We flagged the good things about the draft proposal of the EU 2021-2027 budget a few weeks ago. Now we want to flag the challenges. 1) The Commission proposes the introduction of a common consolidated corporate tax base from 2023 initially for companies with over EUR750mn of turnover and later to be deployed to every company. This proposal in our view is potentially costly in terms of forgone revenues to many countries, it is a huge step towards a closer Union (which not everybody agrees with). It would probably require significant coordination among member states; therefore, whilst some of the benefits of the proposal include lower administrative costs for companies, it may well be that those same costs will simply transit to member states. 2) The Commission proposes to significantly enhance its powers, by introducing the reverse qualified majority voting rule (which means that the Commission’s proposal is deemed to be adopted by the Council unless it decides by qualified majority to reject the Commission’s proposal). This is a steep increase in the Commission’s powers, that in our view will make Eastern Europe as well as several other Western European member states uneasy. 3) It does not fully address the risk that countries within the EU but outside of the Eurozone will use the exchange rate to maintain and strengthen their competitive advantage relative to the countries inside the Eurozone.
Over the past week investors have focused on the perceived destabilising ideas of the new Italian government. We think that most are misinterpreting what is by and large a strategic negotiating tactic of Italy with regards to its priorities around the EU Budget, the EU structure and the eurozone monetary policy going forward, with what is a genuine fiscal risk in the next 24 months.