Even before the COVID pandemic, some major EU economies were slowly stumbling into recession. According to the ECB, it is now expected that EU economies will shrink by eight per cent on average and aggregate government debt will rise from 86 per cent of GDP to over 100 per cent this year.

The European Commission, backed by the political support of the two largest member states, Germany and France, announced that it would be borrowing €750 billion to finance a one-off recovery fund that will hopefully mitigate some of the worst economic effects of the pandemic.

The scramble for growth has broken down barriers of resistance from some member states to promote more solidarity in the EU.

The recovery plan has two elements. The first element is the joint EU budget of €1.1 trillion. Pre-pandemic negotiations failed to bring about the approval of the seven-year budget.

As part of the recovery plan will depend on financing from the budget, pressure to agree on spending limits will now increase.

The second element of the recovery plan is a €750 billion fund that will distribute €500bn in grants to the worst affected member states and €250bn on long-dated bonds with favourable conditions.

Italy and Spain will benefit most. Malta, which has not been classed among the member states most affected by the pandemic, is expected to receive around €1 billion, with €350 million in grants and the rest in loans.

Both the grants and the loans will be subject to specific conditions that make it necessary for beneficiaries to use the funds for particular investments or reforms linked to the achievement of common EU goals, such as cutting emissions or digitalising the economy. This is good news for those who believe that the EU needs more integration and investment in promoting a green economy agenda.

The narrative of this recovery fund gets somewhat problematic for some member states, including Malta, when it describes how the EU loan from the financial markets will be repaid.

It has been suggested that repayment could come through taxes designed to pursue the EU political aims of more equitable taxation and combatting climate change. Other repayment ideas are linked to a tax on imports into the EU based on the carbon emissions involved in their production, a digital tax, or a tax on large companies.

Finance Minister Edward Scicluna gave a rather cold welcome to the introduction of this fund, comparing it to a ‘prickly pear’. He sees this project leading to yet another attempt by the larger member states to impose tax harmonisation. This would have a substantial adverse effect on Malta’s attractiveness to investors in financial services and e-gaming.

The government and the opposition, as well as the local business sector, consistently agree on the importance of promoting our favourable tax regime to attract investment. This competitive advantage is now at risk because the majority of member states see Malta, Ireland and Luxembourg adoptingbeggar-thy-neighbour economic policies.

Large and not-so-large corporations avoid paying tax in countries where they sell their services by domiciling in countries that offer lower taxation rates for corporate profits. A Common Consolidated Corporate Tax Base is seen as key to fighting tax avoidance and promoting transparency, as well as boosting economies across the EU.

The recovery fund is good news for those who believe the EU needs more integration and solidarity. It is less so for countries like Malta that stand to lose through more integration on fiscal matters.

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