Brussels proposes €5bn Brexit fund to break deadlock around Covid plan

Ireland and other countries set to be badly hit by Brexit will have recourse to a €5 billion crisis fund under a new proposal aimed at breaking the deadlock in negotiations over the EU's next budget and pandemic recovery plan.

The proposed Brexit Adjustment Reserve would be used "to counter unforeseen consequences in member states", European Council president Charles Michel said as he unveiled the plan. It would "support the countries, regions and sectors that will be most affected" based on a needs assessment by the European Commission.

“It’s a very important thing, it’s new, and it’s necessary,” Mr Michel told reporters of the Brexit proposal.

Ireland had been among member states that had objected to the previously-proposed method of allocating funding between member states, arguing that the Republic should be in line for more help given the challenges it faces from Brexit disruption, among other reasons.

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The Republic is forecast to be the member state most economically damaged by Britain’s exit from the EU, which will cause significant friction on trade between the islands from January. As such, it argues, it should be in line for the lion’s share of support from the fund.

The details, however, will not be worked out until November, by which time the outcome of the negotiations on what trading relationship the EU and Britain will have from January should be clear.

Grants and loans

The recovery package under discussion involves the European Commission borrowing some €750 billion, which it would give out to member states in grants and loans to pay for investment projects that would help transform economies to be more green and digital while countering the economic downturn caused by Covid-19.

Ireland was initially due for a relatively slim slice of the funds because need was calculated on the basis of unemployment figures and economic growth prior to the pandemic, plus population size. The government argued this did not reflect the real impact of the crisis, which is forecast to see the Irish economy shrink 8.5 per cent this year.

Under the compromise proposal 70 per cent of the grants would be allocated this way, but 30 per cent would be allocated according to how much economies actually shrink in 2020 and 2021, which would be measured in 2022.

The commission argues that economies in a weaker state to begin with are less able to weather the effects of the downturn, and require more urgent and substantial assistance to prevent the kind of widening divergence between member states that has triggered crises in the bloc in the past.

Digital levy delayed

National leaders of EU governments are due to meet next week to try to reach agreement on the budget and recovery plan. Pressure is mounting to reach agreement in order to win the confidence of financial markets as well as shore up economies that were already struggling prior to the pandemic and are forecast to take the heaviest hit, particularly Italy.

A group of countries, led by the Netherlands, had resisted the idea of giving out grants to member states funded by jointly-guaranteed borrowing by the commission, fearing that the obligations to repay the funds would ultimately fall on their taxpayers.

They demanded that the money be tied to requirements for reforms, and raised concerns about money going to countries such as Poland and Hungary while governments there are eroding rule-of-law norms.

To try to forge agreement the compromise proposal suggests giving the leaders of national governments the power to decide by qualified majority vote whether funds should be released to member states that request them when they meet in the European Council.

There are also fierce debates over how the €750 billion in borrowing by the commission would be repaid. The commission has proposed that it should be granted the power to raise its own funds to repay the borrowing.

According to the compromise deal, a tax on plastics levied by the commission has sufficient support to be in place by this January.

A carbon tax on imports and a digital levy – which Ireland strongly opposes – do not currently have consensus, and would be up for discussion next year. A prior suggestion that large companies could be charged a levy to operate within the single market has disappeared from the proposal.

“We don’t have numbers at this stage” for such proposals, said an EU source.