The 27 May 2020 could be remembered in the future as the day on which the European Union finally embraced the path toward fiscal and political unification. The Recovery Plan proposed by Ursula von der Leyen to revive the EU’s economy from the pandemic crisis redraws the Multiannual Financial Framework 2021-27 by incorporating the new Recovery Instrument into the EU seven-year budget. Next Generation EU – the name of the new instrument – comes with a total budget of €750 bn, which the Commission will be able to raise by borrowing money on the financial markets on behalf of the Union, and then largely distribute (500 bn) through grants, thus offering financial support to the countries most affected by the crisis. Built on the Franco-German initiative of 18 May, the EU government’s plan proposes for the first time in EU history the creation of a common European debt on a large scale, and will now have to overcome its most difficult test to become effective – the unanimous vote of the Member States in the EU Council.
THE RECOVERY PLAN AND THE NEW LONG-TERM BUDGET
To give impetus to a sustainable, inclusive and fair recovery for all Member States, the Commission proposes an overall plan of €1,850 bn (in 2018 prices), being the new Recovery Instrument’s €750 bn added to the “old” MFF 2021-27’s €1,100 bn. As well, von der Leyen’s plan rewrites, in the light of the pandemic crisis, the political manifesto presented by the Commission President to the European Parliament last July. Europe’s recovery must remain anchored in the challenges of sustainable development (the Green Deal) and digital transformation, as well as help to strengthen Europe’s strategic autonomy in a number of specific areas, being based on fundamental rights and fully respecting the rule of law, and rebuilding the Union’s leadership in the world.
Therefore, the Commission foresees for the traditional Multiannual Financial Framework 2021-27 a budget of €1,100 bn. The new proposal lowers the overall budget presented by the Juncker Commission in May 2018 (€1,134 bn) and is basically in line with the compromise suggested by the President of the European Council, Charles Michel, at the EU Leaders’ summit last February (€1,094 bn). The sources of budget revenue remain unchanged compared to the proposal made two years ago. The MFF will continue to be fed by Member States’ contributions based on Gross National Income (GNI), national contributions from VAT and contributions collected from common customs duties. The Commission’s proposal to diversify sources of revenue through a range of new own resources (a revenue linked to the ETS, a contribution calculated on the weight of non-recycled plastic packaging waste, a common corporate tax), and repeatedly blocked by Member State opposition, also remains on the table.
The composition of MFF expenditure is also very similar to previous versions. The new budget contains all the funding programmes already foreseen and largely confirms their funding allocation. The Erasmus+ programme (€24.6 bn compared to €26.4 bn in the 2018 proposal) and the Defence Fund (€8 bn compared to €11.4 bn two years ago) have been adjusted downwards, while the Digital Europe budget (€8.2 bn) has been maintained. Two programmes mostly benefit from the new proposal – the research and innovation programme Horizon Europe (from the Juncker proposal’s €83.4 bn to the current €94.4 bn, of which €13.5 bn provided through the new Recovery Instrument) and the InvestEU programme, whose budget has more than doubled (from €13.3 bn to €31.6 bn).
THE RECOVERY INSTRUMENT
In addition to the traditional MFF’s €1,100 bn, there are the Next Generation EU’s €750 bn, spread over the years 2021-2024. The Commission – and here lies the double potentially revolutionary nature of the proposal – will be able to raise those funds by borrowing money on the financial markets on behalf of the Union and then largely distribute them (€500 bn) through grants. The remainder (€250 bn) could be disbursed through loans to Member States.
In order to be able to borrow on the financial markets, as already anticipated in previous weeks, the Commission proposes to increase, exceptionally and temporarily, the so-called headroom, i.e. the difference between the own resources ceiling (the maximum amount of funds that the EU can request from Member States) and the ceiling of actual expenditure. The extraordinary increase in the headroom – 0.6% of EU GNI – will provide the Union with the needed guarantee to issue debt on favourable terms. The funds raised will be repaid from future EU budgets over a period of thirty years, starting in 2027 and ending no later than 2058. To facilitate the debt repayment and avoid burdening national budgets in the coming years, the Commission is planning to propose the introduction of new own resources besides those already envisaged, including a carbon border tax and a digital tax for large companies.
The Recovery Instrument funds will mainly set up totally new programmes, but will also reinforce the funding programmes already foreseen in the common budget. The resources will be channelled into three pillars. The first, to “support Member States for investment and reform”, includes the mainstay of the whole plan, the new €560 bn Recovery and Resilience Facility, which will provide financial support especially to the countries most affected by the pandemic crisis, supporting green and digital transition and the resilience of national economies in line with European priorities. This first pillar contains the new REACT-EU initiative, which will be added to the current cohesion policy programmes to mitigate the socio-economic consequences of the crisis, the strengthening of the Just Transition Fund and the Agricultural Fund for Rural Development (both programmes already included in the MFF). The second pillar of the Recovery Instrument aims at “reviving the European economy by stimulating private investment”. It will contain the new Solvency Support Instrument – operational as of 2020, €31 bn in total – aimed at mobilising private resources and urgently supporting European companies in the most affected regions and sectors. It will leverage the investment programme InvestEU with an additional €15.3 bn, more than doubling its volume and incorporating a new Strategic Investment Facility (SIF), which will mobilise up to €150 bn to specifically improve the resilience of strategic sectors related to the green and digital transition and investing in key internal market value chains.
The third pillar of Next Generation EU brings together investments proposing to learn the lessons of the crisis. First, the new EU4Health Programme involving €9.4 bn (a huge increase compared to the €413 mln in the old MFF proposal), aimed at enhancing health security, appropriate preparedness for future health crises, and the supply of essential medicines and medical devices. The third pillar of the Recovery Instrument also contains the already mentioned increase in R&I investment through the Horizon Europe programme, the reinforcement of the EU Civil Protection Mechanism RescEU, an additional €16.5 bn for external action and humanitarian assistance and the upward adjustment of other European programmes to align the new budget with the priorities of the Recovery Plan.
THE COMING MONTHS
Although very ambitious and potentially historic, the Commission’s proposal is just a proposal as the definition of the recovery plan will now go before the Parliament and, above all, the Member States. The von der Leyen government is hoping to reach a political agreement on the whole package (Recovery Instrument and Budget 2021-2027) in the European Council by July. It is only in this way, the Commission says, that the EU will be able to give renewed impetus to the recovery and be equipped with the necessary tools to relaunch the economy and build its future. This is not going to be easy as while the new Commission proposal is supported by Germany, France and the Southern European countries (Italy in the lead), it is fiercely opposed – precisely because of the Recovery Instrument innovative features (size, fundraising methods and delivery mechanisms) – by the so-called frugal countries (Austria, Denmark, the Netherlands and Sweden). President Michel will be called on to find another compromise. The Recovery Plan will have to be approved according to the EU long-term budget procedures and will, therefore, require a unanimous vote in the Council. In order to advance the European integration and provide the Union with a recovery plan that meets its ambitious challenges, all Member States will have to be in agreement.