© European Union, 2021-2022

Financing the EU recovery fund proves trickier than handing out cash

Negotiations about how the EU’s recovery fund will be financed are in deadlock, more than two years after EU leaders reached a historical agreement. If leaders fail to strike a new deal, rich countries face a bigger bill.

  • The European Union (EU) has so far distributed over 130 billion euros from the COVID-19 recovery fund among member countries — but has yet to figure out how it will pay back the cash it borrowed for the operation. 
  • EU leaders were eyeing an agreement by year-end about a first set of new taxes to finance the fund, but they have given up on that timing.
  • The European Commission’s proposals to raise new taxes on polluting sectors and Big Tech firms are being blocked by Poland and Hungary.
  • A guarantee from rich countries such as Germany and the Netherlands is reassuring the EU’s creditors. But rating agencies say they can downgrade the EU if talks about ‘new own resources’ stall, which would increase the bloc’s borrowing cost.
  • The Commission will table a second set of new tax proposals between July and September next year, including a plan to harmonise corporate taxation across the EU
  • There is a narrow window to agree on the two tax packages, when Spain and Belgium hold the rotating presidency of the EU between mid 2023 and mid 2024. Before, Sweden will be in charge and after Hungary, Poland and Denmark — all countries that are, for different reasons, expected to obstruct a deal. 
  • With journalists and media from over fifteen European countries, Follow the Money has set up a cooperation to monitor how the recovery fund is executed: the #RecoveryFiles.
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On 21 July 2020, at 5:31 a.m, European Council President Charles Michel sent out a one-word tweet: ‘Deal’.

After four days and nights of negotiations, heads of state and government had reached an agreement to jointly borrow 750 billion euros for a COVID-19 recovery fund. 

360 billion euros in loans — to be reimbursed by the countries – and 390 billion euros in grants would kickstart the European economy, which had almost come to a halt. The cash was also meant to boost the EU’s digital and green ambitions. 

European Commission President Ursula von der Leyen and French President Emmanuel Macron welcomed the July 2020 deal as being ‘historical’. Commentators called it the EU’s ‘Hamilton Moment’ after the first U.S. Secretary of the Treasury, Alexander Hamilton, and the deal he brokered. 

The comparison with Hamilton’s compromise is not entirely accurate, however. Levying taxes remains a national power in the EU. Led by German Chancellor Angela Merkel and Dutch Prime Minister Mark Rutte, richer countries have managed to stipulate that the fund is ‘an exceptional response to those temporary but extreme circumstances” and that ‘the powers granted to the Commission to borrow are clearly limited in size, duration and scope.’

Merkel en Rutte made it clear that they had not opened the door for permanent solidarity between rich and poor member countries. 


Fudging the financials

While Commission President Ursula von der Leyen ensured she was extensively photographed during her roadshow distributing the recovery money, an agreement on how the megaproject will be financed is – over two years after the deal was concluded – nowhere in sight. 

The Commission in December last year proposed three new taxes to refund the money it borrowed for the grants – the loans are reimbursed by the countries directly. EU countries need to introduce these levies – two green and one digital measure — domestically and later hand over part of it to the EU.

The deal requires unanimity among EU countries, but meets resistance in several capitals. Poland’s polluting industry means Warszaw would proportionally, after the reform, pay a much larger part of the bill in 'green' taxes. Sweden is fundamentally opposed to Brussels meddling with national taxes, and Hungary seems out to sabotage all decision making in Brussels as long as it has not received any euros from the recovery fund.

Meanwhile, the bill is mounting. The Commission in early October said that rising interest rates had increased the cost of the recovery fund by 450 million euros. Where the EU initially enjoyed negative interest rates, these have by now increased to over 2.5 percent.


Between 2021 and 2026, the Commission raises money on the financial markets and distributes it to member states. The repayment of the borrowed money is scheduled between 2028 and 2058.

The borrowing started on 15 June 2021 and the first money was disbursed (to Portugal) on 3 August 2021.

As of 11 October, the Commission had issued 157.6 billion euros in long-term funding, of which more than 128 billion had been distributed among member states.

Under the agreement, Brussels has until 31 December 2026 to raise and distribute funds.

