October 31
2020
Dolores Utrilla
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8th June 2020
Banking & Finance Covid-19 Institutional law

Insight: “The Commission’s long-term budget proposal and the EU recovery plan: dissecting the jigsaw puzzle” by Dolores Utrilla

A few days ago, the European Commission presented its plan for post-pandemic economic recovery in the EU. This includes a revised proposal for the 2021-2027 Multiannual Financial Framework (MFF), as well as proposals to review other budget-related pieces of EU legislation.

Overall, this represents an effort by the Commission to place a powerful and modernised EU budget at the heart of the EU’s recovery plan, and involves an unprecedented level of complexity in the use of sectoral mechanisms and programmes closely interconnected with each other.

That complexity warrants further explanation to understand the plan’s main features, in order to obtain a comprehensive picture of the different pieces forming the proposed new MFF, as well as its envisaged role in the post-pandemic economic recovery process.

1. The structure of the Commission’s Recovery Plan

In the Commission’s recovery package, the first and most important element is the proposed new long-term EU budget (see section 2 below). The second is the Next Generation EU, the tool used to give Member States 750 billion euros in funds through both loans and grants from that long term budget (see section 3 below).

To unlock the funds under the MFF and Next Generation EU, the Commission is proposing certain amendments to the proposed Own Resources Decision (see section 4 below) and to the current 2014-2020 long-term budget (see section 5 below). To facilitate the repayment of the market finance raised and further help reduce the pressure on national budgets, the Commission will propose additional new own resources at a later stage of the financial period (see section 6 below).

Lastly, the Commission has presented a highly complex pack of proposals for amendment of sectoral legislation concerning both existing and new mechanisms and programmes through which funds from the MFF and Next Generation EU will be channelled (see section 7 below).

Together, these measures are expected to harness the full power of the EU budget to mobilise investment and frontload financial support and investment in the crucial first years of recovery. They are also expected to pave the way to a fair and inclusive transition to a green and digital future, supporting the EU’s longer-term strategic autonomy and making it resilient to shocks in the future.

2. The revised proposal for the 2021-2027 Multiannual Financial Framework

On 2 May 2018, the Commission put forward its proposal for the 2021-2027 EU budget (comprising a draft MFF Regulation and a draft Interinstitutional Agreement) on the basis of which negotiations have been ongoing ever since. However, on 28 May 2020, in view of the new challenges posed by the COVID-19 pandemic, the Commission presented a revised proposal for the 2021-2027 MFF and a revised proposal for an Institutional Agreement between the European Parliament, the Council and the Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management.

The amendments concern, firstly, MFF provisions on cooperation in budgetary matters and on sound financial management. The aim of these adjustments is to provide for greater flexibility in implementation, reflecting the need for new provisions to be activated in emergency situations. They also aim at providing for transparent information of the budgetary authority on the implementation of the Next Generation EU.

Secondly, the Commission proposes amendments to the draft MFF expenditure ceilings in the years 2025-2027 to correspond with the adjustments of its proposals for the future cohesion policy programmes (see section 7 below). These proposals are now being revised to give stronger support to crisis-related investments, provide for greater flexibility for transfers between funds and categories of regions, and introduce new provisions to be activated in emergency situations. The revised version of the cohesion policy programmes will also include a review of national cohesion allocations, with upward adjustments only up to an increased total level of 10 billion euros.

Thirdly, the revised MFF proposal maintains the ‘flexibility architecture’ as proposed by the Commission in 2018, including the extension of the scope of the Emergency Aid Reserve to allow it to be activated for emergencies inside the EU. Now, the adjusted MFF proposal includes an increase of 3 billion euros of the maximum annual amount available under this instrument, renamed Solidarity and Emergency Aid Reserve. The goal is to swiftly enhance EU action through emergency mechanisms, such as the Emergency Support Instrument, RescEU, or the Asylum and Migration Fund.

Fourthly, the Commission is proposing to increase the maximum annual amount available under two different funds: the EU Solidarity Fund, recently amended through Regulation 2020/4619 in order to cover major public health emergencies (which would rise to 1 billion euros), and the European Globalisation Adjustment Fund (which would increase to 386 million euros).

