More fiscal transfers, inflation and a depreciating euro haunt the EU

By
BrusselsReport.eu
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By Herman Matthijs (Professor in public finance at the Universities of Ghent and Brussels and President of Belgium’s High Council of Finance)

To cope with the pandemic, the EU agreed a major investment programme, the RRF (Recovery and Resilience Facility), also known as the EU recovery fund. These are borrowed funds which EU Member States receive on the basis of both their GDP and their level of prosperity. It is important to realise that this money will need to be paid back by the EU to capital markets over a period until 2058. Moreover, if the EU were to borrow for a Member State, that Member State would need to repay that amount to the EU.

With the EU recovery fund, Southern Europe wins the jackpot

Recently, new data has been published regarding these RRF funds, in particular regarding the grants that amount to 337 billion euro. EU Member States will not need to have to pay this money back to the EU. These RRF funds can only be used for the green transition, digital transformation, research and development, public health, education and training, as well as social and territorial cohesion. It is less than clear what these topics have to do with fighting the pandemic.

The figure of 337 969 million euro, or 337.9 billion euro, is from the calculation made in June 2022. With that new calculation, only six countries receive more money than last time: the Czech Republic, Germany, Italy, Austria, Portugal and Spain. Madrid gets 11% more, now receiving 77.2 billion euro in total. Rome follows with 69 billion euro. Together, that already results in 43.5% of the RRF resources. After them, comes France, with 37.4 billion euro, Germany with 28 billion euro, Poland with 22.5 billion euro, Greece with 17.4 billion euro, Portugal with 15.5 billion euro and Romania with 12.1 billion euro.

The biggest loser with this RRF is Luxembourg, which will receive a mere 82 million euro from this fund. Southern countries on the other hand have truly won the jackpot! Indeed, Spain will be paying 14.3 billion to the EU this year, Portugal 2.5 billion and the Italians 19.9 billion. In other words, these are all countries that receive much more from this RRF than they pay annually to the EU budget.

The losers

The Kingdom of Belgium is paying 7 billion euro to the EU this year, while it only receives 4.5 billion from this RRF, which also happens to be 1.4 billion euro less than in the original calculation. In sum, this year, Belgium pays much more to the EU – 2.5 billion euros – than it receives from this RRF fund. For the Netherlands, the net contribution amounts this year to 5.2 billion euro (9.8 billion euro in contributions to the EU, with only 4.7 billion euro RRF funds). On top of that, the Belgian region of Flanders is also disadvantaged within the Belgian distribution of RRF resources.

The following countries pay more to the EU treasury this year than they receive in one-off RRF resources: the three Benelux countries, Germany, Denmark, Finland, Sweden and Ireland. As a result, these RRF grants primarily amount to yet another budgetary transfer from the eight richer Western and Northern EU member states to the eighteen others.

Austria is the only member state where the ratio between the two parameters is more or less equal.

A depreciating euro

Other bad news for inhabitants of the Eurozone is the fact that the exchange rate of the euro has dropped to parity with the U.S. dollar and even lower.

This is indicative for the declining importance of the euro on this planet. Despite existing for more than 20 years, the euro has certainly not become the world’s leading currency.

The decision of the International Monetary Fund of 14 May 2022, which updates the weights in the basket of currencies that make up the Special Drawing Right (SDR) has hardly received media attention.

This basket is determined every five years. This year, the decision of the 24 members of the IMF Executive Board, which took effect on 1 August, implied higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, lower weights for the British pound, the euro, and the Japanese yen:

US dollar: 43.38% (up from 41.73% in 2016)

    Euro: 29.31% (down from 30.93%)

    Renminbi: 12.28% (up from 10.92%)

    Yen: 7.59% (down from 8.33%)

    Pound: 7.44% (down from 8.09%)

The decline of the euro is telling. In 2011, this currency still had a share of 37.4% in the SDR basket.

On top of all of that, there are also the low interest rates from the European Central Bank (ECB) and the sky-high inflation in the eurozone. These constitute a problem for public budgets, citizen’s savings, and more. Wage indexation of 2% in countries like Belgium does not follow the increase in life expectancy, also because it is applied ahead of taxation.

Combatting inflation is one of the ECB’s main responsibilities. However, not much action can be witnessed in this regard in Frankfurt. This while high inflation is likely to continue for years, thereby affecting the value of the euro.

Originally published in Dutch by Flemish magazine Doorbraak

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Image: Pixabay

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