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More EU debt leads to more EU taxes – another bullet dodged

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NEW EU TAXES are vital to cover the cost of its ‘invisible’ Coronavirus Recovery Fund debts – but at what cost to member states?

Facts4EU.Org has revealed that the EU, in Christmas week, floated the concept of new taxes to bring in an amount of €380 billion between 2026 and 2030, of which €85 billion would flow to Brussels.[1] €247 billion of the new taxes are carbon-related, and €133 billion are new taxes on companies.

Brussels sidesteps debate on its powers to dictate member states’ tax policy in order to bring about an increase in the EU’s ‘Own Resources’, which currently consist of a portion of customs duties, the sugar levy and VAT. Member state cash contributions make up the balance of the EU Budget.

As Facts4EU.Org points out, the need for new lines of Own Resources is connected to the Coronavirus Recovery Fund – now known as NextGeneration EU – under which the EU will issue €750 billion of bonds in its own name by the end of 2027, at rate of €100+ billion per annum. The bond repayments will be spread over the following 25 years at an average rate of €30 billion per annum.

The problem for the EU Budget is that €390 billion will be distributed as grants, and only €360 billion as loans. In the past the EU has represented to the investors in its bonds that each bond it issues is paired with a back-to-back loan the EU grants to a sovereign borrower. Under this construction – which applies to €360 billion of NextGeneration EU – the EU Budget is the secondary source of bond repayments to investors: the primary source is the sovereign borrower, whose loan repayments into the EU cover the EU’s bond repayments out to investors.[2]

The EU Budget is the primary source of repayment for the bonds that correlate to the grants portion of NextGeneration EU. This leaves an automatic hole in the EU Budget of €390 billion, or €15.6 billion per annum on average over 25 years and increased by any interest that the EU has to pay on the bonds it issues.

Extra Own Resources are needed. These are levies and taxes imposed on legal persons in member states, albeit that they are collected through the revenue authorities of the member states and that, as is the case with elements in the current Own Resources, the member states get to keep a portion.

Taxes to meet debt repayments are deflationary, because they reduce the money available to be spent on goods and services. This is the natural counterpart to an economic stimulus programme like NextGeneration EU, which accelerates the economic cycle: it is inflationary in the short term as the stimulus money is spent on goods and services to create productive assets, but deflationary in the medium term when production from those assets has to be diverted to paying back the stimulus money.

The EU is planning for the deflationary phase, both in designing and imposing its new taxes, and by setting amounts against them in advance of when its bond repayments fall due. The inducement for member states is that they will retain €295 billion of the taxes raised over the first five years.

The surreal point here is that these measures take €152 billion out of the EU economy in 2026 and 2027 whilst the NextGeneration EU money is supposedly still being spent: the measures promise to reduce the net annual stimulus in those years from €107 billion to €31 billion, unless of course all of the NextGeneration EU money has been spent by the end of 2025.

Further difficulties with economic stimulus packages arise when the funds are not spent productively and when the repayments act as a drag on the economy when they fall due.

NextGeneration EU will not be spent productively if priority is given to Net Zero and the replacement of existing capacity as opposed to the creation of new capacity. This can be justified on non-economic grounds, and can be made to look like economic growth in official statistics, but the growth is bogus: what is real is the extra debt raised to pay for a like-for-like substitution of assets. Even worse economically if the price of the offtake from the new asset is higher than the price of the offtake from the asset that has been retired.

Secondly, there is the build-up of debt falling due within the same timeframe. Eurostat stated at the end of 2020 that EU member state debt was already 90% of GDP, or €12.1 trillion; indeed the Eurozone’s member state debt was 97% of its GDP.[3] This does not include the €750 billion of NextGeneration bonds, even though investors will regard the EU’s bonds as a liability of member states. Debts are being built up in further programmes and organisations such as InvestEU, the European Investment Bank, the European Stability Mechanism, securitisations of Non-Performing Loans, and TARGET2. Creditors regard these debts too as the responsibility of member states, although the debts fall outside the Eurostat figures.

This block of ‘invisible’ debt was at least €4 trillion before NextGeneration EU, so how high will it be by 2028, when the all-too-visible repayments on the NextGeneration EU bonds begin? What will be the capacity of the member states to deliver up the new taxes to Brussels to meet these repayments, as well as to meet repayments on their own ‘General government gross debt’ and on the many other invisible debts that track onto them?

Brussels has so far sidestepped debate of this issue, but global financial markets and actors should not, and nor should the organisations that regulate them and warrant for global financial stability.

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Image by NakNakNak from Pixabay

[1] https://facts4eu.org/news/2021_dec_uk_escapes_eu_taxes accessed on 28 December 2021

[2] An example is the EU bonds issued in 2010 to raise the funds with which the EU made its bailout loans to Ireland and Portugal

[3] ‘General government gross debt’, as per https://ec.europa.eu/eurostat/databrowser/view/sdg_17_40/default/table?lang=enaccessed on 29 December 2021

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