The Recovery Fund and EU budget. Here’s where we are after the European Council (waiting for 6 May)

Mattia Ceracchi
consiglio europeo

Those who were awaiting the crucial summit for the future fate of the EU were probably disappointed, and those who expected a significant step forward in the European response to the Covid-19 crisis can be more than satisfied. The European Council met on 23 April by videoconference (for EU leaders this was the fourth virtual meeting since the beginning of the emergency) to approve the measures agreed on by EU Finance Ministers during the Eurogroup of 9 April. EU leaders gave a formal green light to the so-called Recovery Fund – aimed at preparing and supporting the European economic recovery after Covid-19 – while tasking the Commission to define the fund’s main technical and financial features. Member States are still far from political agreement and the EU government has only a few days to reach a difficult compromise. President Ursula von der Leyen will put her proposal on the table on 6 May, including the plan for a Recovery Fund within the revision of the EU 2021-27 budget.


EU leaders first of all approved the €540 billion package to combat the economic emergency defined by the Eurogroup on 9 April. There are three main pillars of the package, which will have to be operational as of June: SURE, the temporary unemployment support instrument that will allow the Commission to provide loans to Member States on favourable terms of up to a maximum of €100 billion; the guarantee fund set up by the European Investment Bank (EIB), capable of mobilising up to €200 billion in financing (loans) to small and medium-sized enterprises most affected by the crisis; and finally the Pandemic Crisis Support credit line of the European Stability Mechanism (ESM), which can be activated by Eurozone countries providing that the money is used only to support the direct and indirect costs of the health emergency (up to a maximum of 2% of each country’s GDP. Hence, the total figure of €240 billion). Among other items, EU leaders welcomed the roadmap for recovery outlined before the summit by Ms von der Leyen and the European Council President Charles Michel and discussed the easing of the containment measures still in place in most of Europe.


President Michel, in his conclusions, summed up declaring that the Recovery Fund is needed and urgent, and must be of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected, and be committed to dealing with this unprecedented crisis. The Commission will therefore make the first move. This involves the EU government analysing the exact needs and urgently coming up with a proposal that is commensurate with the challenge we are facing. Furthermore, it must also clarify the link that the Recovery Fund has with the Multiannual Financial Framework, which in any event will need to be adjusted to deal with the current crisis and its aftermath.


The intentionally vague wording of Mr Michel’s conclusions highlights the disagreement among Member States on several crucial elements of the Recovery Fund and suggests that several options are still on the table. The solution that the Commission has been working on since the beginning of April, officially reaffirmed by Ms von der Leyen after the Summit, foresees that the Recovery Fund should remain linked to the European budget. What does this mean in practice?

To establish the Recovery Fund, the Commission is planning to update its proposal on the 2021-27 MFF providing for the extension of the so-called headroom (i.e. the space between the existing spending limit in the EU budget and the own resources ceiling). To do so, Ms von der Leyen said, the EU government will need to increase the own resources ceiling to around 2% of EU GNI for the first two or three years of the MFF 2021-27, instead of the current 1.2%. The extended headroom will allow the Commission to raise money on financial markets at favourable interest rates by issuing bonds, thus guaranteed by Member States through the EU budget. The money collected – Ms von der Leyen explained – will be channelled back into the European budget, largely to set up the Recovery Fund and in a small part to feed other MFF funding programmes.


While how to set up the Fund no longer seems to be under discussion (the proposal, supported in particular by Italy, to establish it through Eurobonds guaranteed “jointly and severally” by the Member States was removed from the table in the days before the summit), there are three main aspects that remain uncertain and on which the Commission will have to seek a first possible compromise in the coming weeks. The first is the real size of the Recovery Fund, which von der Leyen preferred not to commit on, but it seems difficult that the Fund could go beyond €400-500 billion, given how the Commission is planning to set it up. The group of Southern European countries has a different orientation, proposing a much more ambitious budget, between €1000 and 1500 billion.

The second is the mechanism to use and allocate the Recovery Fund. Will the Fund mainly provide loans to the Member States which will burden the single countries public debts (this seems at the moment to be the real red line of the so-called frugal countries led by the Netherlands)? Or will the Fund operate mainly through grants, which will directly stem from the common budget without burdening the beneficiary countries’ public debts, as France, Italy and Spain would like? A possible solution could be a combination of loans and grants. The former (the majority) provided by the Recovery Fund, the latter distributed by traditional MFF programmes. A compromise solution that most likely will disappoint the Southern European bloc.

Thirdly, the date when the Fund will come into effect. Linking it to the common budget means automatically postponing its working until January 2021, if the negotiations on the new Commission proposal go well. However, France, Italy and Spain are pressing for the Fund to be activated by the summer. A possible solution, opposed by the hardliner countries, would involve Member States bringing forward the guarantees needed to set up the Fund and replacing them later with a guarantee from the common budget.


The Commission will place its cards on the table on 6 May. At that time, the proposal details will need to be analysed, to better understand whether the positions of the Member States can be reconciled and how much time it will take to reach a compromise. Time is certainly playing against the Southern European bloc, which is aiming for an ambitious agreement and has the interest to finalise a deal as soon as possible so that the new fund can be activated as early as the second half of the year. Surely, in order to close the agreement, many in Brussels share the conviction that EU Leaders will have to meet in person again. Will this be possible at the beginning of June? Another major obstacle towards a strong European response to the Covid-19 crisis.


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