Next EU appointments: MFF and Recovery Fund, Green Deal and Just Transition

There was a strong delay to decide the EU budget for the next programming period 2021-2027 due to various reasons, including the pandemic. And this emergency has made necessary an extraordinary support to various Member States. This was clearly supposed to have consequences for the future common budget, its amount, and its scope, and the current proposal on table is quite promising. Southern Member States asked for a trillion Euro Fund in grants (a “billion” in most European continental languages -twelve zeroes-), and various Member States in the North (the “Frugal Four”) replied that they are for a smaller fund mainly based on loans. The Commission has announced a similar Multiannual Financial Framework (MFF) as previously discussed (1.1 trillion), with complementary instruments to strengthen the economy and an EU Recovery Fund on top: Next Generation EU (€ 750 billion).

A Franco-German agreement pushed this Fund forward on mid-May, and a first agreement started to be in the scope, but there are a lot of pressures, and most probably the MFF will receive some cuts, and even the Recovery Fund. Below you can find an account of the negotiations.

The Commission’s proposal included a Cohesion top-up within the Recovery Fund/Next Generation EU. You can watch and read here the speech delivered by the President of the European Commission, Ms Ursula von der Leyen, at the European Parliament Plenary on 13 May with insights on the new MFF proposal (unveiled on 27 May), own resources and the EU Recovery plan. Most European Parliament’s political groups endorsed this plan on 14 May, and the reaction of the European Council was expected to be shaped on 19 June, while Member States or groups of them had made their counterproposals, contributions, or remarks. However, this online Council meeting produced no results and EU leaders decided to meet physically in Brussels on 17-18 July to discuss the recovery package and the next EU budget 2021-2027.

In the meantime, due to the need to coordinate closer EU institutions for a stronger political leadership to achieve a quick agreement, the President of the Commission has called Mr Charles Michel (President of the European Council), Mr David Sassoli (President of the European Parliament), and Chancellor Angela Merkel (representing the German Presidency of the Council of the EU in the second half of 2020) for a mini-summit on 8 July, before the meeting of the Member States’ leaders on 17-18 July, to take stock of negotiations and put some more input towards a deal. Ms Merkel and Ms von der Leyen have seen very clearly the crossroad where Europe is, and have decided to set the course for the fifth Juncker’s scenario: more Europe!

AEBR has been following all these negotiations within the #CohesionAlliance since 2018, which has organized various meetings with the Commission, and is expected to meet before next Summit. AEBR has also followed this in its own in order to keep the cross-border focus, and this has also been the case of other cross-border networks, like CESCI and MOT. We are coordinating efforts to keep European Territorial Cooperation within the new MFF, but also in Next Generation EU, and increase the awareness of other EU departments and nation-states about the added value of CBC in EU integration, also in times of Covid-19, and when the pandemic ends.

In order to also raise the attention on the harmful effects of border closing, AEBR, CESCI and MOT have launched an Alliance of European Cross-Border Citizens. The Alliance has proposed a draft declaration, open for amendments, comments or remarks. You can also join the Alliance by completing this form.

 

The final period of negotiations (so far) for the future EU budget was opened by southern EU member states (ES, FR, IT, PT, GR and CY) strongly asking Ms Von den Leyen on 12 May for a long-term fund (a trillion Euro – a billion in the long scale) to finance non-refundable grants to safeguard the Single Market and avoid disruptions in EU value chains. Meanwhile, the Commission was finishing the design of a European Fund for economic recovery to be launched in September at the latest, substantially based on grants.

In her presentation of the recovery fund, the President of the European Commission told MEPs that we need to support those that need it the most, push for investment and reform, and strengthen our economies by focusing on our common priorities: like the European Green Deal, digitalization and Resilience.

The Recovery Package would consist of two parts, according to the Commission’s proposal: the MFF as already proposed (around President’s Michel “negotiating box”) and, on top of it, a Recovery instrument funded through a larger headroom. This headroom should fix the maximum amount that the Commission can borrow on the capital markets with the guarantee of the Member States. The size of the package (€750 billion) is impressive, but it is also innovative, as it would include for the first time a massive emission of EU common debt, and new “own resources” to help pay the debt. This is touching another traditional resistance of member states: increasing revenues.