Repayment of the loans – with maturities ranging from three months to 30 years – must be completed by the end of 2058, according to the deal. The Commission aims to start repaying its debt in 2028, including loans maturing before that date, which it can pay back with income from new loans.

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Three new levies

EU officials calculated that the three new taxes should generate an average of 17 billion euros a year between 2026 and 2030.

The biggest cash flow — an average 12 billion euros a year — should come from the reformed emissions trading system (ETS). So far mainly energy producers have been forced to purchase certificates for the greenhouse gases they emit. At the moment, EU institutions are in full negotiations to include emissions from buildings, road transport, aviation and shipping. The Commission wants 25 percent of the countries’ revenue from the reformed ETS to repay the recovery fund.

The second planned tax is an import levy on products manufactured outside the EU with high CO2 emissions; such as electricity, cement, aluminium, steel and fertilisers. The Commission expects this measure to bring in roughly a billion euros a year.

The new "carbon border adjustment mechanism" (CBAM) aims to protect European companies, who are by law required to pay for their emissions, from competing with third countries with less stringent standards. 75 percent of national proceeds would flow to the EU.


A new tax on multinationals, the third levy, of which Brussels claims 15 percent of the revenue, is expected to raise 2.5 to 4 billion euros annually. This levy, which taxes the profits of the 100 largest and most profitable multinationals — US tech giants are expected to cough up most of the bill — must first be discussed within the Organisation for Economic Cooperation and Development (OECD) before it can be introduced in the EU.

Insufficient returns

The estimated revenue that Europe can derive from these three new levies has increased from 16-17 billion to 19-21 billion euros due to inflation, a Commission spokesperson said. 

But that amount is not fully destined to repay the borrowed money for the recovery fund. The Commission plans to use part of the cash to finance a social climate fund that protects vulnerable households and small businesses from the impact of the first measure; the introduction of a new emissions trading system for buildings and road transport. 

The second round of proposals will follow in 2023, including a plan to harmonise corporate tax across the EU

According to the Commission, the amount it has to pay back between 2028 and 2058 (for the part of the fund it pays out in grants) will increase due to inflation to 421 billion euros by 2027, from 390 billion euros in 2018. This means Brussels will have to pay off more than 14 billion per year, skyrocketing interests excluded. 

That's why the Commission already announced that it will come forward with a second proposal for new taxes in the third quarter of next year — including a plan to harmonise corporate taxation across the EU.


Difficult task

The three new taxes are not only inadequate to repay the borrowed money, a political agreement on the levies, too, is still a long way off. At the lingering European summit in 2020 that gave birth to the recovery fund, EU countries agreed that the import levy on polluting industries and the multinational tax — then still called a 'digital levy’ — should be introduced by 1 January 2023. The third measure — the reformed ETS — was also meant to be in place by then. But that timeline is no longer tenable.

In June this year, the world got a rare glimpse into the negotiations over the file and the divisions between the countries, during a live-streamed meeting of the Economic and Financial Affairs Council (Ecofin).

Danish Finance Minister Nicolai Wammen said that it is still much too early to talk about what to do with the revenue as long as it is not clear what exactly the new taxes will look like.

The Commission does not want to wait that long and is ramping up pressure to reach a deal. Budget Commissioner Johannes Hahn warned ministers that the debate is ‘carefully watched by the financial markets and may impact on our rating’. He therefore sees this dossier as a 'litmus test for the union to remain on the path of sustainable public finance'.

The EU has the highest ‘AAA’ rating from two of the three major rating agencies, Fitch and Moody's, as do Germany and the Netherlands. The EU owes this mainly to the temporary increase in the ‘own resources ceiling’ of the member states from 1,4 to 2 percent of the EU’s gross domestic product.

Moody's in September nevertheless noted that "the joint and several nature of the obligations of member countries relative to EU obligations has never been tested" and that it could downgrade if that solidarity proves weaker than expected.

The third rating agency, S&P Global, is more cautious. In May, it upgraded its rating from AA to AA+, but said it could revise downwards ‘if the proposal by the European Commission to introduce new EU revenue sources were to receive significant pushback from member states so that new revenue would not be available when debt repayments start in 2026, which we view would signal a weaker cohesion of the EU.’

Heavy criticism

For now, the member countries don’t seem impressed or in a rush. Many countries blame the Commission for not sharing enough data on the precise impact the proposed tariffs would have on their economies and budgets.