Lastly, the Commission intends to increase the budget of the proposed Just Transition Fund from 7.5 to 40 billion euros (of which 2.5 billion euros would be covered by the MFF and 30 billion euros by Next Generation EU), and proposes to reinforce the just transition scheme under InvestEU. The MFF package includes a proposal for a public sector loan facility, which will mobilise between 25 and 30 billion euros. This means that, overall, the Just Transition Mechanism is now expected to mobilise at least 150 billion euros of public and private investment. The reader is referred to section 7 below for further explanation of these funds.

3. The proposed European Recovery Instrument ‘Next Generation EU’

Next Generation EU is designed as the EU’s Temporary Recovery Instrument, unprecedented in nature and amount, as explained here. Under this instrument, the Commission will borrow 750 billion euros on the financial markets and provide those funds to Member States through a mix of grants and loans. The borrowed funds will come in addition to the appropriations authorised in the EU’s budget, and thus outside of the multiannual financial framework expenditure ceilings. They will be shown distinctly in the budget to illustrate their temporary and exceptional character and in the interests of full transparency.

The required repayment of funds borrowed on capital markets will be paid out of the EU budget from 2028 onwards. All related liabilities of the EU will be fully repaid by 2058. The repayment shall be organised according to the principle of sound financial management with a view to achieving a steady and predictable reduction of liabilities during the overall period.

4. The amended proposal for an Own Resources Decision

As explained above, a key prerequisite for the functioning of the Commission’s recovery plan is the adoption of a Council Decision on the own resources of the EU, the revenue side of the EU financial framework.

As is well known, the current own resources system (dating back to 1988) consists of three main categories of revenue: (i) the so-called ‘traditional’ own resources (TORs), mainly customs duties; (ii) a Value Added Tax-based own resource; and (iii) the Gross National Income-based own resource. While TORs are a direct source of revenue to the EU budget, the latter two categories are in essence national contributions that the Member States must make available to the EU budget. Over time, the Gross National Income-based own resources, originally established as a ‘residual’ source of revenue, have become the system’s predominant component, accounting for more than 70% of the EU revenue.

In its original Own Resources Decision (ORD) proposal, presented in May 2018, the Commission proposed to modernise this system simplifying the existing Value Added Tax-based own resources, diversifying the revenue sources and increasing the synergies between the EU and national budgets. Now, the amended ORD proposal adds three relevant novelties to the 2018 proposal.

Firstly, the Commission proposes a permanent increase in the proposed ORD ceilings. These ceilings determine the maximum amount of own resources the EU can request from a Member State in a given year to finance its expenditure. According to the amended proposal, the ceiling for commitments would rise to 1.46% of the EU gross national income, whilst the ceiling for payments would rise to 1.40%. This represents an increase of 0.11 percentage points for both ceilings by comparison with the original ORD proposal of 2 May 2018. The aim of this measure is to ensure sufficient fiscal space to the EU to cover all of its financial obligations and contingent liabilities falling due in a given year even under the most adverse economic developments.

Secondly, the proposal includes an authorisation to the Commission to borrow funds on behalf of the EU on capital markets, up to the amount of 750 billion euros in 2018 prices. These funds will then be transferred to EU programmes in accordance with Next Generation EU. These borrowing powers are limited in size, duration and scope, in accordance with the exceptional nature of Next Generation EU.

In connection with this, the Commission also proposes to temporarily increase the ORD ceilings by 0.6 percentage points, in order to ensure that the EU has the resources needed to cover the financial obligations and contingent liabilities stemming from this exceptional empowerment to borrow funds. This proposed increase would expire when all funds borrowed have been repaid – at the latest by 31 December 2058 – and all risks for contingent liabilities have ceased.

5. The proposed amendments to the 2014-2020 Multiannual Financial Framework

A further component of the Commission’s recovery package is the proposal to amend the current MFF (2014-2020). Given that all remaining flexibility in the current EU budget has already been exhausted, amendments to Council Regulation 1311/2013 are necessary to allow for frontloading of financial support as rapidly as possible now in 2020.

The proposal provides for an increase of the expenditure ceilings of the 2014-2020 multiannual framework for the year 2020. Specifically, the Commission proposes an increase in commitment ceilings resulting in an increase of payment needs of 6,040 million euros. This is compatible with the 2020 annual payment, which therefore does not need to be revised.