In case this proposal goes through, all recovery funds will be channelled through EU programmes, and the European Parliament will have the same say on how the recovery money is spent as it does on the MFF. The Commission proposes to spend across three pillars:

1. Supporting Member States to recover, repair and come out stronger from the crisis. Most funds will be spent through a new Recovery and Resilience tool, to fund key public investment and reforms aligned with European priorities: the twin transition to a climate-neutral and a digitalised and resilient Europe. This will be done within the European Semester and it will be available to all Member States (whether in the euro area or not) and it will be focused on those parts of the Union that have been most affected and where resilience needs are the greatest. The Commission proposes here a cohesion top-up above the usual cohesion envelope within the MFF. This top-up will be allocated based on the severity of the economic and social impacts of the crisis. Our questions here are: considering regional differences? It should be that way. Cohesion is based on subsidiarity. And, how the decision-making process to allocate these funds will be established? We hope it will be based on subsidiarity but, how far? This is a question we will pose to Commissioner Ferreira, and also to President Von der Leyen, but we should ask the Member States.
2. Kick-starting the economy and helping private investment to get moving again in key sectors and technologies: from 5G to Artificial Intelligence, from clean hydrogen to offshore renewable energy.
   • InvestEU will be strengthened.
   • A new Strategic Investment Facility will be created to help invest in key value chains crucial for our future resilience and strategic autonomy, such as the pharmaceutical sector.
   • A new Solvency Instrument will help match the recapitalisation needs of healthy companies who have been put at risk as a result of the lockdown – wherever they are located in Europe.
3. Learning the most immediate lessons of the crisis, strengthening programmes that have proven their value in the crisis, such as RescEU or Horizon Europe. A new, dedicated Health Programme has also been announced, as well as the strengthening of the instruments for Neighbourhood, Development and International Cooperation (NDICI) and for Pre-accession Assistance.

 

The President of the Commission summarized the Recovery Instrument as follows:

• it will be focused on where there is the greatest need and the greatest potential;
• it is short-term and concentrated on the first years of recovery;
• it will include grants; and
• it will include the possibility to frontload part of the investment still this year, using proven financing models based on national guarantees.

And it will complement the three important safety nets agreed by the Leaders in April:

• the SURE initiative (Support to mitigate Unemployment Risks in an Emergency);
• the finance available from the European Investment Bank;
• the European Stability Mechanism.

“Together with next MFF, this is the ambitious Commission’s answer Europe needs, including new own resources, just as it was proposed in 2018”, said President Von der Leyen. She also asked for “a strengthened solidarity effort between nations, people, and generations to invest in a clean future. Scientist will develop a vaccine against coronavirus, but there is no vaccine against climate change.”

“The huge investment in rebuilding comes at a price: rising debt. If it is necessary to increase our debt, which our children will then inherit. We must therefore use that money to invest in their future, by addressing climate change, reducing the climate impact, and not adding to it. Building a modern, clean and healthy economy, which secures the livelihoods of the next generation.”

The Parliament seems to be on board looking at their resolution on 14 May, asking to finance Reconstruction exclusively with EU funds, through EU programmes, but without mixing up “traditional” and emergency ones; but the Council’s opinion is the most important, at the end of the day. Anyway, the Parliament has offered an unusual agreement to Member States. They could avoid increasing their contributions if they agree to extend EU own resources (new taxes). This would lead to achieve 2 trillion Euro for this plan, mostly in the form of grants than loans.

