ANTALL JÓZSEF RESEARCH CENTRE
THE 2021–2027 MULTIANNUAL FINANCIAL FRAMEWORK: WHERE ARE WE NOW?
ALESSANDRO D’ONOFRIO
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ANTALL JÓZSEF RESEARCH CENTRE
AJRC-Analyses Series of the Antall József Knowledge Centre
Publisher-in-Chief: Péter Antall Managing editor: Péter Dobrowiecki Editorial office: Antall József Knowledge Centre H-1093 Budapest, Czuczor street 2
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©Alessandro D’Onofrio, 2020 © Antall József Knowledge Centre, 2020 ISSN 2416-1705
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THE 2021–2027 MULTIANNUAL FINANCIAL FRAMEWORK: WHERE ARE WE NOW? ALESSANDRO D’ONOFRIO
THE BUDGET ROADMAP: FROM THE 2018 EUROPEAN COMMISSION PROPOSAL UNTIL TODAY In May 2018 the European Commission presented its draft proposal for the next 2021–2027 Multiannual Financial Framework (MFF) which provided the framework on which negotiations between all EU actors (Commission, Parliament and Council) have been based. Major adjustments were expected since the United Kingdom—which contributed to the EU’s budget by roughly EUR 12 billion per year—ceased to be part of the EU and will stop contributing its share of the EU’s outstanding commitments and liabilities from 1 January 2021.1 The consistent “hole” left by the British in the common budget forced Eurocrats in Brussels to rethink the whole structure of the next MFF in order to adapt it to the changed circumstances and consequently try to make it more consistent with the Commission’s key ambitions. Obviously, the loss of a net contributor and the subsequent reduction of resources at Brussels’ disposal put the Commission at a crossroads with only two feasible solutions: on the one side a post-Brexit reduced budget should be reflected in an automatic call to member states to increase their net contributions (set a new ceiling); on the other side the Commission had to make do with its current resources and redistribute them between existing and new programmes set up to achieve the Commission’s new priorities (reform the headings).2 For this reason, former Commission President Jean-Claude Juncker presented a very elaborate proposal in 2018 which included all the characteristics of a traditional MFF plan, which is usually very pragmatic and balanced, but at the same time audacious enough to enable the EU to pursue its objectives. As a rule, the MFF negotiations between the EU27 are always very polarised with the actors usually divided in different and conflicting groups (those supporting a larger budget, those who want to reduce it, those who want more money for Cohesion policies, etc.) each of them trying to obtain the largest share of European resources for satisfy their primary national interests. The main problem of the EU budget procedure lies in the fact that, differently from a normal national budget procedure, before being implemented it requires a favourable unanimity vote in the European Council and the consent of the European Parliament (by simple majority, but with no power to make amendments). The relative marginality of the European Parliament and the excessive Zsolt Darvas: How much the UK will contribute to the next seven-year EU budget? Bruegel. 16 December 2019. <https://www.bruegel.org/2019/12/how-much-will-the-uk-contribute-to-the-next-seven-year-eu-budget/ > Accessed: 10 July 2020. 1
2 Jörg Haas–Eulalia Rubio: Brexit and the EU Budget: Threat or Opportunity? Jacques Delors Institut, Policy Paper 183. 16 January 2017. <https://institutdelors.eu/wp-content/uploads/2018/01/brexiteubudgethaasrubio-jdi-jan17.pdf > Accessed: 10 July 2020.
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centrality of the Council, which therefore enables every single member state to veto the budget, is probably one of the biggest Gordian knots in the European system of governance. It is therefore a common rule for the Commission to set its goals high bearing in mind that to overcome all the different visions within the bloc an agreement will be found only at the lowest possible compromise.3 In detail, the 2018 Commission proposal called for an increased MFF budget with up to EUR 1.279 billion in commitments and EUR 1.105 billion in payments, representing respectively the 1.11% and the 1.08% of the EU27 GNI.4 Since then the size of the budget has been constantly altered until an agreement was reached at the July European Council Summit which set the next MFF at 1.074% of the EU27 GNI.5 This stark reduction of the resources at the EU’s disposal was highly criticized by the members of the European Parliament who convened in a plenary session at the end of July to discuss the European Council’s decision. As expected MEPs reiterated their willingness to withhold their consent for the Multiannual Financial Framework until a satisfactory agreement is reached in the upcoming negotiations between the Parliament and the Council, preferably by the end of October at the latest for a smooth start of the EU programmes in 2021.6 In truth a budged as such is barely enough to permit the EU government to fulfil its ambitions, however for obvious political reasons Commissions cannot by any mean expect “revolutionary” proposals to be approved, as they will be met by the strong resistance of the member states. To get an impression about how limited the resources at the disposal of the EU are, it might be useful to highlight that, for example, the federal budget of the United States represents about 20-25% of the country’s GDP and a similar share arrives to the German Federal Government from the 16 German Länder.7 It is therefore a very hard task for the Commission to try to pursue the EU27’s global ambitions with the very limited resources at its disposal knowing that even an increase of one decimal point might represent an obstacle impossible to overcome. Nevertheless, looking at it from the point of view of the member states, it is understandable that negotiating a substantial amount of resources is not an easy task mostly considering that seven years in this regard are an extremely long time span—a much longer horizon that politicians are accustomed to thinking. Moreover, the ability of a head of state to obtain a good deal for his country could have important repercussions at the national level as well.
EU budget for the Future. European Commission. 2 May 2018. <https://ec.europa.eu/commission/futureeurope/eu-budget-future_en > Accessed: 3 July 2020. 3
Alina Dobreva: Multiannual Financial Framework 2021–2027: Commission proposal. Initial comparison with the current MFF. European Parliament, EPRS Briefing PE 621.864. May 2018. <https://www.europarl.europa.eu/ RegData/etudes/BRIE/2018/621864/EPRS_BRI(2018)621864_EN.pdf > Accessed: 7 July 2020.
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5 Special meeting of the European Council (17, 18, 19, 20 and 21 July 2020) – Conclusions. European Council. 21 July 2020. <https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf > Accessed: 21 July 2020. 2-3.
