Jan 28, 2023
EU Needs Funds to Counter US Energy Push: Here Are the Options
(Bloomberg) -- The European Union is discussing how to boost its financial muscle to counter the US’s $369 billion green subsidy package and tackle costly challenges such as weaning itself off Russian energy and rebuilding Ukraine.
Options range from simply reshuffling existing funds and bolstering the European Investment Bank to additional joint borrowing to create new tools and topping up its common budget.
Calls for more money have revived old divisions between northern and southern member states, however, with the EU still only in the early stages of rolling out its unprecedented €800 billion ($869 billion) pandemic recovery fund.
Why is there a financial gap?
The bloc’s 27 countries agreed in 2020 on a budget for 2021-2027 of around €1.8 trillion that included a pandemic fund financed through joint borrowing.
Despite this record sum, the massive resources offered to companies and consumers under the US Inflation Reduction Act have sparked fears in the EU that its own economic incentives aren’t strong enough to stop investment and jobs crossing the Atlantic.
Russia’s invasion of Ukraine forced the EU to look for resources to support Kyiv and end dependence on Russian gas imports. For some, shielding vulnerable families and firms from the energy crisis also warranted a joint fiscal response.
In addition, the EU has committed to taking a leading role in the reconstruction of Ukraine, which the World Bank has estimated could cost at least $350 billion.
Is this a new debate?
Institutions including the European Parliament and member states who benefit the most from the EU budget, such as in eastern Europe, have traditionally defended larger spending power for the bloc.
Some capitals have called for years for joint fiscal instruments to bolster economic and monetary union.
Lengthy discussions driven by France, Spain, Italy and Portugal aimed at forging a euro-area budget only resulted in a watered-down version at the end of 2019. Fiscally conservative countries including the Netherlands, Finland and Austria were reluctant to agree on new tools that deepen a transfer union and mutualize risks.
This division resurfaced as the EU discussed its response to the Covid pandemic but the magnitude of its economic impact — and crucially Germany’s support for a recovery fund — ultimately led to the creation of the new €800 billion pot.
Which instruments are being considered?
A majority of member states want to focus on existing tools, with possible changes to facilitate access to the pandemic fund.
Some senior officials are calling for a fresh round of joint borrowing to offer cheap loans to member states who need them, similar to the SURE mechanism set up to protect jobs during Covid.
European Commission President Ursula von der Leyen has proposed a sovereignty fund in the medium-term to channel more investment into advanced technologies that could boost competitiveness.
The commission is assessing whether additional resources are needed to fund the transition to cleaner energy and counter US President Joe Biden’s climate act. It will set out potential instruments to promote solidarity and investment next week before EU leaders discuss the issue later in February, people familiar with the matter said.
What do member states think?
Countries including Germany, the Netherlands, Finland and Denmark are against new funding instruments, given existing ones haven’t been fully used, according to the people, who spoke on condition of anonymity because the discussions are private.
France called for a SURE-like instrument in a recent paper, while Italy is the most vocal supporter of a new EU fiscal tool, they said.
Spain, which traditionally supports common fiscal responses, is focusing on the implementation of recovery funds. Madrid doesn’t back a sovereignty fund, an EU official said.
What’s the most likely scenario?
A consensus is emerging on facilitating the use of existing financial instruments in the short term, including the pandemic fund. This may include further flexibility or reshuffling some priorities, diplomats and officials said.
New instruments including the sovereignty fund would come in the medium term, and the European Investment Bank may play an important role in its financing. One option being considered is to increase the bank’s firepower, but that would likely require additional guarantees.
Member states will reassess the 2021-2027 budget in mid-2023. National governments will need to contribute more to the so-called Multiannual Financial Framework, two EU officials said.
The chances of new instruments financed by joint borrowing look slim at this stage, officials said. The bloc will likely need to turn to the markets to finance the reconstruction of Ukraine, however, and this discussion is expected to gain traction in the second half of the year.
©2023 Bloomberg L.P.