These amendments are necessary to start financing, promptly in 2020, the proposed Solvency Support Instrument, the capital increase of the European Investment Fund, the frontloading of additional cohesion spending under REACT-EU, and increased financial means for the European Fund for Sustainable Development.

6. The future proposal for new own resources

In order to provide funding for the proposed MFF 2021-2027, the Commission has announced that it will propose a number of new own resources at a later stage. According to the Commission, these new resources would complement the system of TORs, and could include: (i) a simplified value added-tax based own resource; (ii) ‘green’ own resources, such as a new resource based on the Emissions Trading Scheme and a new Carbon Border Adjustment Mechanism; (iii) an own resource based on the operation of large companies; and (iv) a new digital tax, building on the OECD work on corporate taxation of a significant digital presence. These will be in addition to the Commission’s proposals for own resources based on a simplified Value Added Tax and non-recycled plastics.

According to the Commission, these new own resources could help finance the repayment of and the interest on the market finance raised under Next Generation EU. If introduced by 2024, Member States’ national contributions to the 2021-2027 multiannual financial framework could decrease as a share of their economy compared to their payments in 2020.

7. The proposed amendments to sectoral legislation

Last – but not least – the Commissions’ budgetary package includes a very complex set of proposals for amendment of financial sectoral legislation, of which brief mention can be made here. Overall, these proposals consist of either adjustments to existing EU instruments and programmes, or the creation of new ones, through which funds from the new MFF and from Next Generation EU will be channelled. The Commission’s strategy is to carry out the economic recovery plan under specific instruments and programmes in accordance with their governing EU acts. Moreover, it aims at introducing an additional degree of flexibility in the management of certain emergency tools for the period 2021-2027.

These proposals, and the corresponding instruments and programmes, can be classified into the three pillars foreseen in the Commission’s recovery package, namely (A) recovery tools, (B) investment tools, and (C) preventive tools.

(A) Supporting Member States to recover

(i) Proposal for a Regulation establishing a Recovery and Resilience Facility

The Commission proposes to create a mixed mechanism consisting of grants and loans for the implementation of Member States’ national recovery and resilience plans defined in line with the objectives of the European Semester, including in relation to the green and digital transitions and the resilience of national economies.

According to the Commission’s proposal, the Facility will have an overall budget of 560 billion euros (310 billion for grants and 250 billion for loans). It will be embedded in the European Semester, and therefore Member States will submit national Recovery and Resilience plans as part of their National Reform Programmes.

(ii) Proposal for a Regulation for REACT-EU

This concerns a mechanism for Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU), providing resources for investment in short-term crisis repair actions. According to the Commission’s proposal, it would consist of flexible cohesion policy grants for municipalities, hospitals, and companies, via Member States’ managing authorities. No national co-financing would be required, and this would involve 55 billion euros of additional cohesion policy funding between 2020 and 2022.

(iii) Amended proposal for a Regulation on the Just Transition Fund

The Commission adopted its original proposal for a Just Transition Fund (JTF) in January 2020 as one of the pillars of the Just Transition Mechanism, in the framework of its Sustainable Europe Investment Plan (SEIP). The goal of the JTF is to assist Member States in accelerating the transition towards climate neutrality. Now, in its amended proposal, the Commission intends to accelerate investments in the green transition and therefore proposes an increase of the funds made available for the JTF, up to 40 billion euros.

(iv) Proposal for a Regulation on the public sector loan facility under the Just Transition Mechanism

The Commission is proposing a public sector loan facility as the third pillar of the Just Transition Mechanism. The goal of this facility is to support public investments through preferential lending conditions for the territories most negatively affected by the climate transition. The facility will consist of a grant and a loan component. The grant component, amounting to 1.525 billion euros and financed from the EU budget, will reduce the financial burden for beneficiaries resulting from the reimbursement of the loan that will be provided by a finance partner. The lending component will be managed and financed by the European Investment Bank from its own resources. Overall, the public sector loan facility aims at mobilising between EUR 25 and 30 billion euros of public investments over the period 2021-2027.

(v) The Omnibus Regulation proposal: Reinforcement of rural development programmes

The Commission is also proposing an Omnibus Regulation amending the sectoral draft regulations of, inter alia, the European Agricultural Fund for Rural Development. The proposal includes a 15 billion euro reinforcement of this Fund to support rural areas in making the structural changes necessary in line with the European Green Deal and achieving the ambitious targets in line with the new Biodiversity and Farm to Fork strategies. The funding will be provided through Next Generation EU.

