All the messes in the European Union budget
European Union budget: problems, challenges and unknowns. Giuseppe Liturri's analysis
Last Thursday's extraordinary European Council appears to have been dominated by the tug-of-war between Hungarian Prime Minister Viktor Orban and the other leaders. But this was only the smoke screen that prevented us from thinking about the objective difficulties of the EU budget in coping with the many, too many, challenges it has been facing in recent years. Too many things to do and few financial resources to leverage, with seized Russian funds in the crosshairs.
But this, which seemed like a risky interpretation of ours, born after reading the conclusions of the meeting, is now a widespread belief even in authoritative newspapers, such as the Washington Post of February 2nd.
Orban has only cleverly used this opportunity as a counterpart to grease the mechanisms that still block cohesion and NGEU funds, withheld by the Commission for alleged violations of the rule of law, in favor of his country. If the problem had really been the destination of the funds to Ukraine, he would certainly not have been satisfied with an annual report from the Commission, a debate on the implementation of the financing instrument and a possible proposal for a review ("if necessary") of the instrument between two years. Just enough to land on your feet, but certainly not a significant quid pro quo.
THE CINEMA OF THE EUROPEAN COUNCIL AND THE MONEY PROBLEM
Net of this "cinema" in favor of cameras, just 3 years have passed since, at the end of December 2020, a laborious compromise was reached – also in that case facing Orban's instrumental opposition – on the Multiannual Financial Framework which, from 2021-2027, envisaged approximately 1,100 billion in expenses, financed as usual, mostly (70-80%) by contributions from the States in proportion to the gross national income (GNI) and by a Union share of VAT revenue.
Since then, in Brussels they have discovered that they have exhausted any margin of flexibility to deal with aid to Ukraine – so far the Commission has decided on loans for around 70 billion – and to cover the cost of interest on the bonds issued for the NextGenerationEU. This last chapter is turning out to be a bottomless pit. In fact, the initial forecast of 14.9 billion for the seven-year period was based on rates not exceeding 1.15% until 2027. With the increase in rates, the Commission estimated that the hole fluctuates between 15 and 24.8 billion on the three-year period 2025-2027. Then there are other requests for the migration emergency, border management, defense and aid for natural disasters. A long shopping list formulated by the Commission which has been on the leaders' table since 20 June and on which the divisions have been profound.
THE CRAZY IDEA ABOUT THE RUSSIAN CENTRAL BANK
The main problem has always been where to get the money. The World Bank estimates that the cost of reconstructing Ukraine is equal to $411 billion and so far Western countries have committed €228.6 billion in aid of various kinds and we have been blocked for 6 months for 50 billion (17 grants and 33 loans). And here the “crazy idea” arose to get our hands on the funds of the Russian Central Bank and other private entities, seized in 2022. Already in mid-December the conclusions reported that “The European Council reiterates the call to make decisive progress, in coordination with partners, on how windfall revenues held by private entities arising directly from Russia's blocked assets could be allocated to support Ukraine […] In this context, takes note of recent proposals relating to windfall revenues arising from blocked Russian assets.”
And on Thursday the leaders returned to the topic, reiterating that “potential revenues could be generated under the relevant legal acts of the Union, regarding the use of extraordinary revenues held by private entities arising directly from the blocked assets of the Central Bank of Russia ”.
The seized Russian funds amount to around 260 billion, the majority of which are deposited with the Belgian company Euroclear (191 billion) which announced on Thursday that in 2023 they generated financial proceeds of €4.4 billion which were not paid to the legitimate beneficiaries . A law is expected shortly from Brussels that provides for its mandatory set aside, but confiscation is a step that cannot be taken. The point is that for some time the ECB but also France and Germany have warned that moving from seizure to confiscation, not only of proceeds but also of capital, would create considerable financial instability and damage the euro as an international reserve currency, because such a move it could lead other central banks to move their euro financial assets elsewhere. At most it would be legally possible to impose a tax on extra profits.
PANETTA'S WARNING
In this regard, lastly, the governor of the Bank of Italy Fabio Panetta issued a clear warning on Friday 26th speaking in Riga – ignored by the Italian newspapers but widely reported by the Financial Times – and warning that holding a currency of global use as the euro imposes responsibilities and “using it as a weapon reduces its attractiveness and encourages the use of alternative currencies”. It is no coincidence that the Chinese renminbi has overtaken the euro as the second most used currency in the world in commercial transactions.
He did not refer specifically to the Council and Commission's plans, but that was where he was aiming.
Also in the London newspaper, to overcome legal obstacles, the suggestive proposal was put forward to order that Russian funds be invested in Ukrainian war bonds, with the risk of losing the capital in the event of further war damage.
So the Council – beyond the proclamations – for the moment has ensured that the major expenses are financed with contributions from the States. The additional ceiling required to guarantee the NextGenEU equal to 0.6% of each State's GNI will be exploited, in addition to the pre-existing 1.40%. To sweeten the bitter pill of 64.6 billion in additional expenses, it was decided to cut 10.6 billion from other expenditure items and – net of 33 billion which are loans in any case – the actual requirement was reduced to just 21 billion to be covered with greater "own resources". The curious name with which the EU calls the "our" money that we pay them.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bilancio-europeo-ue/ on Fri, 09 Feb 2024 06:55:26 +0000.