Tense negotiations between the EU 27 member states reached a unanimous agreement to create a fund of €750 billion to combat the COVD 19 crisis in the early hours of this morning. Summit chairman Charles Michel tweeted “Deal” at around 03.15 GMT this morning. The plan involves allocating €350 billion in grants and €360 billion in loans. Spain has been named as one of the primary beneficiaries with €140 billion to be provided over six years, €72.7 billion of that in grants.
Pedro Sánchez, Spanish Prime Minister, declared the deal a “real Marshall plan”. The agreement will be the first time the EU has decided to go into debt to fund their budget.
The plan met fierce resistance from the so-called “frugal” nations, led by Dutch Prime Minister Mark Rutte. Netherlands, Sweden, Austria and Denmark fear this deal will lead to debt being used to finance subsidies. There was also considerable concern on a transfer of wealth to the southern states of the bloc. The northern nations are suspicious of the southern states, considering the, poorly managed and heavily reliant on the careful financial management of their EU partners. The southern reaches of the EU have often felt that economic policies have been tailored to support northern states and have often called out the use of solidarity in speeches whilst action remains limited. The disparity between the north and south has been growing and the COVID19 crisis is the latest in a long line of challenges highlighting the wealth divide.
The summit has been carefully dissected by observers, as the first example of an EU deal hashed out without British engagement. The UK delegation often took a key role in the diplomatic horse trading between the disaffected factions.
This latest deal as ever is a compromise. Money will be raised by the bloc committing to buying bonds together to distribute the cash within member states, the hope being that the bloc can buy and borrow its way out of the impending crippling recession.
The package comes with hefty strings attached, the money is not a blank cheque and spending will be tightly controlled and committed to policies seen a compatible with European priorities, including uncomfortable economic and environmental reforms. Funds will be distributed by the European Commission with member states able to reject a spending plan on a majority basis.
So what does this mean for Spain?
Well this package does introduce an EU tax to help repay the debt, the first will be introduced as early as 2021 as a tax on non-recycled plastic. There will be a proposal in the same year for a carbon adjustment system to equalize the price of imports from countries with poorer environmental standards. The aim would be to introduce this new system come 2023. There are also calls to expand the European emissions trading system to the maritime and aviation sectors with eyes on other sectors, including a financial transaction fee over the next seven years.
Furthermore, the strings attached by the frugal nations will almost certainly threaten plans to repeal the labour legislation of the Rajoy government but Sánchez has already hinted at tax reform, raising the rate of VAT (IVA) alongside tax hikes on the highest IPRF bracket. Yet, Spain experienced two general elections last year when Sánchez was unable to garner enough support to pass his budget on each occasion. With repeal of labour law reform a high priority for the parties he is dependent on for votes, there is a degree of uncertainty about how much sugar will be needed for the bitter pill.
So what does that mean for us?
Well, it would seem this indicates new centrally imposed EU taxes which will impact travel and environmental taxes which will probably be reclaimed through higher prices on your weekly shop. The vaunted headline figure of rescue money is more than 50% loans so, despite all the rhetoric, the Spanish people will be called upon to return that money through higher domestic taxation as well. Where do we expect the money to go? Prepare for environmental start ups, promises of a bright new tomorrow where you can work from home powered by the sun. There is no way to avoid the heartache that is coming. The entire superstructure of the liberal western economy is taking a hit like we have never seen before in history. The handbrake was applied to the entire economy and pumping the accelerator while you cannot afford to refill the tank is perhaps not the best way to stop the car spinning uncontrollably through the air.
Expect political dissatisfaction with the EU to grow in Spain in the coming years as ordinary people are left to foot the bill, once again.