How Will the EU Fund its COVID Recovery Plan?

When the European Commission (EC) shared its proposal for a massive economic recovery plan earlier this year, it trigged a trillion-euro question: How will the European Union (EU) foot the bill for a €750 billion Covid-19 recovery stimulus along with longer-term economic reinforcements—financial firepower totaling an estimated €1.85 trillion?

The answer, according to the May 27 proposal, is over time, and largely based on the same taxes and funding mechanisms originally laid out in the European Commission May 2018 long term 2021-2027 budget proposal. There is one notable exception, however.

The new proposal indicates that digital services taxes on companies with more than €750 in annual turnover (i.e., revenue) will also help fund the recovery by generating an estimated €1.3 billion annually. While that exception might raise an eyebrow given current U.S.-EU tensions over digital services taxes, it is important to recognize that the EC’s suggests it will propose this new own resource at the later stage of the 2021-2027 period. That timing, in theory, gives OECD countries ample time to work out a unified approach to digital services taxation. On the other hand, this also gives individual countries ample time to introduce digital service taxes unilaterally.

The EC’s comprehensive proposal serves two main purposes:

1. Immediately boosting the EU budget with the €750 billion “Next Generation EU” instrument to get the EU economy “back on its feet and foster sustainable and resilient growth;” and
2. Establishing longer-term clarity on an EU financial framework for 2021 through 2027.

The recovery/stimulus funds will be distributed through numerous mechanisms organized into a three-pronged strategic framework that fuels recovery (Pillar 1), kick-starts economic growth (Pillar 2) and strengthens the EU’s resiliency by taking actions based on lessons learned from the current pandemic.

Healthcare, investments related to the European Green Deal, digital advancements (including 5G networks and cybersecurity), infrastructure and professional skills development figure prominently among the investment targets identified in the recovery plan.

And while it is still uncertain if the EC with an “own resource based on operations of companies that draw a huge benefit from the EU single market” revives the EU CCCTB discussion, significant tax policy changes do not currently appear to represent a mechanism for eventually funding those investments, that can always change in the future.