time for this as yet. “It will take time and work to undo the damage that the crisis has caused,” said the new euro group leader Paschal Donohoe.

The President of the European Central Bank, Christine Lagarde, also emphasized that the aid would be necessary until the crisis was over.

The thrifty four, on the other hand, would rather return to normal financial and monetary policy sooner than late.

The EU finance ministers will therefore face some tough arguments in the coming months. But everyone agrees on at least one thing: Everyone hopes to be able to take part in these debates personally.

More: At the EU summit, new distribution criteria for the EU reconstruction fund were decided. A think tank has calculated that Germany in particular will benefit from this.

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