Brussels proposes €5bn Brexit crisis fund to break EU budget deadlock

Brussels proposes €5bn Brexit crisis fund to break EU budget deadlock

EU countries facing a Brexit economic shock are in line to get access to a €5bn crisis reserve, under a draft plan from the president of the European Council that is designed to end a deadlock over the bloc’s recovery fund and long-term budget. 

Charles Michel, the council’s president, on Friday ceded to demands from countries including Ireland and Belgium that have asked for extra financial support to withstand a possible double economic shock in the coming year, from Brexit and the Covid-19 pandemic. 

The move was part of an attempt by Mr Michel to unblock talks on the EU’s €750bn recovery plan ahead of a summit of EU leaders at the end of next week. The council president called for “political courage” to overcome splits over the crisis response, which is tied up with negotiations on the bloc’s longer-term finances.

Other elements of Mr Michel’s proposals include speeding up the repayment of the debt that Brussels has proposed to borrow to finance its recovery, something he said should be achieved through the EU raising money through a new European push to tax large tech companies, and a carbon levy imposed on foreign imports. 

The draft also raises the target for climate-friendly spending in the recovery fund from 20 per cent to 30 per cent. 

Mr Michel stressed that the disbursal of recovery money would be linked to respect for the rule of law but his proposal is likely to fall short of demands from those who want a tougher system of sanctions for countries that attack judicial freedom. Under the system, any breaches of the rule of law and financial sanctions would have to be approved by a qualified majority of member states — raising the prospect that they can be vetoed by Hungary, Poland and their allies. 

Mr Michel said the €5bn Brexit Reserve was a “significant” and “new” amount of money that would “support countries, regions, and sectors most affected” by the UK’s departure from the bloc.

Brussels warned this week of “far-reaching and automatic changes” to trading conditions when Britain’s post-Brexit transition period expires at the end of this year. The UK will exit the EU’s single market and customs union, meaning border checks for trade in goods and increased bureaucracy for services providers. The EU warned that the failure of ongoing trade negotiations would lead to even greater “disruptions”. 

An EU diplomat said the Brexit reserve was partly a response to criticism from a number of governments that the commission’s initial allocation criteria for handing out recovery cash were not a reflection of the real effects of the Covid-19 crisis. Ireland and Belgium had also asked for Brexit to be reflected in the distribution of the funds. 

Mr Michel said that Brussels would carry out an assessment of the economic impact of Brexit by November 2020 to work out how to distribute the €5bn. An EU diplomat said that, should there be a trade deal by the end of the year, “this reserve could not be used or useful any more”.

Mr Michel also responded to demands from the “Frugal Four” countries — the Netherlands, Austria, Denmark and Sweden — that want member states to have a role approving national reform programmes that countries need to submit to access the recovery money. Under the system put forward by the council president, the national plans would be approved by a qualified majority of member states — meaning that in theory they could be blocked. 

Countries including the Frugals, as well as Germany, would also retain prized lump sum “rebates” on their budget contributions — a key demand from richer member states that argue they pay disproportionately into the budget. 

A central part of Mr Michel’s plan is to raise money to repay debt via new levies and taxes.

Mr Michel called for agreement that a levy on single-use plastics would be introduced across the EU by January 2021. It is estimated to raise about €3bn a year.

The draft also calls on the European Commission to propose a “carbon border adjustment mechanism” by early next year and a “digital levy” on tech companies, which should be introduced by the start of 2023. Mr Michel also backed moves to widen the range of industries covered by the EU’s cap-and-trade system for CO2 emissions.

The plan does not however mention a commission proposal for a “business levy” on companies operating in the single market. An EU diplomat said the tax was “controversial”.