EU long-term budget deal must be improved for Parliament to accept it. European Parliament. 24 July 2020. <https://www.europarl.europa.eu/news/en/headlines/priorities/eu-s-long-term-budget/20200722IPR83804/eulong-term-budget-deal-must-be-improved-for-parliament-to-accept-it > Accessed: 24 July 2020. 6
Leokadia Oręziak: Fiscal federalism and a separate budget for the euro area. International Journal of Management and Economics.2018/2. 85–98. 7
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That’s why the Commission must find a balance between how to distribute its resources on long term projects, taking in account the many challenges coming from the changing international scenario, and how to use them to meet the needs of each member state. Of all the things the size of the budget is, unsurprisingly, at the centre of the debate. The hopes of those who believed that the departure of the UK, a known adversary to an increase in the Union's resources, would have facilitated discussions between the remaining EU27 were soon abandoned. In fact, the UK was not the only member state traditionally opposed to an increase in national contribution to the European budget and to a deeper EU fiscal union. Currently, the so called “frugal countries” (Austria, Denmark the Netherlands and Sweden) formed a very influential group which is persistently lobbying for the reduction of national commitments into the EU budget and is content with the current degree of integration. Also, they represent the wealthiest EU countries and net contributors to the budget, but they are insisting that they should not carry the financial burden resulting from the UK’s departure or offer guarantees for other member states’ debts. On the other side of the spectrum there is the EU Commission and the Parliament, supporters of a more ambitious budget that will enable the development of new policies, as well as many member states which would welcome a larger budget with the current distribution criteria which, in most cases, would benefit them.8 However, some of the frugal countries’ concerns might be justifiable since the resources of the EU budget are mostly concentrated in two headings—Common Agricultural Policy (CAP) and Cohesion Policy—which could be hardly considered as areas of added value for the EU. But even so, it is harder to explain the ratio behind their idea for an overall reduction of the common resources. In fact, to keep the common resources at the same level of the previous seven-year budget, the current net contribution of member states should be raised to 1.16% of EU GNI. Therefore, fixing the new MFF at 1.1% of EU GNI—or even below— would automatically imply a sharp reduction in absolute terms of the states’ contribution. Additionally, a further reduction in real terms is likely to happen since all the EU27 member states will suffer a severe economic downturn due to the pandemic.9 Reducing the budget will not only penalize net beneficiary countries—as often thought—but will also have deep repercussions on the EU27 as a whole since, in principle, EU resources are intended to deliver fully European public goods that should benefit all the member states. Furthermore, the cold accounting exercises of the frugal countries might well look out-of-place considering that most of them are richer than the EU average, benefit the most from the single market and yet are entitled to some form of corrections which in turn reduces their net contribution to the European treasury compared to less wealthy member states.10
8 Nicolas-Jean Brehon: Budget debate: the battle for the 1% threshold. Fondation Robert Schuman. 9 December 2019. <https://www.robert-schuman.eu/en/european-issues/0539-budget-debate-the-battle-for-the-1-pour-centthreshold > Accessed: 8 July 2020. 9 Eulalia Rubio: MFF Negotiations: Towards the End? Jacques Delors Institute. 17 February 2020. <https://institutdelors.eu/wp-content/uploads/2020/02/BP_MFF_Rubio-EN.pdf > Accessed: 6 July 2020.
Giordano Mion–Dominic Ponattu: Estimating economic benefits of the Single Market for European countries and regions. Bertelsmann Stiftung. 2019. <https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/ Publikationen/GrauePublikationen/EZ_Study_SingleMarket.pdf > Accessed: 6 July 2020.
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The first attempt to break the deadlock over the budget size occurred in February 2020 when the Council President Charles Michel, during a special summit, proposed a compromise budget set at 1.074% of GNI.11 The Council proposal, which mostly resembled the one put forward by the Finnish Presidency at the end of 2019, despite intense preparations and wearisome discussions, failed to overcome member states’ disagreements. Eventually, also the EP parliament played down the Council’s plan, for it considered it not ambitious enough and insisted that member states should converge towards a solution close to 1.3% of GNI.12 Just few months later, during the 17–21 July European Council special meeting, in a totally changed set of circumstances due to the coronavirus pandemic which hit the continent hard, member states agreed on a new special budget which includes also a bold recovery plan to tackle the post-COVID economic and health crisis. The new budget will collect resources for EUR 1.824 billion and represents a revolutionary step towards a deeper European integration. However, it is an open question whether this smaller budget—without considering the recovery plan—will be accepted by the Parliament.13 If the discussions over the size of the budget might be very troublesome, things are not better when member states are asked to find an agreement upon the allocation of the European resources. As already mentioned, Brexit forced the Commission to plan a consistent reshuffle of the common resources prioritizing new strategic investments and areas of added-value—areas where a single common policy is more cost-effective than twenty-seven separated policies with evident cross-borders benefits.14 With these priorities in mind, the Juncker Commission decided to present a new structure for the MFF, increasing the number of headings from five to seven, each representing the EU’s long-term priorities, while the specific expenditure programmes in the individual policy areas were grouped in 17 policy clusters. Namely, heading 1 Single Market, Innovation and Digital, and heading 2 Cohesion and Values replaced the previous heading 1 Smart and Inclusive Growth; heading 3 Natural Resources and Environment replaced the previous heading 2 Sustainable Growth: Natural Resources; heading 4 Migration and Border Management and heading 5 Security and Defence, replaced heading 3 Security and Citizenship; while heading 6 Neighbourhood and the World and heading 7 European Public Administration replaced respectively the previous heading 4 Global Europe and heading 5 Administration.15 The 2018 proposal also encompassed plans to relocate funds from some traditional headings of spending
Special European Council, 20–21 February 2020. European Council. February 2020. <https://www.consilium. europa.eu/en/meetings/european-council/2020/02/20-21/ > Accessed: 3 July 2020.
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The 2021–2027 Multiannual Financial Framework in figures. European Parliament. January 2020. <https:// www.europarl.europa.eu/RegData/etudes/BRIE/2020/646131/EPRS_BRI(2020)646131_EN.pdf > Accessed: 7 July 2020. 12
13 European Commission: EU long-term budget 2021-2027: Commission Proposal May 2020. European Commission. 27 May 2020. <https://ec.europa.eu/info/strategy/eu-budget/eu-long-term-budget/2021-2027_en > Accessed: 6 July 2020.
The European Added Value of EU Spending: Can the EU Help its Member States to Save Money? Bertelsmann Stiftung. 2013. <https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/ GrauePublikationen/GP_The_European_Added_Value_of_EU_Spending.pdf > Accessed: 8 July 2020.
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The 2021–2027 Multiannual Financial Framework in figures.
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to others, while at the same time creating new headings, introducing new own resources and eliminating the hard-to-explain compensatory mechanisms or rebates. Most notably expenditures in the Common Agricultural Policy and Cohesion Policy, which together accounted for more than 70% of the previous budget, were reduced—respectively by 15% and 11% in real terms—to encourage investments in areas which were so far underfinanced compared to their relative importance for the EU as a whole, such as security and defence (+80%) and border management (+200%), or in areas which represent new overall priorities, like the fight against climate change (+70%) and innovation digitalisation (+43%).16 Protecting European farmers' competitiveness and obtaining the convergence of EU members and regions surely remain key priorities for the Commission, but the growing challenges coming from a more instable international scenario require an increased awareness from the member states to the fact that their competitiveness and security are better protected in a stronger EU. Juncker’s proposal included a significant increase in the share of securityrelated expenditure, namely in the Migration and Border Management (heading 4, which includes the Integrated Border Management Fund), the Security and Defence (heading 5, which includes the European Defence Fund, EDF) and Neighbourhood and the World (heading 6, which is strongly influenced by the incorporation of the EDF). The decision to increase these spending voices is very significant, because it indicates the growing attention on part of the EU in engaging with the rest of the world and being a more active geopolitical actor, despite the loss of a net payer and globally engaged country like the UK. During the February summit the European Council, sharing some of the questions raised during the Finnish presidency, proposed a slight readjustment in the size of the Cohesion Policy and CAP—still reduced but by a smaller amount—but without altering the ratio of the Commission’s proposal. As for the rest of the programmes, the largest reductions were proposed for “migration and border management” (−24%) and “security and defence” (-40%). Most notably, the Council’s decision to reduce cohesion spending by 2% compared to the Commission’s proposal, was widely criticised by a large group of states called the “friends of cohesion”—currently including 16 Member States: Bulgaria, Cyprus, Czechia, Croatia, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.17 Eventually the plan was rejected and no alternatives were offered until July. As expected, given the urgency to find an agreement before the end of the summer, EU member states reached a compromise in July which confirmed the proposed reductions for migration and border control, the new European defence fund, the neighbourhood and development instrument, and the Budgetary Instrument for Competitiveness and Cohesion (BICC), regarded as the possible premise of a Eurozone budget (see paragraph below). One of the heading which suffered the biggest cuts was that one connected to environmental policies, where the main program—Just Transition Fund—was downgraded from the Commission’s EUR 40 billion climate action war-chest to just EUR 10 billion. The same happened to health policies, that was supposed to be one of
The 2021–2027 Multiannual Financial Framework in figures.