 

On 18 May Germany and France attempted to narrow the differences proposing a €500 billion recovery programme on top of the trillion MFF for 2021-2027. This extraordinary fund would be mainly delivered in the form of grants, a crucial aspect to boost economic recovery. And, on 23 May, the “Frugal Four” (NL, AT, DK and SE) asked for a “thorough needs assessment” of the recovery fund and a limitation of national contributions to the new MFF (they already asked to cut €80 billion in the first MFF proposal). Northern and Southern countries still disagree on the size, shape, scope, and conditionality of the so-call “great stimulus” to overcome the deepest recession in the EU history. Eastern EU countries have been less affected and do not want to move too much EU budget. Institutions and member states do agree that digital and green agendas should be priorities during the implementation of recovery plans, but France and Germany ask to support “most affected sectors and regions” while the frugal countries want to concentrate in “activities that contribute most to the recovery, such as R&I, health resilience and a green transition”.

What is about conditionality? There are some country-specific recommendations published by the Commission, which would be linked to the recovery funds, but the extent of this is still unknown. The official negotiation started on 27 May, with the presentation of the new budget proposal, and it will be difficult to reach an agreement before the summer, but it is crucial to do so. A first opportunity came on 19 June at the meeting of the European Council. EU leaders had a “constructive” discussion on the €750 billion for the new recovery fund to overcome the Corona crisis and € 1.1 trillion for the MFF. This was finally just a first round for the Heads of Government to show their priorities and concerns. They have appointed a new meeting (and probably a second one) in mid-July, while President Michel will present a “negotiating table” to try to narrow the distance between the “frugals” (plus some central and eastern countries) and those more hit by the pandemic. Main open issues remain: the size of the recovery fund, the distribution between grants (€500 billion) and loans (€250 bn), the “rebates” for the Frugal Four and Germany, the allocation key, conditionality, and the creation of new EU taxes. The criteria proposed by the Commission to allocate the funds are based on population and PIB in 2019, and on employment figures before the crisis (2015-2019), in order to address countries’ resilience. The new negotiating box will probably allocate 70% of the fund under these criteria, but 30 % based on falling GDP in 2020-2021.

 

The new MFF 2021-2027 proposal is based in the “negotiating box” put forward by Charles Michel, the Council President, in February 2020 (€ 1.1 trillion), topped up with a temporary instrument –Next Generation EU–, which practically doubles EU spending in 2021-2024 with funds raised on financial markets: € 750 billion. Will this proposal survive the tough negotiations in place? The plan will be successful if it is big enough, but also if it is well structured on how and when it will be implemented. Some think-tanks, such as “Friends of Europe”, have underlined some elements that should draw our attention:

• Despite the emergency, only a small part will be spent in 2020 (€ 11.5 billion). The Commission prefers a moderate increase of the budget in 2020, which only requires unanimous vote in the Council and the consent of the Parliament. Otherwise, a higher increase of the budget would have required a temporary increase of own resources and the ratification by all EU national parliaments. For 2021, the Commission has presented € 166.7 billion budget draft to be topped up with €344 billion (almost half of the proposed recovery fund).
• About -of recovery grants (310 out of €440 billion) will be channelled through the Recovery and Resilience Facility, to support recovery and resilience plans by members states. This makes sense, as EU support will be more effective if tailored to each country’s needs and circumstances. The main rationale for this EU support is to prevent further divergence stemming from the asymmetric impact of the crisis or the differences in national recovery capacities, but grants under this Facility will be distributed according to an allocation key based on population and pre-crisis GDP and unemployment levels. Neither the socio-economic impact of the crisis nor the differences in national fiscal positions will be taken into account.
• A new Solvency Support Instrument. It will provide capital support to financially sound firms struggling as a result of the crisis. Managed by the EIB, the Instrument is expected to focus on the member states most hit by the crisis and/or where national solvency support is more limited. However, the regulation explicitly excludes the establishment of geographical quotas and leaves wide discretion to the EIB in ensuring an appropriate distribution of funding across member states.
• The MFF communication placed a lot of emphasis on the need to align the recovery effort with the European Green Deal. However, in some programmes, including REACT-EU, the new Solvency Instrument, the draft regulations on how to ensure this alignment are vague. In others, such as the Recovery and Resilience Facility, the procedures are detailed but look insufficient. Thus, it is possible for a national recovery plan to be adopted by focusing its attention on the digital transformation, even if it has little or no impact on the green transition.
• It is important to highlight the enormous implementation challenge that lies ahead. Many countries are already facing difficulties with disbursing cohesion policy funding on time. They will likely struggle to implement the extra money. This will become even more problematic if tough reform conditions are attached to the disbursement of the funds.
• Finally, we should not forget that the package includes the ‘standard’ MFF. The Commission has shown political realism in building on Charles Michel´s MFF proposal rather than its own May 2018 version, which was more ambitious in size. However, the ‘negotiating box’ presented by President Michel in February 2020 left many issues unresolved. Besides, some of the amendments made by the Commission, such as a slight increase in agriculture spending, may be controversial.

