Recovery plan: a bittersweet deal

Article
Mattia Ceracchi
Credit: Pixabay

On 21 July, at dawn on the fifth summit day, the European Council reached an agreement on the overall €1824 bn Recovery Plan, marking the latest and most important step in building a common European response to the economic crisis triggered by the pandemic. The deal between Member States redraws the Multiannual Financial Framework 2021-27 in line with the structure proposed by the Commission last May, confirming the inclusion of the new Recovery Instrument (Next Generation EU) within the common EU budget. The leaders’ agreement marks a historic step for the Union and a substantial political success for the South European bloc, giving the green light to the creation of large-scale common debt and net transfers of money to the countries most affected by the crisis. Nevertheless, it is a major setback for the definition of a modern EU common budget that is up to the challenges of the coming decades – the green transition and the digital transformation – clearly outlined in the political priorities of the von der Leyen Commission. For the deal to become final, it will have to be voted on by the European Parliament, as all the new EU budget programmes will must start up as of 1 January 2021.

A HISTORIC STEP

The EU leaders have agreed on a total plan of €1,824 bn (in 2018 prices). The agreement sets the Multiannual Financial Framework 2021-27 at €1,074 bn, adjusting downwards both the Von der Leyen Commission’s proposal presented last May (€1,100 billion) and the compromise suggested by the President of the European Council, Charles Michel, at the EU Leaders’ Summit last February (€1,094 bn). In addition to the traditional MFF’s €1,074 bn, there is the new Recovery Instrument’s (Next Generation EU) €750 bn. The Council has confirmed the overall figure proposed by the EU government, but has modified the distribution between grants, dropping from €500 bn proposed by Von der Leyen to €390 bn, while loans have consequently increased from €250 to €360 bn.

Raising Next Generation EU’s funds is a historic and innovative step for the Union, as it gives the green light, for the first time in EU history, to the creation of common debt on a large scale. The Council deal, built on the French-German proposal later adopted by the Commission, authorises the EU government – and here lies the double revolutionary nature of the agreement – to raise the funds by borrowing money on the financial markets on behalf of the Union and distributing it largely through grants. 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 Council has given the OK for the introduction of new own resources. From 1 January 2021, a system of taxation based on non-recycled plastic waste will be introduced, while the Carbon Border Adjustment Mechanism and the digital tax for large companies should become a reality by 2023 at the latest (the Commission will have to present proposals in the first half of next year).

The plan’s overall magnitude, how the Fund’s money will be raised, as well as the final balance between grants and loans, all represent a huge political success for the Southern European countries. It has only been in the last few months that Germany’s historic opposition to the creation of a common debt has been finally overcome, breaking down the strong resistance of the so-called frugal states (Austria, Denmark, Finland, the Netherlands and Sweden). The summit outcome has also marked an undoubted victory for French President Emmanuel Macron, whose support for issuing a common European bond was pivotal in loading the game in favour of the Southern European front, and Chancellor Angela Merkel. This result would have been unthinkable without the German about-face and Merkel’s awareness, in the final phase of her mandate, that the stability and vitality of a united Europe and the preservation of its single market is in Germany’s national interest.

HEAVY CUTS TO FUTURE-ORIENTED PROGRAMMES

The Council agreement confirms the amount of the direct support to Member States for investment and reform. Firstly, it strengthens the new Recovery and Resilience Facility (Recovery Fund), which will provide financial support especially to those countries most affected by the pandemic crisis, supporting the transformation and resilience of national economies in line with European priorities. The Recovery Fund total budget has been increased to €672.5 bn compared to the €560 bn proposed by the Commission in May (specifically, grants from €310 bn to €312.5 bn, loans from €250 bn to €360 bn). The new REACT-EU initiative has largely been maintained (dropping from €50 bn to €47.5 bn) and will be added to the current cohesion policy programmes to mitigate the socio-economic consequences of the crisis.

However, the EU common budget emerging from the leaders’ deal largely fails in matching the required ambitions and is not geared to meeting future global challenges – firstly, the green transition and digital transformation – clearly outlined in the Von der Leyen Commission’s political priorities. In fact, the programmes the EU government had proposed to reinforce aligning the new budget with the priorities of the Recovery Plan have been severely penalised. Taking as a reference the Commission proposal of 27 May and considering the total funds from the EU ordinary budget and Next Generation EU, the leaders’ agreement sees a cut in the budget for Horizon Europe, the research and innovation programme, from €94.4 bn proposed by Von der Leyen to €80.9 bn and massively reduces the InvestEU programme from €31.6 bn to just 8.4 (!), while completely eliminating (the Council conclusions make no mention of it) the new Strategic Investment Facility, which proposed to mobilise up to €150 bn to improve the resilience of strategic sectors and investing in key internal market value chains. Moreover, the new EU4Health programme, aimed at enhancing health security, appropriate preparedness for future health crises, and the supply of essential medicines and medical devices, has dropped from € 9.4 to 1.7 bn. The Just Transition Fund, set up to mitigate the socio-economic consequences of the Green Deal, has fallen from € 40 to €17.5 bn, and the Digital Europe programme has also been adjusted downwards (from € 8.2 to 6.8 bn), International cooperation funding has also been heavily cut (from € 118 to 98 bn).