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Special European Council, 20–21 February 2020.
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the most important voices in the reviewed Commission proposal due to the necessity to tackle the fallout of an unprecedented pandemic. The same happened to Horizon Europe, designed to boost innovation, which suffered severe cuts as well. 18 It is true that migration and border management programs will receive a larger share of resources in the new budget compared to the old MFF, but this is consistently less than the original sum that the Commission wanted: the deal set a budget of EUR 22.7 billion (the Commission asked for EUR 30.8 billion). As for the CAP, the 2018 Commission proposal was mostly maintained, and the new budget for this heading is now at EUR 336.4 billion, of which EUR 258.6 billion are funds and direct payments to farmers and EUR 77.9 billion for rural development, which funds green and social schemes. It is important to note that the agreement also includes EUR 7.5 billion in rural development grants from the EU recovery fund, as we will see later, intended to help farmers meet the bloc’s climate ambitions. Cohesion funds are set at EUR 330 billion—the 2018 proposal set this heading at EUR 330.6—but additional EUR 47.5 billion will come from the new ReactEU program included in the recovery fund.19 Another very debated element which was eventually watered down by the need to reach a deal in the Council regards conditionality, that could be defined as the requirement that all EU spending complies with a set of Union policy standards, subject to withdrawal of funds in the event of failure to do so.20 This is not a new practice from the side of the Commission but in the next MFF Brussels proposed an innovative solution not only to reinforce existing requirements, such as “macroeconomic conditionality” and “infringement conditionality,” but also to include a new one: the “rule of law conditionality.” According to this new requirement, member states which show generalised deficiencies regarding the respect for the rule of law, could see a limitation in their access to EU funds. This indisputable—at least in principle—proposal was diluted in front of the reality of the MFF negotiations between 27 sovereign states frightened by the idea of delegating such a sensitive power to Brussels.21 At the end member states agreed to a very ambiguous formula which stated that “a regime of conditionality to protect the budget and Next Generation EU will be introduced,” with possible sanctions to be adopted by a qualified majority in the Council. “The European Council will revert rapidly to the matter.” The interpretation of this clause is not univocal and it sure that there will be a lot of political leeway, reason why this issue is expected to create conflicts between the European institutions. As a matter of fact, the Parliament was ready to announce that it “strongly regrets” the attempt of the European Council to significantly weaken the efforts of the Commission and Parliament to uphold the rule of
Andrew Sherriff–Mariella Di Ciommo: The EU budget proposal for external action: How much, what for, and what we still don’t know. European Centre for Development Policy Management. 7 May 2018. <https://ecdpm. org/talking-points/the-eu-budget-proposal-for-external-action-how-much-what-for-and-what-we-still-dontknow/ > Accessed: 8 July 2020.
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Special meeting of the European Council (17, 18, 19, 20 and 21 July 2020) – Conclusions. 17–62.
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Research for REGI Committee–Conditionalities in Cohesion Policy. European Parliament, Study PE 617. 498. September 2018. <https://www.europarl.europa.eu/RegData/etudes/STUD/2018/617498/IPOL_ STU(2018)617498_EN.pdf > Accessed: 8 July 2020. 20
Gábor Halmai: The Possibility and Desirability of Rule of Law Conditionality. Hague Journal on the Rule of Law. 2019/11. 171–188. 21
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law, fundamental rights and democracy in the framework of the MFF and the recovery plan, recalling that the Rule of Law Regulation will be co-decided by Parliament.22 As for the structure of the budget, one of the most significant novelties of the 2021–2027 MFF proposal, aimed at simplifying the framework in which the EU budget is built and to make it more in line with the Commission’s political priorities, was eventually maintained. According to the Commission, one of its main objective was to reduce the fragmentation of the MFF into many programmes and instruments and to make it a “simpler, more flexible and more focused budget.”23 The enhancement of the European budget’s flexibility is an issue of foremost importance mostly considering the recent developments caused by the coronavirus pandemic. In fact, in a period like this the ability of the EU budget to adapt to unexpected events and suddenly changing circumstances or, given that seven years are a very long time span, new policy priorities represent a very delicate issue. The Council has been so far diffident towards a more flexible EU budget and notably President Charles Michel put forward a proposal aimed at reducing the size of the Flexibility Instrument and the European Globalisation Adjustment Fund.24 However, the position of the Council slightly changed due to the effects of the pandemic on the economies of the member states. Currently, the degree of flexibility very much depends on three factors: legislative flexibility, that could be increased by relaxing constraints on annual budgets and enhancing the capacity of legislative bodies to set annual spending priorities; executive flexibility, based on the level of discretion administrative units have on deciding how to allocate resources; and contingency reserves for natural disasters and crises, obtained by setting up specific mechanisms to deal with large, unforeseen expenditure needs. While the EU has few special instruments—outside the MFF—to deal with fiscal risks and large unanticipated crises (i.e. the Emergency Aid Reserve, the Solidarity Instrument and the European Globalisation Adjustment Fund) and limited capacities to relocate funds across budgetary lines, the innovative proposal made by the Commission at the end of May to create a European Recovery Fund could finally enable Brussels (as we will see) to borrow money from international markets to mitigate the negative effect of future shocks.25 Additionally, and this point assumes a very high relevance considering the introduction of the new European recovery fund, already in 2018 the Commission presented a plan to the Council aimed at increasing own resources for the financing of the budget, rather than setting the ceilings for each category of EU expenditure. In fact, to increase the Union’s own resources became a necessity in order to cover the “Brexit gap” and to honour the
EU long-term budget deal must be improved for Parliament to accept it. 2020.
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A Modern Budget for a Union that Protects, Empowers and Defends. The Multiannual Financial Framework for 2021–2027. European Commission. 2 May 2018. <https://ec.europa.eu/commission/sites/beta-political/files/ communication-modern-budget-may2018_en.pdf > Accessed: 3 July 2020. 23
Eulalia Rubio: Tackling the coronavirus crisis: How can the EU budget help? Jacques Delors Institut. 31 March 2020. <https://institutdelors.eu/en/publications/tackling-the-coronavirus-crisis-how-can-the-eu-budget-help/ > Accessed: 7 July 2020. 24
25 Benefits outweigh costs of flexibility in EU multiannual financial framework. European Parliament, EPRS Briefing PE 646.142. March 2020. <https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/646142/ EPRS_BRI(2020)646142_EN.pdf > Accessed: 7 July 2020.
