The German Federal Audit Office has published a special report on the consequences of joint EU borrowing in the context of the European coronavirus recovery package. In this report, which is based on calculations conducted by ZEW Mannheim in October 2020 for an expert hearing at the German Bundestag, the Federal Audit Office has confirmed the figures and findings of the ZEW study. The new own resources decision will provide the EU with a guaranteed volume of at least four billion euros, which far exceeds the repayment obligations for the recovery plan. This creates incentives to expand joint European borrowing to finance other purposes, even if this borrowing is, for now, legally limited to the scope of financing the recovery plan. Under the new own resources decision, all EU states will be jointly liable for EU debt until 2058, which, according to the German Federal Audit Office, undermines the principle of national ownership. Professor Friedrich Heinemann, author of the ZEW study on the EU own resource decision and the liability implications for Germany’s federal budget, comments on this matter:

ZEW Economist Professor Dr. Friedrich Heinemann on the debt of the EU.
Professor Dr. Friedrich Heinemann, head of ZEW’s Research Department “Corporate Taxation and Public Finance”, in the latest commentary on the debt of the EU.

“It is very welcome that the Federal Audit Office has made the wide-ranging consequences of the new EU debt instrument transparent. The German Bundestag has so far been unwilling to face the full implications of the pandemic recovery plan and to openly communicate the substantial risks involved. The fact that the recovery package will be entirely financed with borrowed funds and essentially impose joint liability on all Member States is indeed a departure from the principles that have guided German EU policy so far. During the euro debt crisis, the Bundestag still put considerable emphasis on introducing measures that strictly limit the liability risks imposed on the national budget. Now, it has agreed to a stimulus package that will not only allow the EU to finance the recovery plan through debt, but most likely pave the way for large-scale EU borrowing. While the pandemic might provide good reasons to take this course of action, we must not forget the risks that this entails for the federal budget.

My recommendation for the Bundestag is to include a clear commitment in the ratification act of the EU own resource decision that the joint borrowing will be a one-off exceptional measure. This would send an important signal in the European discussion over financial policy – especially since the president of the European Parliament has spoken in favour of making EU deficit financing permanent.”

Date

12.03.2021

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