Initial responses to the COVID-19 outbreak have relied on a massive injection of public spending to the most affected parts of economy and society by EU Member States and the European Central Bank. It became clear that, given the emerging depth of economic downturn, more public intervention is needed and it should be the EU to dig deep into its pocket as well.
After a record taking five days of intensive discussions and the EU’s longest-ever summit, the 27 Heads of State and Government reached a political compromise for the next EU budget 2021-2027, as well as for an additional Recovery Fund, called ‘Next Generation EU’.
In total, the spending plan for the next seven years will include roughly EUR 1.824.trillion (EUR 1.074 trillion EU budget, EUR 750 billion Recovery Fund). And it was the EUR 750 billion Recovery Fund which consumed most of the energy put into negotiations.
As times have long gone when countries were negotiating just on their own, it were basically three camps setting the scene. In simple terms described: the so-called ‘Frugal Five’, consisting of the Netherlands, Austria, Sweden, Denmark and Finland trying to limit the grant part of the Recovery Fund and preferring loans over grants, linked to conditions. The Southern Alliance including Italy, Spain, Portugal and Greece demanding the opposite. The ‘Visegrad-4’, including Poland, Hungary, Slovakia and the Czech Republic leaning widely towards the Southern Alliance but with a stronger focus on conditionality of funding than the ratio between free money and money that needs to be paid back. And not to forget, Germany and France as the inventors of the EUR 750 billion Recovery Fund idea, with Germany, holding the current EU-Council Presidency, being set as broker and France tending more towards the south of the EU-hemisphere than any other direction.
Following harsh discussions, leaders agreed that it was suitable to split the EUR 750 billion Fund in EUR 390 billion in grants and EUR 360 billion in the form of repayable loans. It was also agreed that the funds should be linked to reforms. Should a government suspect that a state is not sufficiently fulfilling its obligation to reform, this can trigger a review mechanism that ultimately stops further payment to the accused country.
To finance the EUR 750 billion for the Recovery Fund, the European Commission will be allowed to borrow on the capital market for the first time ever in its history. These debts are to be paid off gradually from 2027 to 2058. Since the EU gets into debt but does not itself assume liability, the Member States will ultimately be the guarantors. This, plus the envisaged repayment through increased own resources is a milestone for the EU, one with several question marks.
The own resources include a non-recycled plastic tax, a carbon border adjustment mechanism, a digital tax, a revised emission trading scheme, and in the future, a financial transaction tax. The vague idea of a ‘single market tax’ for large companies has been dropped for the time being.
While the plastic tax will be introduced by January 2021, the design and scope of the other instruments are still unclear. Most of these proposals tend to be very controversial among national governments – taxation is a national prerogative under EU law – and the exact implementation of these instruments remains to be seen.
EU Member States have taken bold decisions several times in the last decade to mobilise historic amounts of money to safeguard businesses and employment. With this package they have shown once more that they are willing to dig deep into their pockets. In the end, for a good reason - getting the strongest integrated market going again, at full speed, is of paramount importance.
If the investment pots being distributed are directed towards the real economy and harnessed by reforms, they indeed can help kick-start the economy and make it stronger and more resilient for the future, safeguarding also the bloc for property companies to operate successfully domestic and cross-border. Embracing the digital and green transformation will also be targeted for moving ahead, to foster growth and job creation and to allow loans to be repaid.
As a next step, the European Parliament will have to give its consent to this agreement and entered at the time of publication of this article into respective negotiations with the Council. Ultimately, we expect the Parliament to give its consent before the end of the year, after showcasing some criticism and obtaining symbolic changes.
The EPRA Public Affairs team has raised the listed sector’s voice from the beginning of the pandemic in various ways, e.g. with initialising a joint letter of 18 real estate trade associations all across Europe to contribute to the discussion. While the Recovery Fund is aimed to provide support over the next three years, the recovery period will take its time and be for some sectors more painful than for others. It is clear that this might also entail new legislation on EU and Member State level upcoming, with an impact on the property industry in general as well as the listed real estate sector in special.
EPRA remains deeply involved in the relevant discussions and networks, to monitor any developments in this direction, to protect our membership on the one side but also look for new opportunities to come up on the other side. ‘Every cloud has a silver lining’ as they say, or to take it with Meister Goethe, ‘there can only be strong shadow, where there is much light’.
In case you want to find out more about EPRA’s policy and regulatory work, please contact t.steinmann@epra.com.
