October 01
2020
Dolores Utrilla
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21st July 2020
General Development

The European deal for post-pandemic economic recovery: content and meaning

– by Dolores Utrilla –

Today 21 July 2020, at 05.30 Brussels time, European Council President Charles Michel announced that EU leaders have reached an agreement on the two crucial tools for  post-pandemic economic recovery in the EU, namely (i) the Recovery Fund ‘Next Generation EU’ and (ii) the updated proposal for the next long-term EU budget or Multiannual Financial Framework (MFF).  

Today’s deal, resulting from the European Council’s longest meeting in 20 years (17-21 July), represents the starting point for the adoption of the relevant legislative texts following the procedures enshrined in the TFEU. The political agreement builds on the complex and ambitious proposal put forward by the Commission in late May (see section 1 below), as subsequently adapted and submitted to the European Council by President Michel on 10 July (see section 2 below). The final agreement, which needs now to be endorsed by the European Parliament, presents some significant divergences from the Commission’s original plans, but still follows its main lines and constitutes an unprecedented step in the history of the European integration (see section 3 below).

1. The Commission’s proposal

On 28 May 2020, the Commission presented its plan for post-pandemic economic recovery in the EU, which included a revised proposal for the 2021-2027 MFF, a proposal for the creation of a temporary Recovery Fund, and several proposals to review other budget-related pieces of EU legislation. This ambitious plan involved an unprecedented level of complexity in the use of sectoral mechanisms and programmes closely interconnected with each other. 

The reader is referred to this map to understand the main features of the Commission’s proposal, as well as to these papers by Armin Steinbach and Stefano Dorigo to read more about the legal subtleties, challenges and problems of the Recovery Fund and of the fiscal side of the recovery plan, respectively.

2. The negotiation hard points

Ever since the last Council summit, held by videoconference in June, President Michel has been holding bilateral talks with EU leaders in an attempt to find a compromise between the Member States, whose positions were split into two blocks. Firstly, the so-called ‘frugal four’ (Austria, Sweden, Denmark and the Netherlands), joined by Finland, which opposed both the amount of the Recovery Fund and the very idea of giving grants to Member States. Secondly, the rest of Member States, headed by France, Italy, and Spain, with the significant support of Germany, in favour of debt mutualisation through a mixed system of grants and loans, and for which the projected amount of funds to be channelled through grants was a crucial aspect of the recovery plan.

Building on the Commission’s proposal, and in view of the positions expressed by each Member State, on 10 July 2020 President Michel presented his proposal for the MFF and the Recovery Fund, which endorsed the Commission’s overall approach but contained some important amendments thereto. These coincided with the main points of disagreement between both national blocks:

  • The size and distribution of the Recovery Fund. President Michel’s Proposal endorsed the Commission’s plan to empower the Commission, through an own resources decision, to borrow up to 750 billion euros to be used for back-to-back loans and for expenditure channelled through the MFF programmes. However, President Michel suggested a more balanced distribution between grants and loans, by comparison with the Commission’s proposal – the latter being to devote 500 billion euros in grants and for 250 billion euros to be distributed by way of loans. 
  • Conditionality. President Michel proposed to establish certain conditions on beneficiary Member States (including ‘green’ and rule of law requirements) as a requisite for accessing EU funds, but no veto power was foreseen for individual Member States (thereby departing from the demands of the frugal countries).
  • The size of the MFF. President Michel proposed a 1,074 billion euro long-term budget (below the 1.1 billion proposed by the Commission, but above the 1 billion euros suggested by the frugal countries) to fulfil the long-term objectives of the EU and to preserve the full capacity of the recovery plan.
  • Repayments and own resources. According to the President’s proposal, repayments of money raised by the Commission under Next Generation EU would start in 2026, which made it all the more urgent to introduce new own resources (namely a new own resource related to the use of plastic waste starting in 2021, as well as a carbon adjustment measure and a digital levy to be introduced by the end of 2021).
  • Rebates. Departing from the Commission’s proposal, and to facilitate an agreement, President Michel proposed that lump sum rebates be maintained as compensatory cheques for Denmark, Germany, the Netherlands, Austria and Sweden. 

3. The political agreement

Overall, the deal reached today constitutes a historical landmark in the EU’s budgetary and fiscal history, by opening the door for the first time ever to joint debt issuance and to (future) joint taxes.

The European Council agreement (available in the form of Conclusions here) follows the lines of the Commission’s original plans, but with five important amendments (most of them in the manner suggested by President Michel), namely (i) an increase in the amount of loans to the detriment of grants, (ii) a strengthening of socio-economic conditionality to ensure far-reaching reforms, (iii) a diminished degree of ‘rule of law’ conditionality, (iv) a slightly diminished size of the MFF, and (v) the grant of lump sum compensation to several countries.

(i) Grants and loans

The size of Next Generation EU will be 750 billion euros, as proposed by the Commission. However, it will be distributed in 390 billion for grants and 360 billion for loans, in contrast with the original Commission’s plan, backed up by the Franco-German proposal, to devote 500 billion euros for grants and 250 for loans. 

