The European Union’s massive Covid-19 stimulus funding has created a large debt hangover and there is a risk the money could be misspent or even defrauded, according to the head of the union’s top financial watchdog, the European Court of Auditors (ECA).
Tony Murphy, who began his career at the Irish Court of Auditors in Dublin and was elected ECA president last year, has called on the European Commission to tighten its oversight of how the funds are spent to ensure adequate controls on the so-called recovery and resilience facility.
“With such large amounts at stake, it’s imperative that EU taxpayers’ money is adequately protected. There is an obvious need for effective checks,” he told journalists.
“I think we have to acknowledge there’s an inherent risk in terms of increased risk of fraud.”
The total sum made available in the stimulus fund is €724 billion, though so far just €144 billion has been paid out to EU countries. Of this, €97 billion has been distributed in grants – which governments can keep without repaying the commission – and €47 billion in cheap loans.
In a break with usual practices, the Covid-19 stimulus fund was deliberately designed to be distributed as a reward when countries fulfil certain milestones, such as rolling out high-speed broadband, digitalising public administration, or constructing electric car charging points.
The idea was to incentivise reforms that would help the EU towards its goals of greening, digitalising and modernising the continent’s economy. The priority was to make the money available as soon as possible so the stimulus could have the greatest effect, and it is credited with cushioning the blow of the pandemic and helping economies quickly rebound.
But distributing funds for milestones rather than in return for the proof of “costs actually incurred” comes with risk, Murphy warned.
For example, if a member state promises to build a bridge, the proof that the bridge now exists is enough for the commission to sign off on the spending. It will not check whether contractors were hired in a fair competition, whether normal prices were paid for the construction materials and whether the accounts balance.
“The underlying procurement and all the other procedures which were carried out to get there are basically policed by the member state,” said Murphy. He described it “a design flaw”.
The biggest recipient of the funds in the EU is set to be Italy, which has roughly €200 billion earmarked for it by the end of 2026, of which it has already secured almost €67 billion.
The right-wing government of Giorgia Meloni is in talks with the commission about whether it can replace some original projects in its programme that it now realises cannot be completed on time.
Then there’s the question of how it will all be repaid.
The stimulus money was raised by joint EU borrowing on the international market, in loans that will have to be repaid by 2058.
The commission has proposed novel ways to raise money for repayment, such as a tax on plastics, a digital tax, or a levy on imports that have emitted a high amount of carbon during their manufacture. .
But these measures require the approval of member states, and some are controversial: none have yet become concrete. Ultimately, EU member states themselves will be on the hook.
“These loans will be on the books of the commission until 2058. If you look at our annual report for 2021, you will see that the contingent liability of the of the commission ... has exponentially exploded,” Murphy said.
This is due to the stimulus fund borrowing, but also Sure, the cheap financing made available to member states to allow them to financially support those made unemployed by Covid-19.
“There’s a huge contingent liability, which is a liability for all of us here. It’s a liability that has to be met by somebody. Borrowing is fine, but we have to bear in mind that ultimately it will have to be repaid,” he warned.
When the joint borrowing programme was negotiated and agreed in 2020, then-taoiseach Micheál Martin said he expected Ireland to be a “net contributor” in the repayment of the funds. That means that, ultimately, we would pay back more than we receive, due to Ireland’s relative economic strength.
Ireland is entitled to an estimated €1 billion in grants under the programme, an amount that was calculated per member state based on factors such as size, economic growth figures and the impact of the pandemic. Ireland has yet to draw down any of the cash.