Policy brief

Financing the European Union: New Context, New Responses

With the European Union for the first time taking on debt to help finance the economic recovery from the coronavirus, new resources are needed to fund

Publishing date
11 September 2020

This Policy Contribution is an edited and abridged version of a paper presented at the Informal Ecofin under German presidency in Berlin, Germany on 11 September 2020

Roughly two thirds of the European Union’s budget is financed out of member states' national tax revenues. These resources, based on gross national incomes, are transparent, fair and in line with the principle of subsidiarity but they lead to political debates that emphasise the cost of EU spending rather than the benefits, and add to the perception of the EU budget in terms of net balances, rather than value added.

The financing of the EU budget must be reassessed in the light of the July 2020 decision to launch the Next Generation EU programme. Budget resources could include a plastics charge, a carbon border adjustment mechanism, a digital tax, revenues from emissions trading and a financial transactions tax. We evaluate these options against four criteria: whether the origin of the revenue can be assigned to a particular member state; whether the revenue can be raised in isolation or requires pan-European tax coordination; whether the new resource can help reduce tax distortions in the EU; and whether the resource is related to EU policies.

Revenues from emissions allowances fit these criteria best. Carbon emissions do not primarily cause damage only where they occur. Taking the EU cap on emissions as a given, additional emissions in a particular member state should be regarded as a negative externality on other member states. Emission reduction objectives are set at EU level. Whoever auctions off an allowance, wherever the corresponding emission occurs in the EU, and wherever the resulting good or service is consumed, the impact on common policy outcomes is the same. In this regard, proceeds from the sale of emissions trading system allowances are not that different from customs duties.

Compared to the ETS, the other candidates for EU own resources are less convincing. Carbon border adjustments are intended to limit international competitive distortions rather than to generate revenue. Digital taxes and minimum corporate taxes are best left to the process underway in the Organisation for Economic Co-operation and Development. On a financial transactions tax there is no agreement within the EU.

Total ETS revenues up to 2050 would approach €800 billion in a realistic scenario and possibly even €1.5 trillion assuming the scope of the ETS and the share of auctioned permits are increased. ETS revenues therefore would be largely sufficient to repay the Next Generation EU debt. However they would generate distributional effects, and so part of the revenues should finance grandfathered rights that would accrue to the member states. The EU can tackle the distributional issues involved in the reform of own resources.

Recommended citation
Fuest, C., J. Pisani-Ferry (2020) ‘Financing the European Union: new context, new responses’, Policy Contribution 2020/16, Bruegel

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry holds the Tommaso Padoa Schioppa chair of the European University Institute. He is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

  • Clemens Fuest

    Since April 2016 President, Ifo Institute – Leibniz Institute for Economic Research at the University of Munich
    Since April 2016 Director of the Center for Economic Studies (CES)
    Since April 2016 Professor for Economics and Public Finance at the Ludwig Maximilian University of Munich
    Since April 2016 Executive Director of CESifo GmbH
    2013 - 2016 President and CEO of the Centre for European Economic Research (ZEW), Mannheim and Professor of Economics, University of Mannheim
    2008 - 2013 Professor of Business Taxation and Research Director, Centre for Business Taxation, Saïd Business School, University of Oxford
    2001 - 2008 Professor, Chair of Public Economics, University of Cologne
    1995 - 2001 Senior Research Assistant, Chair of Public Economics, University of Munich
    1991 - 1995 Research Assistant, Chair of Economic Policy, University of Cologne

Related content