(vi) Proposal for a Regulation establishing a Technical Support Instrument

This proposal refers to the establishment of a standalone Technical Support Instrument (TSI) available to all Member States, as a successor to the Structural Reform Support Programme (SRSP) established by Regulation 2017/825 for the period 2017 to 2020. The proposed TSI would ensure that the Commission can continue to accompany Member States’ reform efforts by providing them with substantial technical support to strengthen their administrative capacity to prepare and implement the reforms that will foster resilience and underpin the recovery.

(vii) Proposal for an amending Regulation on the Fund for European Aid to the Most Deprived

The Commission is proposing to introduce certain amendments to Regulation 223/2014 on the Fund for European Aid to the Most Deprived (FEAD). The proposal aims to enable Member States to increase the resources under the FEAD and to receive an additional pre-financing payment. It also aims to exempt the additional resources from national contributions. These exceptional changes are without prejudice to the rules that apply under regular circumstances.

These amendments would lead to additional commitments in the year 2020, financed from an increase of the ceiling of the 2014-2020 MFF. They would also lead to additional commitments for the years 2021 and 2022, and to additional payments in the years 2020 to 2025.

(viii) Proposal for an amending Regulation on humanitarian aid

The Commission is proposing certain amendments to the Humanitarian Aid Regulation 1257/96, so that its delivery mechanisms can be used to implement reinforced humanitarian assistance funded by Next Generation EU (in an amount of 5,468 million euros).

(ix) Amended proposal for a Common Provisions Regulation

In May 2018, the Commission put forward its original proposal for a Regulation laying down common provisions on the use of cohesion policy funding for the period 2021-2027, framing the support of the Funds around a few critical EU policy priorities. The proposal concerned: (i) the European Regional Development Fund; (ii) the ESF+; (iii) the Cohesion Fund; (iv) the Just Transition Fund; (v) the European Maritime and Fisheries Fund; (vi) the Asylum and Migration Fund; (vii) the Internal Security Fund; and (viii) the Border Management and Visa Instrument.

Now the Commission has presented an amended version of its 2018 proposal. Although it does not involve changes in budgetary terms, it includes relevant new elements, such as increased flexibility for transferring resources between Funds, completed by additional flexibility for transfers between the ERDF, the ESF+ or the Cohesion Fund. It also empowers the Commission to adopt implementing acts to allow for temporary measures for the use of the Funds in response to exceptional and unusual circumstances, allowing, inter alia, the increase of interim payments by 10 percentage points.

(x) Amended proposal for a Regulation on the European Regional Development Fund and Cohesion Fund

This proposal includes amendments to the scope and specific objectives of the European Regional Development Fund (ERDF) as well as a flexible mechanism that can be quickly applied in crisis situations. The Commission’s goal is to enable cohesion policy investments to play a leading role in ensuring recovery and in paving the way for economic development over the long-term. In order to improve the overall economic resilience and recovery of the EU, it proposes to improve the flexibility of investment under cohesion programmes to address weaknesses in the health sector, improve preparedness related to unexpected emergencies, promote job creation in small and medium enterprises and fully exploit the economic potential of tourism and culture sectors.

This proposal does not imply any changes in the proposal for a 2021-2027 MFF of 2 May 2018. Amounts for the ERDF and the Cohesion Fund for the period 2021-2027 remain unchanged.

 (B) Kick-starting the economy and helping private investment

(i) New proposal for a Regulation establishing the InvestEU Programme and a new Strategic Investment Facility

In May 2018, the Commission presented its original proposal for the InvestEU Programme, consisting of an EU budget guarantee for financing of investment projects via the European Investment Bank group and national promotional banks. Now, the Commission is withdrawing its proposal and putting forward a new one. The new proposal increases the initially foreseen budget for InvestEU (to 15.3 billion euros, funded through Next Generation EU).

Additionally, it includes a new Strategic Investment Facility to be equipped with 15 billion euros provisioning from Next Generation EU. This facility will focus on building stronger European value chains in line with the strategic agenda of the EU and the New Industrial Strategy for Europe presented by the Commission in May 2020.

