A TR EU Special : Why the EU's Problems Are much Bigger Than Those Reported.

Politico reported the following yesterday On the EU Recovery Fund and the MFF.

EU national leaders on Thursday directed European Commission President Ursula von der Leyen to draw up plans for a new long-term financial blueprint for the bloc that would also drive an economic recovery from the coronavirus crisis with a combination of loans and grants. The leaders did not agree on a figure for the recovery effort, which some Commission officials have proposed should be up to €2 trillion.


The leaders delivered the instructions to von der Leyen at their latest virtual European Council summit — a video conference in which they discussed not just the devastating economic toll of the pandemic, but all aspects of the crisis, including the challenge of when and how to lift containment measures.

The effort to reinvent the Multiannual Financial Framework (MFF) — the EU's regular, seven-year budget — to also serve as an emergency rescue program is a potentially treacherous gambit aimed at circumventing a fierce fight among EU leaders over how to finance a recovery fund.

Among the risks is the possibility that a budget deal, already extremely late compared to previous cycles, will be further delayed, potentially jeopardizing implementation of a wide range of EU programs that could stall when the current budget plan runs out on December 31.

But there is an array of other potential problems, including legal hurdles to the unusual financing measures being contemplated by the Commission, questions over whether the strategy could be put into action quickly enough, and uncertainty over various technical details that would accompany such an unprecedented leveraging of the budget commitments of EU nations.

While von der Leyen said she viewed the idea as the only viable solution, it is far from clear that leaders on the European Council will ultimately accept what the Commission puts forward, especially the higher national contributions that will be required at a time when all EU economies are now contracting and some headed for deep recessions.

In essence the Eurogroup have thrown the whole problem back to the Commission because they have no solution and have therefore decided to "kick the can down the road" rather then end up actually discussing this because they know exactly where that discussion is going to go and what the press reports after it will be.

In effect they have decided that they don't want any negative news going out, particularly to Italy and Spain.

What they have in effect tried to do, is kill two very fraught issues with one massive bolder by trying to roll the "recovery fund" into the EU 7 year Multi Financial Framework (MFF)

Here's where this gets very interesting indeed. my understanding is that EU contributions are NOT on the basis of GDP but on GNI (Gross National Income).

"GDP is the total market value of all finished goods and services produced within a country in a set time period. GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad."

So the EU budget is based on the income governments get from taxation rather than how much their country produces. While GDP might be down by around 15%, GNI is likely down by as much as 70%.

If the MFF was set, as the argument goes on a percentage of GNI at 1.06% but all governments income from shutdown have been trashed by lockdown then if that has currently led to a 70% loss of government income the EU budget, even if set at 1.06% of GNI is going to be roughly 70% below what it previously was BEFORE the pandemic.

So rather that having a "recovery fund" they are going to have 70% less money than they had previously.

So, just to get the EU budget it previously had it would require contributions of 1.06/0.3 = 3.53% just to get the original budget with no recovery fund.

But, if they set the MFF at 3.53% for 7 years, and the economies recover they are going to be paying massive amounts to the Commission as GNI recovers which will near bankrupt national governments and hand the EU massive amounts of money and with it power.

If they don't increase the budget contributions in terms of GNI then its likely the Commission will not have enough money to even sustain its basic costs, let alone any existing grants and programmes.

Therefore, not only is the MFF an existential threat to the Commission, its also an existential threat to National Governments.

As the funding of the EU is via agreements in the treaties, the only way out of this would be to renegotiate the treaties and if that happened, the fur and feathers would be everywhere.

We don't know how lucky we were to get out when we did, and for this reason alone, we definitely don't want to extend past 31st December.