Whether these questions will be constructively discussed in the negotiations or will constitute points of obstruction remains to be seen. It is hard to assess the prospects of this exceptional recovery package with the eyes of classic MFF negotiations. These are exceptional times, and this may also affect negotiation dynamics. Non-agreement on the recovery package would send a very negative political signal to the world. Let’s hope that member states and European Parliament acknowledge this fact and behave constructively and responsibly.

 

In the meantime, the Commission has re-confirmed several times its strength in defending the role of Cohesion in the new instruments. During her presentation of the new REACT-EU emergency instrument (Recovery Assistance for Cohesion and the Territories of Europe) on 28 May, Commissioner Ferreira confirmed that, despite of being one of the oldest EU tools, cohesion will be one of the key elements of this recovery proposal, together with conversion and reforms.

Cohesion is crucial to consider the different starting points of EU territories, and their different capacities to respond to new challenges (including those already known as climate change and new ones, such as the effects of current pandemic). REACT-EU is an emergency temporary instrument to be implemented until 2021, topping current structural funds with additional €55 billion (€5 billion already available in 2020):

2020: EUR 5 billion (MFF)

2021: EUR 42.5 billion (ERI)

2022: EUR 10.8 billion (ERI)

The rules will be the current ones, but with greater flexibility (measures activated during the pandemic will stay: transfer between programmes, objectives and regions). The allocation of funds will consider “the severity of the economic and social impacts of the crisis, including the level of youth unemployment and the relative prosperity of every member state”. €373 billion would be allocated to cohesion, plus €40 billion to the Just Transition Fund (see below) “to alleviate the socio-economic impacts of the transition towards climate neutrality in the regions most affected.”

The Commission keeps the same cohesion’s focus under the new EU budget: “supporting economic competitiveness through research and innovation, digital transition as well as the European Green Deal agenda and the promotion of the European Pillar of Social Rights.” But it pays more attention to strengthening health care systems and sectors particularly impacted by the crisis such as culture or tourism. A big part of the structural funds will go towards fighting youth unemployment and reinforcing education and training frameworks, as well as fighting poverty and exclusion through the European Social Fund Plus (ESF+). Countries with high youth unemployment rates must dedicate at least 15% of the fund to support young people. On top of that, at least 5% of the ESF+ will be dedicated to alleviating child poverty.

“It is a massive increase that is completely necessary if we see the extra effort that is required,” said the Commissioner. “EU cohesion policy was one of the first instruments the Commission used to react to the COVID-19 outbreak”, and flexibility will remain a key element in the new regional policy, which will also include a “fully-fledged crisis-response mechanism” to respond to potential future crises.

A mid-term “review of national cohesion allocations in 2024, taking into account the latest available statistics,” is also foreseen. This could lead to an adjustment of up to €10 billion for all countries.

The chair of the European Parliament’s Committee on Regional Development, Younous Omarjee, welcomed the proposal but was cautious on the final outcome as the Council will have a big say on the final package. “The cohesion policy was the only Union policy capable of responding urgently to the crisis to help the hospital sector, SMEs and employees.” He also stressed the importance of the instrument to support territories “when they are hit by an unprecedented explosion.” (…) “Cohesion policy has helped build Europe. It will help rebuild it,” he said.

The president of the European Committee of the Regions (CoR), Apostolos Tzitzikostas, also praised the recovery plan and called for its swift adoption: “The #MFF proposal goes in the right direction for all regions, cities and villages of the EU. It is based on solidarity, responsibility and subsidiarity. It will benefit all local and regional communities across Europe, as demanded by the CoR.”