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payment of the money borrowed with “Next Generation EU,” as well as to expand the overall EU budget. The current EU system of own resources is certainly very valuable since it provides—despite the application of the various rebates and correction mechanisms— steady, predictable and reliable revenues; it guarantees a balanced budget; and by following the subsidiarity principle it allows member states to freely decide about the distribution of the financial burden among individual taxpayers.26 Nonetheless, the current financing system has been criticized over the last few decades because it lacks transparency, is highly complex, has a weak democratic accountability since it misses of the direct link between EU revenues and citizens, and most of all it does not contribute effectively to the Union’s central strategies and policies. The EU budget is currently financed by three main categories of revenues: the first group includes “traditional” own resources (mainly customs duties); the second is represented by value added tax based on own resources; and the last one consists of the GNI income resources. In 2017, VAT-based own resources accounted for 14.7% of overall EU revenues while traditional own resources contributed to a rather small share of 17.7%. Thus, GNI-based own resources, which is perceived as a national contribution, has reached two-thirds of the EU’s total own resources. 27 In its original proposal the European Commission envisaged several structural reforms which are based on the recommendations derived by the High Level Group of Own Resources (HLGOR), chaired by former Italian Prime Minister Mario Monti, which was appointed to plan potential reforms to the EU’s own resources system in the next long-term budget. The proposal involved the modernisation and the simplification of the existing own resources system and the diversification of the sources of revenue.28 First of all, the Commission anticipated a reform of its traditional source of own resources, the customs duties, which envisaged a 20% flat rate granted as collection costs in favour of member states. Given that custom duties revenues are highly uneven through member states, they resemble a hidden form of contribution correction for fewer countries. That is why in its 2019 plan the Commission reduced this flat rate to 10% of revenue along with the elimination of the UK rebate—out-dated after Brexit—as well as all other rebates (as we will see in the following section). Moreover, the calculation method for the VATbased own resource would be made less complicated and more transparent. In addition, new own resources will replace or complement the EU’s current funding sources. Concretely, the European Commission proposes to apply a 20% rate to the revenue generated from auctioning emission trading certificates (ETS), and by the free allowances for modernisations within the energy sector. Also, the Commission proposed to apply a 3% rate to the share of taxable profits of each member state based on the common consolidate corporate tax system (CCCTB), and
26 EU budget own resources. European Commission. 2020. <https://ec.europa.eu/info/strategy/eu-budget/ revenue/own-resources_en > Accessed: 7 July 2020.
Margit Schratzenstaller [et al.]: EU Taxes as Genuine Own Resource to Finance the EU Budget – Pros, Cons and Sustainability-Oriented Criteria to Evaluate Potential Tax Candidates, Tax Candidates. FairTax Working Paper Series No. 03. June 2016. 27
28 Mario Monti [et al.]: Future Financing of the EU. Final report and recommendations of the High Level Group on Own Resources. European Comission. December 2016. <https://ec.europa.eu/info/sites/info/files/about_the_ european_commission/eu_budget/future-financing-hlgor-final-report_2016_en.pdf > Accessed: 9 June 2020.
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collect the revenues from a tax of EUR 0.8 per kilogram of non-recycled plastic waste. These new incomes are expected to raise around EUR 22 billion per year, thereby reducing the share of national contributions from over 80% to 71% by 2027.29 It is also important to underline that the Commission’s main aim, apart generating new revenues to overhaul the EU budget, is to help the EU meet its climate change and sustainability policy objectives. A decision on the matter requires an opinion from the EP and a unanimous agreement in the Council, and the latter might be challenging. In fact, currently the majority of the EU member states is not favourable to a tax coordination as they consider the option of nation–wide tax cuts or lower tax levels as one of the few instruments available to secure their competitiveness. The European Parliament has indicated that “if there is no progress in own resources, the Parliament will not be ready to accept the MFF.”30 In February, the European Council’s President proposed the creation of additional own resources generated by taxes on digital or aviation duty, a carbon border adjustment mechanism or a financial transaction tax. Following the previous Commission’s and the European Council’s proposals, the new Commission President Ursula von der Leyen reported that many member states were in favour of increasing the EU’s own resources and introducing new forms of taxation, but a clear convergence was missing regarding their nature and their use at the European level.31 At the last Council Summit, member states agreed to work towards reforming the own resources system and gave the green light for the introduction of new own resources. This new source of revenues will be mostly directed to pay back the money borrowed by the Commission to finance the “Next Generation EU” recovery fund. However, the deal envisioned a clear date only for one new own resource based on non-recycled plastic waste which will be introduced and applied from 1 January 2021. Proposals for a carbon border tax and digital tax should come in early 2021—with the aim of introducing the taxes by 2023—as well as a future proposal for collecting revenues from the bloc’s carbon Emissions Trading System into the EU’s budget. That could be extended to cover aviation and maritime. Finally, leaders promised to “work towards” other levies “which may include a Financial Transaction Tax.”32 In July the European Parliament, believing that in its decision the Council failed to tackle the issue of the recovery instrument repayment, reiterated that consent will be given for the MFF only when a clear agreement on the reform of the EU’s own resources system will be found. In fact, it is quite understandable that with a small budget as the one agreed, and without further cuts too key programmes, the introduction of new own resources is necessary to cover at least the costs related to the recovery plan.33
Margit Schratzenstaller: Tax-based Own Resources as a Core Element of a Future-Oriented Design of the EU System of Own Resources. Intereconomics 2018/53. 301–306. 29
30 Beatriz Rios: MEPs ready to fight against member states on EU budget. Euractiv. 25 November 2019. <https:// www.euractiv.com/section/economy-jobs/news/meps-ready-to-fight-against-member-states-on-eu-budget/ > Accessed: 10 July 2020. 31 Ján Ridzoň–František Novotný–Peter Palus: Why it makes sense to adopt new own resources for the EU budget. Euractiv. 17 October 2019. <https://www.euractiv.com/section/future-eu/opinion/why-it-makes-senseto-adopt-new-own-resources-for-the-eu-budget/ > Accessed: 13 July 2020.
Special Meeting of the European Council, 63–64.
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EU long-term budget deal must be improved for Parliament to accept it.
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If the European Parliament will reject the Council’s proposed budget, there could be the situation of a no-deal before the end of the year. In this case the Commission should be ready to put forward an extraordinary back-up plan. In fact, Brussels could decide to adopt an exceptional budget for 2021 in order to overcome the deadlock and provide a quick response to the COVID-19 crisis. Following the Art. 312(4) of the TUE, if no new budget is adopted by the end of the previous financial framework, “the ceilings and other provisions corresponding to the last year of that framework shall be extended until such time as that act is adopted.”34 Itis not going to be an easy task to pass such an exceptional budget, even if just absolute majority is required. The resources would not be vast and most of them should be redirected to pre-existing programmes, but the Commission will have some degree of autonomy in deciding on some spending items to finance COVID-19-related measures and in announcing some changes as contained in its proposal—such as more flexibility in the use of Cohesion Policy spending to tackle the crisis.35 Besides, if the Brexit transition period is not extended, there will be an approximately EUR 6-7 billion extra for the budget, previously allocated to the UK, which could be used to this purpose. Paradoxically, in order to maintain the same level of 2020 spending—adjusted to inflation—member states contribution is expected to increase, calculated on the basis of the GNI forecast for 2021. In this scenario, the frugal countries and CEE countries which have been relatively spared by the worst effects of the pandemic might be asked to make bigger efforts for the common budget while, without new agreements, all the rebates will cease to exist. Moreover, even if the allocation criteria would remain mostly unchanged, important reductions will affect Cohesion funds, while larger resources could be allocated to sustain “emergency measures” for the member states most affected by the crisis.36 It is clear, that in order to have a budget which is of benefit for all the member states an agreement must be found as soon as possible.