The picture emerging from these painful cuts clearly shows that the “truly” European programmes, as expected, have been greatly overshadowed by the interests of the two opposing sides. On the one hand, the Southern European bloc favoured an ambitious budget, but were even more interested in safeguarding the Recovery Fund’s direct transfers, as well as the budget’s old priorities (cohesion policy and agriculture). On the other hand, the frugal countries, formally agreeing on modernising the MFF, were ultimately focused on reducing their contribution to the common pot. In the middle is the European Commission, the most penalised by the negotiation outcomes, once again being unable to assert community reason over intergovernmental dynamics. The EU government has seen the budget share under its own direct management dramatically reduced, and the agreed cuts now raise more than one question about the ability of the Von der Leyen Commission to effectively implement its political agenda over the next four years.

THE GOVERNANCE CONUNDRUM

How to allocate the Recovery Fund’s resources and the fund’s overall governance proved to be one of the most difficult issues to resolve during the 4 day summit. The Council agreed that 70% of the grants disbursed by the Facility should be committed in 2021 and 2022, with the remaining 30% to be fully committed by the end of 2023. The leaders’ agreement therefore reduces the duration of the Recovery Fund from four to three years, satisfying the demands of the frugal countries.

In order to receive the financing, each Member State will have to prepare «national recovery and resilience plans» where the reform and investment programme for the years 2021-2023 will be defined (if necessary, the plans will then be reviewed and adapted in 2022 to take account of the final allocation of funds for 2023). The national plans should, first of all, be consistent with the Commission’s country-specific recommendations and in line with the main European priorities («Effective contribution to the green and digital transition shall also be a prerequisite for a positive assessment»). The assessment of the plans will be under the Commission’s responsibility and will have to be approved by the Council by a qualified majority. Specifically, in order to give the green light to states’ requests for payments, the EU government will ask the opinion of the Economic and Financial Committee (the Council group bringing together MS Finance Ministry representatives in Brussels). At that point, «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». In this case, the Commission will have to wait for the European Council to discuss «exhaustively» the matter in order to approve payments.

This is the ‘super emergency brake’, which the frugal states, and the Netherlands in particular, advocated as a minimum condition for approving the agreement. The established mechanism will allow a single country to freeze the allocation of funds, but this may last up to three months (starting from the Commission’s request for an opinion to the Economic and Financial Committee) and will not be easy to politically justify, especially if a national plan is questioned by one Member State only. Above all, however, this arrangement keeps the final decision on the outcome of the national plans’ assessment under the Commission’s responsibility, and does not allow a single country to veto the disbursement of funding to the other EU Member States. This is a condition, strongly promoted by the Netherlands, which could compromise the functioning of the entire Recovery Fund and which was therefore strongly, and successfully, opposed by Italy during the negotiations.

THE ROLE OF THE EUROPEAN PARLIAMENT

In order to become definitive, the agreement reached in the Council on the Recovery Plan needs to be approved by the European Parliament. On 23 July, MEPs discussed and voted on a first resolution in response to the Leaders’ Summit outcome, welcoming the establishment of the Recovery Fund, but highlighting a number of critical issues. These include cuts to European programmes and the lack of ambition of the common budget, the uncertainty on the introduction of new own resources and on the mechanism to link EU fund disbursement to the rule of law (strongly opposed by Poland and Hungary), and the claim of a substantial role in the Recovery Fund’s governance, from which the Parliament has been completely omitted.

The Parliament’s vote will be scheduled after the summer break, between September and October. MEPs will only be able to accept or reject en bloc the compromise found by the Member States, with no possibility of amendments. It is likely that the Parliament will be able to obtain some concessions on the raised critical points, but it is highly unlikely that it will be able to modify the Council agreement to any great extent. Therefore, the MEPs will have to choose between approving the leaders’ compromise, and thus giving up most of the positions advocated for over the last three years, or rejecting it by calling into question the historic turning point of the common debt and ultimately jeopardising the start of all the EU budget programmes scheduled for 1 January 2021.

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