The amounts available under the Recovery Fund will be allocated to seven individual programmes, namely the Recovery and Resilience Facility (RFF) (672.5 billion euros, including 360 billion for loans), ReactEU (47.5 billion euros), Horizon Europe (5 billion euros), InvestEU (5.6 billion euros), Rural Development Fund (7.5 billion euros), Just Transition Fund (10 billion euros), and RescEU (750 billion euros). The reduction in the level of grants from the projected amount (500 billion euros) to the finally agreed one (390 billion euros) translates into cuts in the Just Transition Fund, the Rural Development Fund, and Horizon EU, as well as into the complete removal of the Health Programme.

To ensure  that the money is allocated to the countries and sectors most affected by the crisis, EU leaders agreed that 70% of the grants under the RFF will be committed in 2021 and 2022 and 30% will be committed in 2023. Allocations from the RRF in 2021-2022 will be established according to the Commission’s allocation criteria taking into account the Member States’ respective living standards, size and unemployment levels.

(ii) Economic conditionality

According to today’s agreement, Member States will have to prepare their national recovery and resilience plans for 2021-2023 in accordance with the country-specific recommendations and the roadmap for the green and digital transitions. The disbursement of grants will take place only if the agreed milestones and targets set out in the recovery and resilience plans are fulfilled.

The recovery and resilience plans shall be assessed by the Commission within two months of the submission, under the main criteria of their consistency with the country-specific recommendations. The Commission’s assessment will need to be approved by the Council by qualified majority through an implementing act which the Council shall endeavour to adopt within 4 weeks of the proposal. The positive assessment of payment requests will be subject to the satisfactory fulfilment of the relevant milestones and targets. This means that, departing from the demands of some of the Member States, headed by the Netherlands, the final deal does not include a veto right for individual countries.

If, exceptionally, one or more Member States consider that there are serious deviations from the satisfactory fulfilment of the relevant milestones and targets, they may request the President of the European Council to refer the matter to the next European Council. Thereby frugal Member States have a way to strengthen scrutiny on how funds are spent and may delay reimbursements for up to three months. 

(iii) Environmental, but no ‘rule of law’ conditionality

According to today’s agreement, effective contribution to the green and digital transition will also be a prerequisite for a positive assessment of the Member States’ recovery and resilience plans. However, no deal was made on the ambitious ‘rule of law’ conditionality suggested by President Michel, an initiative strongly supported by the three-week old German Presidency of the Council (as explained by Anjum Shabbir here). The need to reach a unanimous agreement and the foreseeable impact of this point of the proposal on certain eastern European countries (especially Poland and Hungary) has diluted it in the final agreement, which merely mentions that ‘the European Council underlines the importance of the respect of the rule of law’.

(iv) MFF, repayments and own resources

The agreement for the 2021-2027 MFF comprises an overall amount for commitments of 1,074.3 billion euros, below the 1,100 billion euros proposed by the Commission but above the 1,000 billion euros suggested by the fugal countries. The MFF includes a Brexit reserve of 5 billion euros to support the Member States and economic sectors hardest hit by Brexit.

Concerning the EU’s own resources, the ceiling allocated to the EU to cover annual appropriations for payments is fixed at 1.40% of the GNI of all the Member States, whereas the total annual amount of appropriations for commitments shall not exceed 1.46% of the sum of the GNI of all the Member States. 

The amounts of the own resources ceilings will be temporarily increased by 0.6% for the sole purpose of covering all liabilities of the EU resulting from its borrowing to address the consequences of the COVID-19 crisis, until all these liabilities have ceased to exist, and at the latest until 31 December 2058.

Moreover, today’s deal includes a key agreement to provide the EU with new resources to pay back funds raised under Next Generation EU. The Member States have agreed on (i) a new levy on non-recycled plastic waste that will apply as of 1 January 2021; (ii) the development, on the basis of a Commission’s proposal, of a carbon adjustment measure and of a digital levy, both of which would be introduced by the end of 2022 and would apply by 1 January 2023 at the latest; (iii) a revised ETS scheme, possibly extending to the aviation and maritime sectors; and (iv) the possible future introduction of other own resources, which may include a Financial Transaction Tax.

Lastly, EU leaders declined the Commission’s proposal to amend the current 2014-2020 MFF, stressing that the two Coronavirus Response Investment Initiatives (the original one and the subsequent ‘plus’ version) are important elements of the EU’s short term response to the crisis. 

(v) Rebates

Finally, and contrary to the Commission’s proposal to extinguish rebates after Brexit, the European Council’s agreement maintains discounts on the annual gross national income-based contributions to be made to the EU budget by five of the net contributors – Germany, the Netherlands, Sweden, Austria and Denmark -, which will profit from an overall reduction of 52 billion euros in the period 2021-2027. 

 

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

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