Why Ireland will push for change in how EU recovery money is shared out

In the 1980s and 1990s the taoiseach of the day would return from Brussels talking about the billions we were going to get in funding. Now we are in the EU “rich” club and are a net contributor to the EU budget.This means our direct payout from the new EU recovery programme, if it is agreed, will be limited.

In fact our distorted GDP data – inflated by multinational accounting – has us getting less than other smaller, relatively well-off EU states out of the illustrative share-out featured in European Commission documents, thought these may change in negotiations. The low level of unemployment here is also featuring in the initial calculations as a factor indicating that Ireland's share should be relatively low.

In the long term our rich country status could also see us paying more into future EU budgets each year after 2028 to help repay the loans. In fact the balance for Ireland between the short-term gains and the long-term cost is the least favourable of any EU country, except Luxembourg, measured as a share of the economy.

The Republic will support the principle strongly, reckoning that the upside of solidarity here is more important than the direct cash. But we will be among a group of countries arguing the the share out should be done on the basis of which countries have been hit hardest by the recession, rather than on the economic data for the last couple of years.

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1. What is the new EU recovery package?

France and Germany have proposed a new €500 billion recovery fund , which the European Commission has packaged up as a Next Generation EU plan totalling €750 billion. This breaks down as €440 billion in grants, €60 billion in loan guarantees and €250 billion in loans to go to member states, with the worst affected by the crisis and the least well off to get the most. The plan will be discussed by EU leaders at a forthcoming summit though is unlikely to be finalised until later in the year and faces opposition from the "Frugal Four" – the Netherlands, Austria, Denmark and Sweden.

Centralised borrowing by the EU – and the provision of direct grant aid – would, if agreed, be a major political and economic signal and an initiative that could grow over time. In a break from its previous alliance with many of the more frugal States, the Republic has sided with southern EU members from the start of the crisis in supporting the idea of centralised borrowing.The commission calculates that the package could leave EU GDP 2.25 per cent higher in 2024 .

2. What would it mean for Ireland?

How the fund would be divided is still to be negotiated. However initial work by the European Commission, designed to give indicative illustrations, showed Ireland as the recipient of €3 billion, or 0.4 per cent of the money available. This would be €1.9 billion of grants, with the rest available as loans or guarantees.

Ireland would certainly take the grants – no country will turn down free money, Whether we would take the loans would depend on their terms – currently we can borrow very cheaply on the markets, but EU loans from this and other sources would provide a backstop if the markets got difficult.

The bulk of the grant money, €1.2 billion, would come from what is being called the Recovery and Resilience Facility, largely going towards green and digital investment programmes.There will be €215 million to support various kinds of employment subsidies, €350 million for rural development and €130 million for so-called Just Transition funding, designed to help communities hit by moves to a lower carbon economy.

These are useful sums, though not enormous in the context of a deficit which could approach €30 billion this year and perhaps €15 billion next year when the EU funds would start being available.

3. How was Ireland’s allocation worked out?

The European Commission working document shows that the allocations are based on a grouping of countries.

The Republic is in the group or richer nations on the basis of our above-average GDP per capita figures and a low debt-to-GDP ratio. In fact our GDP per capita is shown as the second highest in the EU, only exceeded by Luxembourg. The richer countries get less of a share.The bigger recipients are in two other groups – those with lower incomes but low debt and those with lower incomes and high debt.

So, for example, Ireland, whose national output accounts for 2.5 per cent of EU GDP, gets 0.4 per cent of the funds, while Italy, a lower income/high debt country which accounts for 12.8 per cent of EU GDP, gets 20.4 per cent, making it the biggest recipient.

Some other rich, small states stand to do better than Ireland. For example Austria accounts for 2.9 per cent of EU GDP and gets an indicative allocation of 1 per cent and Sweden, accounting for 3.4 per cent of EU GDP, gets 1.2 per cent.