WHAT ARE THE “REBATES”? WHY DO THEY EXIST? One of the most interesting proposals contained in the 2018 MFF plan, which aimed at making the seven-year budget more fair and more transparent, regarded the reform of the many contribution reductions—also known as rebates—of which some member states benefit. As expected, the elimination of the rebates was largely debated by member states and the Commission during the two years of negotiating and eventually did not lead to a substantial revolution of these disputable arrangements. In detail, rebates are ad-hoc, complex, non-transparent and regressive system of revenue correction mechanisms, introduced in the mid-eighties, as a result of the British government’s request to limit its contribution to the common budget—and mostly to direct state subsidies to help farmers across the whole continent. The British firstly raised their request at the Fontainebleau European Council in 1984 where the British Prime Minister Margaret Thatcher obtained the 34 Art. 312 of the Treaty of the European Union. EUR-Lex. 7 June 2016. <https://eur-lex.europa.eu/legalcontent/EN/TXT/HTML/?uri=CELEX:12016E312&from=EN > Accessed: 10 July 2020.
Eulalia Rubio: The EU Budget and Covid: We need a “plan B.” Jacques Delors Institut. 30 April 2020. <https:// institutdelors.eu/en/publications/the-eu-budget-and-covid-we-need-a-plan-b/ > Accessed: 10 July 2020. 35
Eulalia Rubio: The EU Budget and Covid.
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acceptance of a complex financial mechanism that reduced the country’s net contribution to the EU budget. Since then Germany and other net contributor member states are benefitting from several types of revenue corrections.37 In 2018 the Commission, using the opportunity of Brexit which made the UK rebate pointless, proposed to reform the revenue side of the EU budget and addressed a system that has become “opaque and distorted” by gradually eliminating all rebates between 2021 and 2025.38 In the Commission´s view all member states should contribute in the most similar way possible to the EU budget based on their economic strength. As known, EU member states’ contributions to the common budget are calculated according to their economic strength, measured by their GNI, thereby ensuring solidarity and fairness on the revenue side of the EU resources. However, some countries, driven by the British precedent, claimed some form of reduction on their part of contributes. Due to these corrections, the countries which benefit from rebates pay to the budget about 0.70% of GNI while the average contribution of the remaining member states is about 0.84% of GNI.39 Over the years, the logic behind the rebates mechanism has been repeatedly questioned by the EU institutions and the European Court of Auditors has even highlighted that these correction mechanisms, apart effecting negatively the simplicity and transparency of the financing system of the EU budget, have various shortcomings. On one side, the criteria to assess objectively whether a budgetary burden is excessive for each member state are not clear, while on the other side there are no monitoring mechanisms that help establishing when a member states qualifies for a correction or it is still entitled to it, and it is not possible to establish whether other member states that do not receive a correction could qualify.40 As a matter of fact, this discriminating treatment reserved to a small club of member states has been primarily dictated by the necessity of reaching a compromise (when it came to the different visions regarding MFFs) between the European Commission’s ambitions and the opposition of the richer member states to destine more resources to finance European projects. The problem lays in the fact that member states primarily take into consideration their individual net positions when determining the benefits derived from the EU—i.e. the difference between what they pay into the EU budget and the transfers they receive out of it—and much less attention is paid to indirect benefits from EU membership, which generally are far greater than the single member states’ contributions to the EU
Alessandro D’Alfonso: The UK ‘rebate’ on the EU budget. An explanation of the abatement and other correction mechanisms. European Parliament, EPRS Briefing PE 577.973. February 2016. <https://www.europarl.europa.eu/ RegData/etudes/BRIE/2016/577973/EPRS_BRI(2016)577973_EN.pdf > Accessed: 6 July 2020. 37
EU budget 2021–2027: Time to decide. European Commission. 9 October 2020. <https://ec.europa.eu/ commission/presscorner/detail/en/IP_19_6039 > Accessed: 10 July 2020. 38
39 Zsolt Darvas: A new look at net balances in the European Union’s next Multiannual Budget. Bruegel, Working Paper Issue 10. 12 December 2019. 11–12. <https://www.bruegel.org/wp-content/uploads/2019/12/WP-ZSOLTFINAL.pdf > Accessed: 10 July 2020.
The UK ‘rebate’ on the EU budget.
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budget.41 However, the reluctance of the richer member states to spend their money is not totally unexplainable. In fact, the largest net payers to the EU budget are particularly critical towards the EU resources allocation criteria which, according to them, place too large of a burden on rich countries and do not destine money in the creation of what are unanimously considered European public goods. Unfortunately, these concerns are sometimes founded since it is hard to deny that the largest EU spending programmes, namely CAP and Cohesion Policy, do not often have a European added value and are mostly subject to improper use. However, since a way to assess whether EU funds are solely destined in widely European public projects does not exist, rebates represent a hardly justifiable mechanism based on subjective considerations.42 While a reform of the EU budget aimed to only allow the usage of these funds to provide strictly European public goods is politically impossible, due to the resistance of some member states to accept a reduction of direct financing coming from traditional spending voices, or even to link them to more conditionality, rebates remained at their place. Furthermore, already at the end of May, following the presentation of the “Next Generation EU” proposal, President of Commission von der Leyen stipulated that “in the present situation... phasing out of rebates would entail disproportionate increases of contributions for certain member states in 2021–2027. To avoid this, the current rebates could be phased out over a much longer period of time than foreseen by the Commission in its proposal in 2018.”43 In other words, the Commission showed its readiness to accept to maintain the rebates also in the next seven-year period in order to break the resistance of the northern “frugal” countries to the ambitious recovery plan which will be integral part of the 2021–2027 MFF. But which are the correction mechanisms under scrutiny? Obviously, the most consistent and the one which gave theoretically way to all the other corrections was the UK rebate. Since 1985 the United Kingdom was entitled to a financial rebate of about 66% of its financial contribution calculated on the previous year. The cost of the UK rebate was divided among EU member countries in proportion to the share they contribute to the EU budget. The amount of the UK rebate was every year different, since it depended on many different variables, such as GNI and the harmonised value added tax (VAT) base in EU Member States. In 2014–2019 the UK rebate averaged EUR 5.6 billion a year and for 2020 the Commission estimated the rebate to be set at EUR 5.3 billion.44 In retrospect, the idea to grant the British with some form of benefits in order to appease their reluctance to be more committed to the European project showed to be a nonsense. On the contrary, it led other member states to adopt a similar approach and to make request for other form of reduction
41 Gabriel Felbermayr–Jasmin Gröschl–Inga Heiland: Undoing Europe in a New Quantitative Trade Model. Ifo Institut Working Paper No. 250. January 2018. <https://www.ifo.de/DocDL/wp-2018-250-felbermayr-etal-tardemodel.pdf > Accessed: 11 June 2020.
