Q&A: What is the European Union stimulus fund and who is paying for it?

Who is paying?

Ireland is to receive €1 billion in grants largely over the next two years from a European Union stimulus fund designed to counteract the damage of the Covid-19 pandemic and make economies more green and digital.

Plans for how to spend the money, including on Cork commuter rail, peat restoration, and unemployment re-training programmes were unveiled as European Commission president Ursula von der Leyen visited Dublin on Friday.

But what is the scheme and how does it all work?

Where is the money coming from?

Ireland is to receive €914 million for 2021-2022 and a further roughly €75 million after that. The latter sum is calculated depending on how the economy fares due to the Covid-19 pandemic, so can change.

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The money is in the form of grants, not loans, and so does not need to be directly repaid to the European Commission. It is Ireland’s slice of a massive EU €750 billion stimulus package.

Is Ireland a ‘net payer’ to the fund?

There are no net payers or net beneficiaries of this programme – as of now. It is not like the EU budget, into which each member state contributes funds, and to which Ireland has been a net contributor since 2013.

It is based on joint borrowing: the first time this has ever been done by the EU.

How will the joint borrowing be paid back?

The European Commission is currently raising funds on the financial markets at historically low interest rates to distribute as the stimulus money to member states. The Commission loans are due for repayment between 2027 and 2058.

The executive has proposed several initiatives to raise revenue to allow it to repay the loans directly without the need for member state contributions. These include an extension of an emissions trading system, which makes polluters pay for the emissions they release; a levy on imports into the EU that are made to lower environmental standards; a “single market tax” on the largest companies; and a tax on digital multinationals – though this has been put on pause.

If these options are not adequate, the 27 EU member states will collectively pay back the borrowing. What percentage each member state will repay will be calculated in a similar way to the EU budget: based on each country’s gross national income year-by-year.

It is impossible to know in advance the relative size of each country’s gross national income in the future. How much the Commission will be able to repay directly through its proposed levies is also unknown. For this reason, it is not possible to calculate now how much the fund will cost Ireland, compared to how much it receives. In addition, the plan as a whole, including its positive impacts on the economies of other EU member states, is expected to increase the size of Ireland’s economy.

Which countries are getting the most money?

The proportion each country receives was calculated based on economic performance going into the pandemic, and on the impact of the crisis on GDP.

Ireland had the fastest-growing economy in the EU for some years and a relatively low unemployment rate. Once Covid-19 struck, it was the only economy to grow in the EU in 2020, supported by strong multinational exports. For this reason, Ireland’s allocation of funds is among the smallest in the EU.

The countries set for the highest allocations are those that had underlying economic weaknesses going into the pandemic, and which were hit hardest by the crisis, particularly due to tourism and hospitality forming a large part of their economy. Italy is set to receive €68.9 billion in grants, Spain €69.5 billion, Greece €17.8 billion and Portugal €13.9 billion.

Who decides how the money is spent?

Member states agreed rules about spending in advance. At least 37 per cent had to be spend on climate initiatives (Ireland’s percentage is 40 per cent); a fifth had to go on digitalisation (Ireland’s is 32 per cent). No spending could do any harm to environmental goals.

Each country produced a plan within these rules, while committing to implement existing recommendations for reforms by the Commission (for Ireland, this includes measures to tackle aggressive tax planning, provide more affordable housing, and implement Sláintecare).

The idea behind the spending is that it should make countries’ economies fitter for the future. Each country can claim 13 per cent of grants up front, and then must demonstrate targets met to qualify for more.

There are concerns among some member states about whether the money will be well spent. Hungary’s plan is currently held up; the Commission has not approved it due to concerns about insufficient safeguards against corruption.