Superb article in the Daily Telegraph about the current financial situation in the EU

It is rebuilding its economy. It is embarking on a programme of economic sovereignty. It is finally weaning itself off Russian oil and gas and, in so doing, helping Ukraine defend itself.

The EU has ramped up its spending over the last three years in an effort to turn itself into the fiscal powerhouse its most ardent supporters have always wanted it to be. There is a catch, however: it seemed to ignore how it would pay for it all.

Over the last week, bitter wrangling has broken out over some minor budget cuts, while the European Commission is struggling to build support for an extra €86bn (£74bn) on its budget. In reality, the EU is starting to run out of other people’s money – and very soon that is going to become painfully apparent.

For anyone who believes in closer economic cooperation in the European Union, with higher centralised spending, borrowing and tax raising powers, and with something close to a finance ministry that can direct spending from one region to another, the last couple of years have represented a great leap forward.

There was the €750 billion-plus Coronavirus Recovery Fund, designed to help member states bounce back from the pandemic. There is a chips act, and a green industrial strategy, arguably designed to match President Joe Biden’s vast subsidies for alternative energies in the United States, as well as to reclaim control of the high-tech supply chains that industry depends on.

And to its credit, it has been sending significant sums of money to help Ukraine fight off Russian aggression, as well as, slightly less to its credit, indexing the salaries of all its officials to sky-high Belgium inflation (12.5pc at its peak earlier this year). It has even issued hundreds of billions worth of bonds. There has been a significant increase in its scope, powers, and spending.

Here’s the problem, however. The bills are finally starting to fall due. This week, the European Parliament criticised some very modest cuts to the 2024 spending programme, reducing it from €189bn to €187bn. But the real battle is gathering over the fiscal plans for the next four years.

In June, the Commission laid out plans for a €66bn increase in the 2021-2027 budget, as well an extra €20bn on top of that for helping Ukraine. The Commission hopes to have that agreed by the end of the year.

And yet, right now, none of the 27 members appear very keen to stump up the extra cash. It is not hard to understand why. For a start, it is not as if the money is spent very usefully.

Of the extra €66bn in funding demanded, €19bn is needed to pay for higher than expected interest costs on its additional borrowing (because it never seemed to occur to anyone in Brussels that interest rates might rise), €1.9bn for higher administration costs of running the EU’s machinery, always a top priority, €15bn for the cost of coping with extra migration, because that is hard once you lose control of your borders, as well as €10bn to top-up existing funds like InvestEU (€5bn), Innovation Fund (€3bn), the European Defense Fund (€1.5bn) and the European Innovation Council (€500m) – puny amounts that may make little difference to the industrial competitiveness of the continent.

Next, all the major countries are in a tight financial position themselves. France recently saw its credit rating cut, and is struggling to balance its budget. Germany is performing worse than any other economy in the zone, and has just cut corporate taxes by €32bn to stimulate growth, while Italy has returned to the stagnation that has been a feature of its economy since it swapped the lira for the euro back in 1999.

Against that backdrop, it is very hard to persuade governments that they have to tax and borrow even more to hand money over to Brussels. Probably the only major country that could afford to contribute extra cash is fast growing Poland,with 4.9pc growth last year.  

This will be very hard to fix. The EU has already tried issuing its own debt, and while investors were happy enough to buy the one-off bonds, assuming that Germany and France were not about to allow the EU to go bust, it will be difficult to raise any more.

And while it has plenty of plans to raise its own taxes, as soon as any of them look close to materialising, they crash into a wave of opposition. Consider the plans for aviation taxes, or carbon taxes, or the extra 0.5pc levy on corporate profits across the EU. They can never seem to receive broad support.

The UK, much as hardcore Remainers are reluctant to admit it, is well out of the whole mess. It would be almost unimaginable for a British Prime Minister, at a time when taxes are set to reach 70-year highs, when the NHS is running out of resources and the public sector is plagued by a wave of strikes, to have to find tens of billions more to send to Brussels every year, especially as much it was spent elsewhere.

But no one should be in any doubt over the potential consequences for the rest of the Continent. If the Commission cannot raise the extra money, it will have to cut spending sharply, perhaps reduce its support for Ukraine, and abandon its industrial strategy.

As Mrs Thatcher once remarked, “the problem with socialism is that eventually you run out of other people’s money”. The EU has been coasting on “other people’s money” for decades. But as spending rises, and as it attempts to further expand its power and influence, Brussels is beginning to run out.

2 thoughts on “Superb article in the Daily Telegraph about the current financial situation in the EU

  1. “Absolutely love the insights shared in this article! Building a solid financial foundation is key, and you’ve outlined the essential steps beautifully.

    Budgeting is where it all starts – understanding where your money goes is crucial for making informed decisions. And having that emergency fund? It’s like having a safety net that provides peace of mind during uncertain times.

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