Zsolt Darvas: Who pays for the EU budget rebates and why? Bruegel. 4 December 2019. <https://www. bruegel.org/2019/12/who-pays-for-the-eu-budget-rebates-and-why/ > Accessed: 12 June 2020.
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Zsolt Darvas: An uncompromising budget. Bruegel. 29 May 2020. <https://www.bruegel.org/2020/05/neweu-budget-proposal-the-uncompromised-compromise/ > Accessed: 14 July 2020. 43
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in their contribution. Over the last seven-year budget, the member states, other than the UK, benefiting from explicit reductions on their payments to the EU were: Austria, Denmark, Germany, the Netherlands, Sweden and Ireland. One of these adhoc corrections, expiring at the end of 2020 because of the Brexit, is the so-known “rebate on the UK rebate,” that was a 75% reduction in the financing of the rebate that was granted to Germany from 1985 and to Austria, Sweden and the Netherlands from 2002. Moreover, over the last MFF a GNI-based distribution of the UK rebate raised an extra GNI contribution (+0.044%) for each member state. However, the abovementioned net contributor countries eventually paid only 0.011% of their GNI, increasing thereby the contribution of the remaining twenty-three members which had to pay 0.065% of their GNI to compensate the lower overall revenues.45 Other correction mechanisms are temporary and they usually coincide with the years covered by a given financial framework. In the 2014–2020 MFF, Germany, the Netherlands and Sweden benefitted from provisional reduced call rates for the VAT-based resource set at 0.15%—just the half of the standard 0.3% applied to the rest of the EU27—while the Netherlands, Sweden and Denmark also profited from annual lump-sum reductions to GNIbased contributions. A similar lump-sum reduction has been granted to Austria during the first three years of the last MFF. The lump-sum reductions are not connected to the UK rebate but are granted after its calculation and financing and all member states are asked to contribute. Similarly, over the last framework Denmark, Ireland and the United Kingdom also benefitted from correction related to security and citizenship opt-outs as included in the Amsterdam Treaty. On average over 2014–2018, Denmark received EUR 10 million annually, Ireland EUR 6 million and the UK EUR 75 million.46 An indirect compensation, which should not be included in the list of rebates but which actually generates hidden consistent benefits for a smaller group of countries, is associated to collection costs. As already mentioned, collection costs for custom revenues at the European Union level are part of the common budget. Yet, they are collected by those single member states which retain 20% of these revenues as collecting costs, which is excessively high. Moreover, the collection costs associated to custom revenues benefit mostly certain Northern and Western European countries, like Belgium. Germany, the Netherlands and Sweden, that have well-located seaports and better infrastructure.47 The impact of rebates on member states is very uneven. In fact, as it is easy to imagine, the UK was the biggest beneficiary during the last seven-year term with EUR 5.08 billion a year, followed by the Netherlands (EUR 0.92 billion), Germany (EUR 0.75 billion) and Sweden (EUR 0.32 billion). On the contrary these corrections constituted an additional cost of EUR 2.08 billion a year for France, EUR 1.54 billion for Italy and EUR 1.02 billion for Spain. As some studies show, when the share of GNI is taken as indicator of the value of these Zsolt Darvas: A new look at net balances… 12.
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The UK “rebate” on the EU budget.
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Top 20 ports handling freight, 2013–2018 (million tonnes). Eurostat. 6 March 2020. <https://ec.europa. eu/eurostat/statistics-explained/index.php?title=File:Top_20_ports_handling_freight,_2013-2018_(million_ tonnes).png > Accessed: 14 July 2020. 47
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rebates, 22 EU countries contributed over time by close to 0.09% of their GNI to benefit the UK (0.22% of GNI), the Netherlands (0.13% of GNI), Sweden (0.07% of GNI), Germany (0.02% of GNI), Austria and Denmark (0.035% of GNI).48 But most importantly, rebates have also an overall effect on the final net contribution of every member state in the EU budget, with richer member states paying less in the budget as a share of the GNI than less wealthy member states. In fact, while most EU countries contribute about 0.85% of the GNI to the EU budget, the club of “rebates” beneficiaries contribute significantly less—Austria and Denmark between 0.76% and 0.78%, Germany 0.72%, Sweden 0.69%, the Netherlands 0.64% and the UK 0.58%—despite being richer and with a relatively low public debt.49 It is therefore reasonable that the Commission, in view of this anomaly, originally proposed to gradually remove these unfair mechanisms and to obtain that all member states contribute in an equal way as a share of their GNI—roughly 0.90%—to the common budget.50 In this scenario, if all the rebates were fully eliminated, the net contributions of the Netherlands would have increased by 0.15% of GNI, of Sweden by 0.12%, of Germany by 0.07%, while it would not change the net contribution of Denmark and would reduce the net contribution of other countries by 0.05%, each year. The reduction of the “collection costs” of the revenues from 20% to 10%, would also have had significant direct budgetary consequences for some of the already mentioned member states.51 Unfortunately, the agreement reached in July by the EU head of states simply obtained that Germany, Sweden and the Netherlands would lose their current rebate on the amount of VAT they pass on to the EU. On the contrary, all four frugal countries were offered larger rebates in order to break the deadlock on the coronavirus recovery plan. At the end, for the period 2021–2027, lump-sum corrections will reduce the annual GNI-based contribution of Denmark, the Netherlands, Austria and Sweden, as well as of Germany, which, in that order, will benefit of a gross reduction on their annual contribution of EUR 377 million, EUR 1.921 million, EUR 565 million, EUR 1.069 million and EUR 3.671 million. These gross reductions shall be financed by all member states according to their GNI.52 Moreover, from 1 January 2021, member states shall retain, by way of collection costs, 25% of the amounts collected by them.53
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Future Financing of the EU. 66.
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EU Budget for the Future. European Commission. 9 October 2019. <https://ec.europa.eu/info/sites/info/ files/factsheet-eu-budget-financing_.pdf > Accessed: 10 July 2020. 50
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“NEXT GENERATION EU”: A BOLD PROPOSAL TO OVERHAUL THE EUROPEAN INTEGRATION PROCESS The most important element attached to the new 2021–2027 MFF is represented by a EUR 750 billion recovery fund. The revolutionary proposal presented at the end of May by the European Commission to tackle the pandemic-related economic downturn, named “Next Generation EU,” is a temporary instrument whose primary goal is to borrow money from financial markets in the name of the EU—therefore using the high credit rating of the EU27 to obtain very favourable conditions—to finance EU-wide expenditures necessary to put back on its feet the world second biggest economic power. This sum will be repaid over a long period of time throughout future EU budgets—not before 2028 and not after 2058— and through new own resources. In order to support this plan the Commission proposed to temporarily lift its own resources ceiling from currently 1.2% to 2.00% of EU GNI and permanently to 1.4%.54 The EUR 750 billion fund (of which originally EUR 500 billion were grants and EUR 250 billion were loans), will be allocated directly through the EU budget’s existing headings, even if its resources are subject to special provisions determined by the specifics of the crisis. Obviously, the instrument is mostly focused on financing the Commission’s top priorities, i.e. the European Green Deal, found vital health research and digital transitions, and a principal objective is to invest in areas that contribute to decarbonisation and the energy transition. “Next Generation EU” is a very substantial intake for the 2021-2027 MFF, which in this way will push the financial power of the EU budget to more than EUR 1.8 trillion.55 It is important to underline that the meaning of this instrument goes well beyond its impressive size. In fact, for the first time in its history, the EU is taking a necessary next step towards a more federal union and a deeper fiscal integration. The common debt raised by the Commission on the market will be backed by the Union as a whole and will be repaid through successive MFFs mostly with own resources and, in a smaller amount, by direct national contribution. An instrument as such, capable of supporting investments during periods of weaker economic conditions and to ensure at least limited temporary transfers is an extremely tool necessary to ensure the economic and political stability of the EU in the long term. However, given that the EU cannot use the EU budget to borrow for its own expenditure, as stated in the Article 311 of the EU Treaty, a reform of the treaties is now unequivocally necessary if we want to avoid that the “Next Generation EU” is a one-off.56 The proposal arrived after frenetic weeks when member states were struggling to contain the spread of the virus within their own borders and the European institutions seemed apparently unable to give a clear answer to the economic and social damage caused by
54 Europe's moment: Repair and prepare for the next generation. European Commission. 27 May 2020. <https:// ec.europa.eu/commission/presscorner/detail/en/ip_20_940 > Accessed: 15 July 2020.
