An ambitious recovery budget, tough negotiations ahead

On 27 May the European Commission unveiled its amended proposal to the EU’s Multiannual Financial Framework (MFF) for 2021-2027. The backbone of the proposal is the latest ‘negotiating box’ put forward by the Council President Charles Michel in February 2020, amounting to €1.1tn. This is topped up with a temporary €750bn instrument called ‘Next Generation EU’, which almost doubles EU spending for 2021-2024 with money raised on the financial markets.

The overall package is impressive. Not only is it very ambitious in size, but it’s also truly innovative as it foresees, for the first time in history, a massive emission of common EU debt to finance EU expenditures. From a macro-economic perspective, providing a common budgetary response to the crisis and delaying its repayment beyond 2027 makes a lot of sense. The fact that the Commission has proposed to disburse most of the borrowed money in the form of grants rather than loans and to focus its support on those countries and regions most in need is also important for ensuring that the crisis does not sow further divisions and undermine the Single Market. Last but not least, the idea of creating new ‘own resources’ to help service the debt is politically attractive, even if it is unlikely to change member states’ traditional resistance to reforming the revenue side of the EU budget.

The coming months will show whether the Commission’s proposal can survive negotiations in good shape. The widespread consensus is that reaching an agreement will prove very difficult and certain countries may try to reduce the ambition of the package. However, the success of the plan will depend as much on its overall size as on how and when the money will be spent. In this respect, there are some elements that demand attention and may be objects of discussion in the context of the negotiations.

First, despite the urgency of the situation, only a very small part of the recovery effort (€11.5bn) will be spent in 2020. This is, of course, very regrettable, but doing otherwise would have been difficult. Frontloading a bigger part of the recovery effort by raising debt would have required a temporary increase of the own resource ceiling and thus the ratification by all EU member states’ national parliaments. The Commission has preferred not to follow this path and has instead opted for a moderate increase of the 2020 budget, which only requires a unanimous vote in the Council and the consent of the European Parliament.

Second, almost three-quarters of the recovery grants (€310bn out of €440bn) will be channelled through the so-called ‘Recovery and Resilience Facility’ to support member states’ recovery and resilience plans. This makes sense, as EU-level support will be more effective if tailored to each country’s needs and circumstances. However, whereas the main rationale for this type of EU support is to prevent further divergence stemming from the asymmetric impact of the crisis or the differences in national recovery capacities, grants under this Facility will be distributed according to an allocation key based on population and pre-crisis GDP and unemployment levels. Neither the socio-economic impact of the crisis nor the differences in national fiscal positions will be taken into account.

Third, a much-welcomed step is the creation of a new programme called the ‘Solvency Support Instrument’. This will provide capital support to financially sound firms struggling as a result of the crisis. Managed by the EIB, the Instrument is expected to focus on the member states most hit by the crisis and/or where national solvency support is more limited. However, the regulation explicitly excludes the establishment of geographical quotas and leaves wide discretion to the EIB in ensuring an appropriate distribution of funding across member states.

Fourth, the MFF communication placed a lot of emphasis on the need to align the recovery effort with the European Green Deal. However, in some programmes, including REACT-EU, the new Solvency Instrument, the draft regulations on how to ensure this alignment are vague. In others, such as the Recovery and Resilience Facility, the procedures are detailed but look insufficient. Thus, it is possible for a national recovery plan to be adopted by focusing its attention on the digital transformation, even if it has little or no impact on the green transition.

Fifth, it is important to highlight the enormous implementation challenge that lies ahead. Many countries are already facing difficulties with disbursing cohesion policy funding on time. They will likely struggle to implement the extra money. This will become even more problematic if tough reform conditions are attached to the disbursement of the funds.

Finally, we should not forget that the package includes the ‘standard’ MFF. The Commission has shown political realism in building on Charles Michel´s MFF proposal rather than its own May 2018 version, which was more ambitious in size. However, the ‘negotiating box’ presented by President Michel in February 2020 left many issues unresolved. Besides, some of the amendments made by the Commission, such as a slight increase in agriculture spending, may be controversial.

Whether the above questions will be constructively discussed in the negotiations or will constitute points of obstruction remains to be seen. It is hard to assess the prospects of this exceptional recovery package by relying on our knowledge of classic MFF negotiations. We are living in exceptional times, and this may also affect negotiation dynamics. A failure to agree on the recovery package would send a very negative political signal to the world. Let’s hope that member states as well as the European Parliament acknowledge this fact and behave in a constructive and responsible manner.