Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 57 56 On the matter of ‘responding more assertively to global events’ Mrs von der Leyen said that an EU version of the US Magnitsky Act will be proposed, allowing sanctions if human rights are infringed. On trade, the focus was on revitalizing and reforming the multilateral system, with the EU looking to lead reforms of the World Trade Organization and World Health Organization. In support of all of the above, the Commission President clearly and specifically addressed the European Green Deal and its fundamental role, not only for the imminent recovery, but also in the very way the bloc will prosper long into the future. Headlining the proposal was the new EU-wide goal of a 55% reduction in emissions by 2030, up from the current target of 40%. Indeed, 37% of NextGenerationEU will be spent directly on European Green Deal objectives and a target of 30% of NextGenerationEU’s €750 billion to be raised through green bonds was also announced. This commitment takes green financing to the next level and will reinforce Europe’s position as the largest issuer in green bonds worldwide. It serves as a clear message to the rest of the world of the importance the EU places on combating climate change: it will achieve climate neutrality by 2050, it will honor its commitments to the Paris Agreement and it will lead others in doing so. Neatly abutting the green pillar, the Commission President also took stock of its digital twin, entreating policymakers and the private sector alike to make this “Europe’s Digital Decade”. Despite this theme being long established and widely endorsed, Europe has fallen behind. To date, all of the tech giants are based in China and the US; 40% of those living in rural areas are still without access to broadband connections; and the real data economy lies latent yet untapped with 80% of industry data being collected yet never used. 1 While the pandemic has taken a heavy toll, it has played an uncomfortable, yet vital, role in revealing weaknesses in the European system that have been neglected or ignored and in this digitization is not immune. To thrive in a post-COVID world, Europe must be transformational and digitization will be key. It is therefore not surprising to learn that 20% of NextGenerationEU will be invested in the Commission President’s ‘Digital Decade’. Given the historic sum enshrined in the recovery fund and its heavy focus on the environment and digital there is a clear message echoing from the corridors of Brussels; a robust desire to rebuild, rebuild quickly and, above all, rebuild in such a way that is future proof and does not leave anyone behind. This was not the case after the Global Financial Crisis of 2008. Since then, inequality in Europe has increased and become more entrenched, both socially and economically. These inequalities were borne out by COVID-19 with the most vulnerable individuals, areas and nation-states being the most adversely affected. However, the aforementioned themes can play a part in the reversal of the status quo and provide an opportunity that could bring multiple benefits to many of Europe’s less developed regions, allowing them to finally mobilize untapped resources and accelerate their economic progression. However, this is no mean feat for Member State governments. Despite the unprecedented support emanating from the highest echelons, national administrations now face the unenviable task of supporting a recovery whilst simultaneously dealing with a heavily inflated debt pile and much reduced revenue. McKinsey forecast that this could result in a worldwide deficit of $10 trillion in 2020 and a cumulative shortfall of up to $30 trillion by 2023. This will require a delicate and meticulous balancing act by policymakers; in order to “avoid disrupting the economic revival, fiscal measures must not come too early, but to avoid losing control of the fiscal trajectory, they should not come too late”. However, if we have learned anything from the aftermath of the Global Financial Crisis it is that economic austerity and tapered investment are not the answer. The Commission President entreats Europe “to emerge stronger by creating opportunities for the world of Of the grants, 70% (€218.75 billion) will be committed in 2021-2022 and the remaining 30% (€93.75 billion) in 2023. To access the funds, Member States need to prepare ‘National Recovery and Resilience Plans’, which must include both reform and investment proposals, be based on 2019 country-specific recommendations from the Commission and should focus on economic growth, job creation and social cohesion, along with the twin EU priorities of green and digital. In terms of the putative ‘federal taxes’, the European Commission set out a number of options in its May 2020 Proposal, one of which has already been approved by Member States, an EU tax on non-recyclable plastic packaging waste. Other proposed taxes included an extension of the Emission Trading System to airline and maritime transport, a carbon border adjustment mechanism, which is a form of carbon tariff to ensure domestic environmental policies are not ‘undercut’ by more lightly regulated foreign imports, a digital services tax and an EU Single Market Levy, a tax on the larger companies that benefit most from the EU Single Market. It is worth noting that the recovery fund will require ratification of all Member States through their national parliaments (but not technically the European Parliament, although it does have influence through its role in the general 7 year EU budget). On September 16, 2020, Ursula von der Leyen gave her maiden ‘State of the Union’ address to the European Parliament. Naturally, the Commission President underscored the importance of a renewed EU Health Union, with various measures to strengthen cross- border coordination. In terms of the ‘social market economy’, amongst other things, Mrs von der Leyen explained that the Commission will work to complete the Capital Markets Union and the Banking Union: “Deep and liquid capital markets are essential to give businesses access to the finance they need to grow and invest in recovery and in the future. And they are also a pre-requisite to further strengthen the international role of the euro.” tomorrow and not just building contingencies for the world of yesterday”. However, whilst valiant and emboldening in sentiment, this call to arms is fraught with challenges, none more so than the fiscal dynamics with which Europe (and the rest of the world) must now contend. In conclusion, many of the recent EU initiatives have focused on achieving ‘Strategic Autonomy’. What started in the heat of the COVID-19 storm in April as an understandable desire to “increase the strategic autonomy of the Union and produce essential goods in Europe” has taken on its own momentum. Precisely what this means we will learn over the coming months and years. 1 “Closing the $30 trillion gap: Acting now to manage fiscal deficits during and beyond the COVID-19 crisis”, McKinsey & Company, 16 July 2020. Policymakers in Europe Take Action to Secure the Post-COVID Recovery Given the historic sum enshrined in the recovery fund and its heavy focus on the environment and digital there is a clear message echoing from the corridors of Brussels; a robust desire to rebuild, rebuild quickly and, above all, rebuild in such a way that is future proof and does not leave anyone behind.