It appears that our inflated GDP level may count against us twice in the calculations , by pushing up GDP per capita and also by cutting our debt-to-GDP ratio. Using GNI*, the measure developed by the CSO to factor out the distorting impact of multinationals, would give a different picture, putting our national output some 40 per cent lower and pushing the debt ratio to almost 100 per cent, compared to less than 60 per cent as a percentage of GDP.

This is all now for negotiation and Ireland may push for a better deal. However, given the controversy about Ireland's corporate tax policies, this is tricky territory. Leprechaun economics – the name given by Paul Krugman to the massive 2015 rise in Irish GDP driven by intellectual property assets being moved to Ireland – may be giving Ireland a big corporate tax boost, but it also means these things are delicate around the EU negotiating table.

4. What about paying for all this?

The bad news is that as a net contributor, Ireland might in the long run pay in a lot more to the fund than it gets out. The good news is that because the money is going to be borrowed by the EU Commission for long periods, the main repayments will not fall until way into the future. So in the short term everyone gains – the bills fall due later.

The new programme is being integrated with the EU’s budget and will involve an increase in EU’s own resource ceiling – the maximum amount it can raise each year. This will give it headroom against which it can borrow funds. The repayments are due between 2028 and 2058.

Ireland’s “contribution” to repayments is put at €18.7 billion in the commission’s document – the vast bulk of this would be reflected as higher annual EU contributions for up to 30 years after 2028. The net position, subtracting the long term cost from the short term gain,shows Ireland a net contributor to the tune of 4.5 per cent of current GDP – the second highest contributor after Luxembourg.

In the short-term, the payment in will be a lot less. The additional cost to Ireland in the years to 2027 – the period of the next EU budget – will probably be around €400 million, meaning we will make a net gain over the next few years.

In the long term, costs will depend on future EU budgets and also on whether EU leaders accept any of the commission’s proposals to raise more or its “own resources” – EU-wide taxes going to the central pool controlled by the commission. Doing this would cut member states’ contributions. However Ireland will focus on the cost side, too, as it could potentially add to our EU budget contributions after 2028.

5. How does this fit into the overall EU budget picture?

The next EU budget is now proposed to run to €1,850 billion (€1.85 trillion), including the new rescue measures.Ireland has been pushing to retain Common Agricultural Policy spending in particular. It appears that Ireland may get around €2 billion per annum from various EU programmes under the next budget from 2021 to 2027, but the country will face annual average payments to the EU of €3.4 billion. From the economic point of view, of course, the Republic gets massive benefits from membership of the EU single market, vital to Irish businesses and also to attracting foreign investment here over many years.

6. What other issues arise?

There are a few other awkward issues for the State in the talks to come. The European Commission has proposed a digital tax on multinationals as one of the measures to raise its own resources and thus help pay for the recovery plan. This could cut corporate profits declared here and thus Ireland’s tax take. A proposed annual levy on companies to access the EU single market would also not suit small exporting nations such as Ireland.

The commission also proposes an extension of the emissions trading system – the charge on big companies for carbon use – to the maritime and aviation sectors or a carbon border adjustment mechanism, a tax on imports back into the EU from companies who had moved production to countries with lower emissions standards.

The Franco-German paper also again raised the idea of reviving a common EU corporate tax base – Ireland has long fought this idea, particularly the element which would involve a consolidation, or common central collection, of taxes from big companies.

7. How does it relate to the ECB?

The ECB has long called on EU governments to step up via strong budgetary action to help support economies, a call reinforced by its president Christine Lagarde. So agreement on the recovery plan would present some coherence that the EU was moving ahead on both the fiscal and monetary front – on the other hand, a breakdown in talks on the recovery plan would leave the euro zone again relying entirely on the ECB's monetary programme to provide support. The ECB's presence in the market is a vital support to Ireland, helping the country to raise funds very cheaply. In the March to May period the ECB purchased €3 billion of Irish debt on the markets under the pandemic programme, and went heavily into the market for Italian bonds.

In terms of hard cash, this is the crucial support from Europe for our recovery.