At the heated Ecofin meeting of ministers in June, the Commission's plans came under heavy fire. Several EU countries see reasons to torpedo the negotiations.

‘What is crucial for markets is that we have committed to pay the loans, not which type of own resources will finance it,’ said Danish Finance Minister Nicolai Wammen.

Then Swedish Minister Mikael Damberg went a step further by saying that it is not ‘essential’ to come up with new resources. Instead, the payments of the creditors ‘should be financed through re-prioritisation within the existing [budget]’, he said.

Tough talk

While Sweden prefers to completely ditch the new resources for the EU, other countries are mostly concerned about their share in the costs. Polish minister Magdalena Rzeczkowska thinks the proposed measures are not balanced because they ‘overburden the poorest member states’.

As the country with the second highest CO2 emissions in the EU (after Germany), Poland earns a lot from the emissions trading system. In 2020, it received 3,16 billion euros from the auction of aloowances. So far, Poland has been able to spend that money by itself. But as a quarter of its income threatens to flow to Brussels, Warsaw rebels.

‘The transfer of the proceeds from the sale of ETS allowances to the EU budget poses a threat to the achievement of the EU climate goals. These revenues should remain in the national budgets where they will be used to achieve climate goals in the most effective way’, Rzeczkowska said.

That quote is at odds with the data Poland provided to the Commission, however, which shows that between 2013 and 2020, the country spent almost half of its income from certificates on non-climate goals.

‘If the Polish government was genuinely concerned about the use of ETS revenues for climate action, it could have done so already with all its revenues available,’ Klaus Röhrig of NGO Climate Action Network Europe told us at his office in October.

In addition to the Scandinavian and Polish objections, the Hungarian government of Prime Minister Viktor Orbán is also opposed, as usual. Hungary is hijacking the OECD negotiations on the third planned source of tax income for the Commission: the levy on the most profitable multinationals.

Difficult discussion

Negotiations about the EU’s new tax resources are extremely difficult. French minister Bruno Le Maire, who led the Ecofin meeting in Luxembourg because his country chaired the council, seemed relieved when he could pass on the file.

‘I wish you courage for this discussion that will not be easy,’ he said with a telling smile to his colleague from the Czech Republic, who would take over the presidency two weeks later.

The Czech presidency runs until the end of December, which is when EU countries and later the Parliament and the Commission had agreed to introduce the new taxes.

The Czechs may be able to facilitate an agreement on the ETS reform and CBAM by the end of the year. The final phase of negotiations, involving Member States as well as the Commission and Parliament, started with a meeting on 10 October. But it has not yet been decided whether part — and which part — of that income will flow to Brussels. The tax on the excess profits of multinationals will take much longer.

What’s the alternative?

There is a plan B. If EU countries cannot agree on new tax revenues, they have to make adjustments according to the usual gross national income (GNI)-based distribution keys. 

That would mean the Netherlands, Germany or Sweden will pay considerably more than for instance Poland or Greece. At least some of the rich member states would in that case insist on heavy cuts in the next EU budget, according to insiders. The alternative is a budget increase of about ten percent, which would not go down well in Berlin or Stockholm. A likely compromise would be to partially increase the budget and to slash existing European programmes for the remaining amount. 

Sweden is a special case. Although it would pay much less with the proposed new EU tax resources — mainly because of its low CO2 emissions — it blocks the reform because it is opposed in principle to new 'European taxes'. The Netherlands is more pragmatic and supports the proposal because it is less costly, as long as correction mechanisms such as the social climate fund do not become too expensive.


An agreement on new tax revenues will require a presidency that prioritises the file. That is unlikely in the first half of next year, when Sweden takes the torch from the Czech Republic. The Spanish and Belgian Presidencies offer a window to clinch a deal before Hungary, Poland and Denmark take over from July 2024. The EU no doubt also hopes that Madrid and Brussels will manage to rush through the second round of tax reforms, which will be proposed at the start of the Spanish Presidency.

Meanwhile, the clock is ticking and the rating agencies are watching. If EU countries don’t manage to find new money to finance the fund, that will impact the bloc's creditworthiness and pass the bill on to usual suspects such as Germany and the Netherlands.

Jesse Pinster and Peter Teffer contributed reporting