It’s all about how you spend it

It’s all about how you spend it

‘Money makes the world go round’ or so the saying goes. In the EU, there is no shortage of the green stuff, rather the problem now is everyone agreeing on how it should be spent. In some cases, it might pay for governments to get a little radical with their spending.

Last year, European leaders agreed that an €800 billion common pot of loans and grants should be put together to help countries recover from the Covid pandemic and shore up their economies to fend off future shocks.

Some of that money is starting to flow now, as the European Commission approves the recovery plans governments have put together. The EU executive is scrutinising the wishlists and making sure they include plenty of digital and green investments.

Hungary and Poland are unlikely to get their slice of the pie anytime soon, because of spats between Brussels, Budapest and Warsaw over rule of law issues, as suggested by Commission President Ursula von der Leyen this week.

How to spend all that money that is magically floating around is an increasingly pressing question in the hallways of decision-makers in Brussels. After all, the EU only has a limited amount of leverage at its disposal to guide the hands of national governments.

BRUSSELS BEHIND THE SCENES is a weekly newsletter which brings the untold stories about the characters driving the policies affecting our lives. Analysis not found anywhere else, The Brussels Times’ Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels behind the scenes straight to your inbox every week, subscribe to the newsletter here.

An ongoing review of fiscal rules - grouped under the Stability and Growth Pact - aims to channel investments towards sustainable projects. An update is due by 2023 but the conversation is already happening about allowing green investments more debt leeway.

“We are relaunching this review of our economic governance against a backdrop of enormous investment needs, as the climate emergency becomes more acute with every passing year,” EU economy chief Paolo Gentiloni said earlier this month.

When you consider that well over €500 billion will be needed each and every year up to 2050 for the EU to meet its climate goals, the importance of getting those rules right becomes clear.

It will be no easy feat either, given the diverging interests between different countries. Another rulebook, the sustainable investment taxonomy, is also proving to be divisive because of the rich tapestry of different preferences formed by national opinion.

Before the end of this year, the Commission has to decide whether nuclear power and fossil gas power should qualify for a green label, which would signal to investors that those projects are sustainable and a safe place to put their money.

The scales are tipping in favour of nuclear and gas, thanks to the lobbying and alliance-building by France and Germany, respectively, but both decisions will inevitably leave a significant group of countries displeased, whatever the result.

As one EU official told your columnist on the down-low, “we know whatever we propose will be unpopular with one side or the other”. The Commission is just going to have to pick which options makes the most people happy.

In both the SGP and taxonomy cases, governments accept that the Commission sets the spending rules. They might not like it but at the end of the day, everyone sings from the same hymn sheet.

But one source of substantial revenues, generated by the Emissions Trading System (ETS), is still considered by most member states to be a sacred cow, which Brussels should not meddle with.

Billions of euros are generated every year by the sale of pollution permits and the price per tonne of those allowances has reached record highs this year. Really, it is less a sacred cow and more a fatted calf.

The Commission wants to ring-fence those billions for climate action or to at least attach some green strings to how ETS revenues are spent. Governments have in the past flinched at being told what to do with their annual windfalls.

When the UK’s departure from the EU threatened to leave a multi-billion-euro shaped hole in the bloc’s coffers, ETS profits were mooted as a possible ‘own resource’ that could plug the gap but this was quickly shot down.

This time might be different though, as governments have less scope to say no. Brexit was arguably no reason to mess around with the EU’s accounting, while climate change and sky-high energy prices, however, are a completely different matter.

An ‘own resource’ proposal is still awaited from the Commission. It was supposed to debut in the summer but has since slipped off the timetable and has a frustrating ‘TBC’ next to it in the institution’s work programme. The waiting game continues.

Most of these spending rules are all rather conventional, truth be told. The EU does not want to rip up the playbook, rather polish it and give it a bit of an update. But faced with a big, bad world, maybe Brussels should think further outside the box.

Last week, while European prime ministers and presidents were meeting at the European Council, NATO defence ministers got together for their own pow-wow. Here is where governments could get radical.

According to a somewhat informal agreement dating back several years, NATO members are meant to spend 2% of GDP on defence. Not many countries achieve that and it was a loud drum that Donald Trump used to beat during his time in the Oval Office.

As the EU busies itself defining what is and what is not a sustainable investment, NATO countries could redefine what counts as defence spending. Specifically, they could include renewable energy investment within that 2% total.

Russia proved this week that it considers energy supply to be a weapon. Moscow has cut gas shipments to EU-neighbour Moldova and reportedly told its government they will turn the tap back on if its relations with Brussels cool a bit.

Vladimir Putin has also suggested that more gas could flow through the new Nord Stream 2 Baltic Sea pipeline if Germany and the EU grant the energy project a quick approval.

Blackmail tactics like that cannot work if 40% of gas and 30% of oil are not being imported every year from Russia. By the same extent, Russia’s massive defence budget would be even less sustainable if hundreds of billions of dollars in energy exports dry up.

Wind turbines really do look like a more powerful geopolitical weapon than tank turrets these days.

BRUSSELS BEHIND THE SCENES is a weekly newsletter which brings the untold stories about the characters driving the policies affecting our lives. Analysis not found anywhere else, The Brussels Times’ Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels behind the scenes straight to your inbox every week, subscribe to the newsletter here.