MFF Negotiations have not started yet but the Commission has already presented a draft budget for 2021, including an important share of the recovery instrument, the so-called ‘Next Generation EU’. For 2021, the Commission is pledging €211 billion in grants and around €133 billion in loans. The problem is that neither the overall EU long-term budget nor the size or the distribution of the recovery fund has been agreed by the EU-27 leaders yet. The legal department of the Council has established that the recovery fund is compatible with the Treaties. The leaders are due to meet for to discuss the Commission’s plan on 17-18 July, and EU institutions will meet on 8 July to have a common and strong position, perhaps based on a cut of the MFF (down to 1.05 billion €) and even of the recovery fund. Rebates will stay, conditionalities will come back, but a budget close to 2 trillion € might be a clear sign of EU commitment by Member States.

 

The Green Deal

Several think-tanks following climate change have welcomed the Green Deal focus of the Recovery Plan, even asking for a more radical shift towards a more nature-friendly behaviour.

On 11 December 2019, the Commission presented the European Green Deal, with the ambition of becoming the first climate-neutral bloc in the world by 2050. On 14 January 2020, the Commission announced the European Green Deal Investment Plan to help finance the transition. But not all Member States start from the same point in their transition – some will be more impacted than others. The Green Deal seems to be reinforced after the Corona crisis, and it will be one of the drivers of recovery.

 

The Just Transition Mechanism

The JTM is a key tool to ensure that the transition towards a climate-neutral economy happens in a fair way, leaving no one behind. The Mechanism provides targeted support to help mobilise at least €100 billion over the period 2021-2027 in the most affected regions, to alleviate the socio-economic impact of the transition. Special attention will be paid to regions strongly impacted by the transition but with less capacity to deal with its challenges.

To access funding, Member States have to draw up, in dialogue with the Commission, territorial just transition plans identifying territories that would be most impacted by this transition, set out their development challenges, and outline their pathways for transition until 2030, in close consultation with relevant national, regional and local stakeholders. The Commission has approved all requests made by 18 Member States (BE, BG, CY, CZ, EL, ES, FI, HR, HU, IE, IT, LT, LV, PL, PT, RO, SE and SK) and will unlock its support through the 3 pillars of the Just Transition Mechanism:

• the Just Transition Fund, which will provide grants that will mobilise €30-50 billion for social and economic transformation in just transition regions;
• a dedicated scheme under InvestEU, which will crowd-in up to €45 billion in private investment, and
• a public sector loan facility, which will mobilise 25-30 billion euros in public sector investment.

The European Commission revealed on Thursday (28 May) how individual EU members can gain from the newly-fortified €40bn JTF. Talks are still ongoing on widening the scope of the fund to more regions that might need green aid.

 

Over the past two years, the Commission already provided hands-on support to regions through the Structural Support Reform Programme (SRSP) to help prepare long-term economic strategies for their transition out of coal, such as in Slovakia’s Horna Nitra region, Greece’s Western Macedonia or Romania’s Jiu Valley.

You can find more information in the Commission’s dedicated website.

 

 

Migration

In the meantime, we should not forget there are other open issues, such as those regarding migrants, asylum-seekers and refugees. Irregular entries have dropped in the last two months, but let’s see how the situation looks like once the borders return to a more “normal” stand. Around the Greek-Turkish border there were very worrying news at the end of March due to the risk of spread of the virus (fortunately this area has not the worst exposure). Crossings in the Mediterranean seem to have dropped, and illegal border crossing on Europe’s main migratory routes fell by 85% in April, according to FRONTEX. On the other hand, the European Union Court of Justice has asked Hungary to review the situation of asylum-seekers in its border with Serbia in Röszke, and release them if there is no reason to keep them under arrest. Italy has proposed to regularize 600,000 migrants to guarantee social benefits.

The announcement of the Italian Government to “regularize” foreign workers without papers (estimated in 600,000 people) is a very interesting sign of new political approaches in Europe.

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