Just occasionally it's not all about the money. The context the European Union summit deal sets for the European agenda in the next couple of years is much more important for Ireland than the cash we will get. We saw in the last crisis just how a fractious political atmosphere – and some mistaken policies – can have a huge economic cost. Perhaps some lessons have been learned. Whatever the rows that led to an agreement, centralised borrowing of hundreds of billions of euro, with €390 billion distributed via grants, is a big step forwards.
The addition of a €5 billion Brexit fund – from which we should get a significant if as yet unspecified share – makes the likely Irish cash take look a bit better. But the vital thing for Ireland is that the EU reached a deal and that the fatal delays seen during the last crisis, which fuelled market turmoil and did such damage, have been avoided.
The political fallout the from the rows seen during the summit will be worth watching. But the EU desperately needed a budgetary deal to sit alongside the huge monetary action taken by the European Central Bank. And now it has one.
A failure to agree at the summit might have given the financial markets a reason to test the ECB’s resolve and pick away at the discomfort in some member states about the scale of the central bank’s actions. Further political rowing could have stoked these fires.
Keeping the political show on the road at the summit makes this less likely and a rerun of the economically damaging market tension seen during the last crisis should thus be avoided.
Low interest rates
In turn, this increases the chances for Ireland of being able to continue borrowing at super-low interest rates, which is vital. This is much more financially significant for Ireland that the cash benefits from the new deal – though this was always going to be the case. Ireland is one of the richer member states and this deal is designed to help the poorer ones.
Ireland suffered in the original proposed allocation mechanism drawn up by the European Commission, largely because our inflated GDP level leaves Ireland looking richer than it is. In the original plan, we were to get €1.9 billion in grants and access to €1 billion in loans, a small share from a €750 billion cake.
In terms of grants, it now appears we might get about €1.3 billion in the initial 2021-2022 allocation – under which 70 per cent of the money from the main recovery fund will be paid out.
The rest of the money – about 30 per cent of the fund – will be paid out later under a different formula which should be more favourable to Ireland as it includes the economic hit from Covid.
And further sums may be available from other funds. So in total we may get more than the €1.9 billion in grants originally estimated by the commission. Whether Ireland would avail of the loans part of the deal is unclear – at the moment the State can borrow very cheaply on the markets.
But the bigger financial win for Ireland is agreement on a new €5 billion Brexit fund as part of the next EU budget, to be allocated to countries worst hit by the UK’s departure from the EU. Ireland and Belgium are likely to be the two biggest beneficiaries here.
There is no indication of how this fund will work or the exact basis of allocation, but this makes the summit outcome for Ireland in terms of direct cash benefits look better.
Borrowing
What about paying for it all? The commission will borrow the money on the markets – the big political departure which was long fought over – with a commitment to have it paid down by 2058.
How the necessary repayments will be financed will depend in part on how successful the commission is in bringing forward proposals to raise its “own resources” – taxes that it would keep and be used to pay down the debt. A plastic waste tax is to be introduced in 2021, but beyond that ideas such as a digital tax remain to be fought over.
If the commission does not find enough own resources to make repayments, it means that, in the longer term, countries will have to pay more into the EU budget over a long period of years to 2058, to gradually pay down the borrowings.
As a net contributor to the EU budget, Ireland would have to pay its share and could have to pay significantly more in cash over the years than it will get from the funds. There is a long way to go to see how this works out.
So the net cash outcome for Ireland is the certainty of grants over the next few years and a top-up from the Brexit fund. In time, particularly after 2026, the State may have to pay in more to the EU budget each year to fund repayments of the money borrowed by the commission.
But the wider economic significant is greater. Underlining that the EU is standing together to address the crisis is important. It suggests that some lessons from the last crisis have been learned, Crucially, the EU has added a budgetary wing to the ECB's support programme which is so vital to Ireland. Flying on one wing would have increased the risks for Europe in the months ahead.
