The Recovery Package: Next Generation EU
Covid-19 pandemic irrupted during the final negotiations for the future EU budget when southern EU member states (CY, ES, FR, GR, IT and PT) asked very strongly in the middle of confinement for a long-term fund, substantially based on grants, to support those more in need, to push for investment and reform, and to strengthen EU economies by focusing on common priorities like the Green Deal, digitalization and resilience. € 750 billion will be borrowed in the capital markets within the next three years, to be (partially) returned by EU new own resources.
published on 3/8/2020 (updated on 7/9/2020)
Most EU Member States declared stronger or lighter confinement in the second half of March, and various EU guidelines and recommendations started a process of coordination which ended up with a strong commitment for reconstruction and resilience, a huge effort to facilitate the development, production, logistics and delivery of effective immunisation and, finally, a stronger EU.
The pandemic irrupted in the final period of negotiations for the future EU budget, southern member states (CY, ES, FR, GR, IT and PT) re-activated this in the middle of the confinement (12 May), strongly asking Commission’s President von der Leyen for a long-term fund of a trillion Euro (a billion in the EU continental 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, substantially based on grants.
In her presentation of this Recovery Fund on 13 May, the President of the European Commission told the Members of the European Parliament that the EU must support those that need it the most, push for investment and reform, and strengthen the economies by focusing on common priorities like the European Green Deal, digitalization and resilience.
Thus, the Recovery Package would consist of two parts, according to the Commission’s proposal: the MFF (around President’s Michel “negotiating box”) and, on top of it, a Recovery instrument Nex Generation EU 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 this earlier proposal, the Commission planned all recovery funds to be channelled through EU programmes, and the European Parliament would have the same say on how the recovery money is spent as it does on the MFF. The Commission proposed to spend across three pillars:
- Supporting the Member States to recover, repair and come out stronger from the crisis. Most funds will be spent through a new Recovery and Resilience Facility (RFF) (€ 560 billion according to 10/7 NegoBox), but finally € 672.5 bn, of which 360 bn in loans and 312.5 in grants, 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 proposed 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 still 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 have posed to Commissioner Ferreira, and also to President Von der Leyen, but we should ask the Member States too.
- 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 (€ 30.3 bn proposed, but finally just6 bn, to be added to 2.8 bn earmarked in the MFF).
- A new Strategic Investment Facility (React-EU) (proposed € 50– finally 47.5 bn) to help invest in key value chains crucial for our future resilience and strategic autonomy, such as the pharmaceutical sector (!).
- A new Solvency Support Instrument (€ 26 billion which disappeared in the Council’s conclusions) would have helped 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.
- Learning the most immediate lessons of the crisis, strengthening programmes that have proven their value in the crisis, such as RescEU (proposed € 2 – 1 bn, now under MFF) or Horizon Europe (proposed € 13.5, but finally 5 bn, while 75.9 bn are earmarked in MFF). A new, dedicated Health Programme (proposed € 7.7 billion, but finally just by 1.67 bn (in MFF). Some of these announcements have dropped in the course of negotiations, as well as the strengthening of the instruments for Neighbourhood, Development and International Cooperation (NDICI) (additional € 15.5 billion funding was announced, but it does not appear in the conclusions) and for Pre-accession Assistance (?). € 30 bn were proposed in 10/7 NegoBox but, finally, 10 bn have been earmarked for the Just Transition Fund; and Rural Development has dropped from 15 to 7.5 bn.
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.
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. Scientists 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. In any case, the Council’s opinion is the most important, at the end of the day. Anyway, the Parliament offered an unusual agreement to the Member States. They could avoid increasing their contributions if they agree to extend EU own resources (new taxes). This could have led to achieving 2 trillion Euro for this plan, mostly in the form of grants rather than loans.
On 18 May Germany and France attempted to narrow the differences with the Member states asking for a smaller Fund, 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. But, 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 disagreed on the size, shape, scope, and conditionality of the so-call “great stimulus” to overcome the deepest recession in EU history. Eastern EU countries were less affected and did not want to move too much EU budget. Institutions and member states also seemed to agree that digital and green agendas should be priorities during the implementation of recovery plans, but France and Germany asked to support “most affected sectors and regions”, while the frugal countries wanted to concentrate in “activities that contribute most to the recovery, such as R&I, health resilience and a green transition”. In the end, there are few environmental signs in the Council’s conclusions on 21 July.
Some think-tanks, such as “Friends of Europe”, have underlined some elements that should draw our attention:
- About ¾ of recovery grants (around 290 out of €390 billion) will be channelled through the Recovery and Resilience Facility (RFF), 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 should be taken into account.
- 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 a 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). In his last proposal before the Summit, finally included in the Conclusions, the President of the Council asked to commit 70% of the RRF in 2021 and 2022, and 30% in 2023. The total envelope should be disbursed by 2026.
- A new Solvency Support Instrument was proposed previously, but it has disappeared in the conclusions. It would have provided capital support to financially sound firms struggling as a result of the crisis. Managed by the EIB, the Instrument was 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 excluded the establishment of geographical quotas and left 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 or 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 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 various issues unresolved.
These questions were discussed during the negotiations prior to the Council Summit in July, and it is still hard to assess the prospects of this exceptional recovery package with the eyes of classic MFF. These are exceptional times, and this has also affected negotiation dynamics. Non-agreement on the recovery package would have sent a very negative political signal to the world, but the reality was quite the opposite and, despite necessary fine-tuning, this agreement will be probably a major milestone in the process of EU integration.
Back to overview