EU Budget 2021. A kick-start of the European Recovery. European Commission. June 2020. <https://ec.europa.eu/ info/sites/info/files/about_the_european_commission/eu_budget/factsheet_draft_budget_v14_0.pdf > Accessed: 15 July 2020. 55
Jorge Núnez Ferrer: The MFF Recovery Plan breaks with a fundamental taboo. CEPS. 27 May 2020. <https://ceps.eu/the-mff-recovery-plan-breaks-with-a-fundamental-taboo/ > Accessed: 16 July 2020. 56
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the pandemic. At first Brussels, lacking the authority to intervene in the management of the health crisis since this is of national competence, alleviated member states efforts by relaxing state-aid directives and fiscal rules—among others with the suspension of the Stability Pact—to allow governments to subsidise businesses losing revenues and increase national spending. At the same time, the European Central Bank addressed the economic fallout by significantly expanding asset purchases, relaxing bank capital rules, offering credit to banks with a subsidy and accepting an even broader set and less credit worthy collateral from banks. Other measures completing the existing framework of European support initiatives, include the EUR 540 billion package consisting of the Temporary Support to mitigate Unemployment Risks in an Emergency (SURE), the Pan-European Guarantee Fund, and the Pandemic Crisis Support for Member States. Unfortunately, very limited help could have been offered through the EU budget, since the crisis occurred during the last year of the previously agreed MFF and all ceilings has been fixed already at the end of 2013. Nevertheless, the Commission took several initiatives such as: mobilise all unused funds, allow reallocations between and within programmes, simplify access criteria, provide liquidity by delaying the repayment of unspent pre-financing and abolish national cofinancing of EU cohesion spending. However, it was soon visible that the consequences of an originally symmetric shock, as the COVID-19, were going to affect member states in a most unequal way. The uneven capacity of European countries in providing support against this catastrophic event would have threatened the very existence of the single market as a whole. Therefore, as many soon realized, making use of uniform choices at the EU level to oppose and overcome this shock was in the shared interest of everyone.57 In this perspective, the first input came with the Franco-German proposal of a recovery fund presented on 18 May. This plan can be considered to be the very first step towards a real European solidarity plan alternative to the status quo. The proposal put on the table EUR 500 billion in grants obtained by bond emission at the EU level aimed at financing EU budgetary expenditures for the most affected sectors and regions, involving redistribution between EU countries. The momentous decision of the German government to assume shared responsibility for some of other EU member states’ debts has been hailed as the signal of the beginning a new era for the EU— or even its own “Hamiltonian moment.”58 However, as expected, the idea was soon rejected by the group of the frugal countries and few days later Austria, Denmark, Sweden and the Netherlands put forward a plan for an alternative recovery fund which only provides loans and avoids any mutualisation of debt, reiterating that the overall level of standard MFF—not considering the recovery fund—should not exceed 1.00% of GNI and insisting that rebates must be maintained.59
Guntram B. Wolff: EU debt as insurance against catastrophic events in the euro area: the key questions and some answers. Bruegel. 22 April 2020. <https://www.bruegel.org/2020/04/eu-debt-as-insurance-againstcatastrophic-events-in-the-euro-area-the-key-questions-and-some-answers/ > Accessed: 15 July 2020. 57
Antonio Villafranca: Recovery Fund: volata finale. Istituto per gli Studi di Politica Internazionale. 22 May 2020. <https://www.ispionline.it/it/pubblicazione/recovery-fund-volata-finale-26261?fbclid=IwAR3tmahWYlKq9R4A5 KADlv604RfR4Yl6jsieOGaC9HEWFZgs46xS2uqyg2E > Accessed: 15 July 2020. 58
59 Antonio Villafranca: Recovery Fund: compromesso cercasi. Istituto per gli Studi di Politica Internazionale. 18 June 2020. <https://www.ispionline.it/it/pubblicazione/recovery-fund-compromesso-cercasi-26576 > Accessed: 16 July 2020.
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On 27 May the Commission came out with its own proposal which mostly reflected the Franco-German plan but also included EUR 250 billion in loans. Von der Leyen’s plan promised to combine the European budget’s two main features: on one side, medium and long-term structural spendings, which represent the core of the “traditional” sevenyear MFF (thereby increased by EUR 11.5 billion); and, on the other side, for the first time, macroeconomic stabilisation at the Union level (divided in EUR 440 billion grants, EUR 60 billion guarantees and EUR 250 billion loans).60 This comprehensive plan was integrated few days later into the European Central Bank’s decision to increase the pandemic emergency purchase program (PEPP) by EUR 600 billion—only for the Eurozone member states— aimed at generating EU investment for a total of EUR 3.1 trillion in front-loaded support tools for Europe’s recovery, in addition to the economic and financial support provided by each member state under the already mentioned State Aid Temporary Framework.61 The Commission’s proposal, limited in duration and use, found its legal basis in Article 122 of the Treaty on the Functioning of the European Union (TFEU), which allows the Council of the EU, upon a proposal from the Commission, to grant financial assistance to member states which found themselves in severe difficulties caused by exceptional occurrences beyond their control that call for a collective EU response in a spirit of solidarity.62 According to the Commission’s original proposal the money raised for “Next Generation EU” will be distributed across the member states according to the severity of the health crisis—loss in GDP due to the pandemic—and other economic indicators, like unemployment and growth. Access to such financing will depend on the outcome of bilateral negotiations between the member state and the Commission, which will first evaluate compliance between the national recovery plan and the long-term strategy of the EU.63 As a matter of fact, the changes to the anticipated standard seven-year budget are generally small, and some of the planned cuts for some programs might be compensated by new funds distributed through the new recovery instrument. Obviously, the recovery fund will be mainly directed to the countries most severely affected by the pandemic—chiefly Italy which will receive EUR 209 billion and Spain which will receive EUR 140 billion—but an important share of these funds will be directed also to those countries initially affected by the reductions in the Cohesion and Agricultural policies which revealed their unease to see mostly of the new resources directed to southern Europe.64 In fact, the largest part of the “Next Generation EU” will be allocated through the Cohesion and Value heading,
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Edoardo Gambaro–Giulia Massara: Next Generation EU: The Commission’s Proposal for the European Recovery. GreenbergTraurig. 10 June 2020. <https://www.gtlaw.com/en/insights/2020/6/next-generation-euthe-commissions-proposal-for-the-european-recovery > Accessed: 15 July 2020. 61
62 Art.122 of the Treaty of on the Functioning of the European Union. EUR-Lex. May 2008. <https://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E122:EN:HTML > Accessed: 15 July 2020.