(ii) Proposal for an amending Regulation establishing a Solvency Support Instrument

The Commission proposes to establish a new Solvency Support Instrument (SSI), a temporary equity-based mechanism to foster private investment in support of viable companies, through amendments to Regulation 2015/1017 on the European Fund for Strategic Investments. The SSI would have a budget of 31 billion euros and would work through the provisioning of an EU budget guarantee to the European Investment Bank Group in order to mobilise private capital to support the solvency of eligible companies.

(iii) Proposal for an amending Regulation on the European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund

By this proposal, the Commission aims to enable the implementation of the measures contained in the recovery plan through the delivery mechanisms provided for under Regulation 2017/1601 establishing the EFSD, the EFSD Guarantee, and the EFSD Guarantee Fund.

Specifically, the Commission’s goal is to make available an additional amount of 1,040 million euros for the EFSD, increasing the EU guarantee by 2,078 million euros, and bringing the total EU guarantee ceiling to 3,578 million euros. This proposal extendsuntil 31 December 2021 the investment period during which the EFSD guarantee agreements for supporting financing and investment operations can be concluded with the eligible counterparts.

 (C) Learning lessons from the crisis

(i) Proposal for a Regulation establishing the EU4Health programme

The Commission is proposing to establish a new health programme, EU4Health, to strengthen health security and equip the EU against future health crises. The programme is designed to support Member States in the transition to better preparedness and the reinforcement of their health systems. According to the Commission’s proposal, EU4Health would run from 2021 to 2027, with a budget of 9.4 billion euros, out of which 7.7 billion will be provisioned through Next Generation EU.

(ii) Proposal for a Decision amending the Union Civil Protection Mechanism (rescEU)

With this proposal, the Commission purports to reinforce rescEU, the EU’s Civil Protection Mechanism governed by Decision 1313/2013, to respond to large-scale emergencies. In essence, the proposal is designed to ensure that rescEU provides an adequate safety net for when Member State capacities are overwhelmed, enabling the Commission to fund national strategic capacities through grants and procurements, as well to deploy an inter-connected emergency information management infrastructure that can cater for any type of emergency. The proposed budget for rescEU is 3.1 billion euros. The additional financial envelope mobilised by Next Generation EU for rescEU will be 2 billion euros.

(iii) The Omnibus Regulation proposal: Reinforcement of programmes for research, innovation, and external action

Apart from modifying rural development funding, the already mentioned proposal for an Omnibus Regulation purports to amend the sectoral draft regulations of (i) the Framework Programme for Research and Innovation and its implementing specific programme Horizon Europe, and (ii) the Neighbourhood, Development and International Cooperation Instrument. In essence, the Commission is proposing targeted modifications to its 2018 proposals on these programmes in order to adjust their functioning and budget to Next Generation EU, in so far as they will be used to channel part of the funds under that instrument.

(iv) Amended proposal for a Regulation on the European Social Fund Plus

On 30 May 2018, the Commission adopted its original proposal for a Regulation on the European Social Fund Plus (ESF+), conceived as the EU’s main instrument to invest in people and to implement the European Pillar of Social Rights. The ESF would merge several funds and programmes: (i) the European Social Fund and the Youth Employment Initiative; (ii) the Fund for European Aid to the Most Deprived (FEAD); (iii) the Employment and Social Innovation (EaSI) programme; and (iv) the programme for the EU’s action in the field of health.

Now, the Commission has presented an amended version of its 2018 proposal, which excludes the EU health programme (now covered by Health4EU) from its scope of application. The amended ESF+ proposal also introduces a crisis-response mechanism under the shared management rules in the form of implementing powers to the Commission to ensure that under exceptional circumstances, temporary derogations could be provided to respond to such events.

8. Next steps

For this complex package to come into effect, all the Member States must unanimously agree on the amended proposal for the Own Resources Decision and approve it in accordance with their national constitutional requirements. In the meantime, the amendment of the current 2014-2020 MFF will allow funds to already be made available in 2020.

The Commission has invited the European Council and the co-legislators to examine these proposals rapidly, with a view to reaching a political agreement at the level of the European Council by July. The Commission will then work closely with the European Parliament and the Council to finalise an agreement on the MFF 2021-2027 and the accompanying sectoral programmes. For the package to be up and running on 1 January 2021, the process will have to be completed by the early autumn.

 

Dolores Utrilla is Assistant Editor at EU Law Live and Associate Professor at the University of Castilla-La Mancha.

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