EU long-term budget 2021–2027.
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David M. Herszenhorn–Lili Bayer: Ursula von der Leyen’s big gamble with borrowed money. Politico. 27 May 2020. <https://www.politico.eu/article/ursula-von-der-leyens-big-gamble-with-borrowed-money/ > Accessed: 16 July 2020. 64
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suggesting that some of the previous ideas to reform the EU budget were finally dropped.65 Even if the planned recovery fund represents a big opportunity that all member states must be able to seize some countries strongly opposed its introduction. It must also be noted that as Germany took over the EU Council’s Presidency on 1 July, expectations for the introduction of a new long-term budget and an agreement on the recovery fund largely increased. This optimism laid in the idea that the country holding the Presidency would traditionally play an influential mediating role in Council decisions and, in the case of Germany, it also represents the biggest contributor to the EU budget. Therefore, it is important to note that mostly Merkel’s decision to put all the political weight and relative influence in the bloc of her country in support of the “Next Generation EU” plan, helped to reach a deal in July. However, the budget negotiations lead to a compromise which, while delivering a historic coronavirus package, does not adequately support some of the key elements of the Union’s long-term agenda, especially its international ambitions. In fact, even though the new package retains the original EUR 750 billion, it does so by placing EUR 360 in cheap loans and EUR 390 billion of grants that are tied to national plans—and thus reforms—to strengthen the growth potential, job creation and economic and social resilience of member states economies. The plans also have to make economies greener and more digital and be in line with the Commission’s annual recommendations. Member states will get access to these resources according to their progress toward certain targets, which will be assessed periodically. Furthermore, the Council also agreed on a peculiar “surveillance mechanism” which allows a member state, or more, which considers that another isn't meeting its targets, to ask for the matter to be discussed by state leaders at European Council level. This compromise has been mostly directed to appease the Dutch leadership not convinced by the idea that other member states should receive grants without conditionality. As already discussed, much deeper rebates were also granted to net contributors to the EU budget, like the frugal countries and Germany, than before. As already mentioned “Next Generation EU” has a large component of grants, EUR 390 billionand EUR 360 billion of loansand is divided in three main pillars. The first pillar, which in the original plan included EUR 415 billion grants and EUR 250 billion loans, and then was brought to EUR 377.5 in grants and EUR 360 in loans, aims to support members states’ recovery from the crisis. The most important element of this pillar is the new “Recovery and Resilience Facility,” the largest component of the “Next Generation EU,” with EUR 312.5 billion grants and EUR 360 billion loans, created to support post-pandemic essential investments and reforms especially in those sectors where resilience needs are the most required (i.e., employment, education, research, innovation, health, environment, and finance), to improve the economic and social resilience of member states and to support the green and digital transition. Other instruments included in this pillar are: an integration of EUR 47.5 billion to the current cohesion policy programmes between 2020 and 2022 under the new REACT-
65 Kevin Koerner–Barbara Boettcher–Mark Wall: The Commission’s recovery plan for Europe – bold and challenging.(Deutsche Bank.) 28 May 2020. <https://www.dbresearch.com/servlet/reweb2. ReWEB?rwsite=RPS_EN-PROD&rwobj=ReDisplay.Start.class&document=PROD0000000000508542 > Accessed: 16 July 2020.
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EU initiative, set to achieve a quick response while the other instruments are put in place; a strong reduction of the Just Transition Fund (to EUR 10 billion, against the original proposal aimed at reaching a total value of EUR 40 billion in 2021–2027) to help member states in their transition towards climate neutrality; and EUR 7.5 billion—halved from the original plan—to the European Agricultural Fund for Rural Development to support farmers and rural areas in making the structural changes necessary to implement the European Green Deal. In order to have access to such facilitators, member states should prepare recovery and resilience plans as part of their national reform programs.66 The second pillar, emblematically titled “Kick-starting the economy and helping private investment,” aims to restart the bloc’s economy and create the conditions for a recovery led by private investment in key sectors and technologies. A new Solvency Support Instrument would collect private resources to urgently support the most affected European companies. Altogether, EUR 31 billion from the EU budget would unlock up to EUR 300 billion investment for companies from all economic sectors and prepare them for a cleaner, digital and resilient future. InvestEU, Europe’s flagship investment programme, previously upgraded to EUR 15.3 billion to mobilise EUR 240 billion of private investment in projects across the bloc was eventually reduced to EUR 5.6 billion. The new Strategic Investment Facility—part of the InvestEU—is expected to receive further EUR 15 billion to support building strong and resilient value chains across the EU and enhance the autonomy of the Union’s single market. This is expected to generate EUR 150 billion in private investments.67 Lastly, “Learning the lessons from the crisis,” presented a mix of measures related to health, protection, research and external actions amounting to EUR 39 billion (mostly grants). A new EU4Health programme with a total funding of EUR 9.4 billion, of which EUR 1.7 billion—originally it was EUR 7.7 billion—from the “Next Generation EU,” to enhance EU health crisis prevention, preparedness and response will be reinforced, while rescEU—the EU’s civil protection mechanism—would receive additional EUR 3 billion. On the contrary Horizon Europe, despite the loss of EUR 13.5 billion, would reach the considerable amount of EUR 80.9 billion— EUR 5 billion from Next Generation EU—necessary to increase European support for health and climate-related research and innovation activities. In order to strengthen EU external actions, EUR 10.5 billion would be allocated to the neighbourhood instrument (including a new External Action Guarantee) and EUR 5 billion to humanitarian aid.68 Even if in this current form the “Next Generation EU” remains a very bold plan to tackle the worst consequences of this unprecedented crisis it goes far from deploying the true macroeconomic potential of the EU, and probably will be barely sufficient to face the economic downturn derivate from the pandemic. Ironically by pushing for a smaller allocation of grants, the frugal countries have undermined their own aim of modernising the EU budget and increasing investments for innovation and green policies, areas which matter
66 Europe's moment: Repair and prepare for the next generation. European Commission. 27 May 2020. <https:// ec.europa.eu/commission/presscorner/detail/en/ip_20_940 > Accessed: 14 July 2020.
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Europe's moment.
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the most for them. For example, the Just Transition Fund, which the Commission proposed to overhaul to EUR 40 billion, has been reduced to just EUR 10 billion. A small consolation prize for the Commission’s environmental ambitions is represented by the clause stating that only countries that have signed up to the EU-wide goal of climate neutrality by 2050 will be eligible for funding. On the contrary, the overall size of the Recovery and Resilience Facility, has been raised to EUR 672.5 billion, but by reverting the amounts of loans—and that of grants. Further cuts have been agreed for very important instruments like the EU4Health programme and for the Horizon Europe. All these programmes financing innovation and research would have been of great benefit to the frugal countries which not only see a reduction in funds—only partially covered by the increased rebates—but, especially in the case of the Netherlands, defending their controversial position, isolated themselves politically mostly from their biggest economic partner, i.e. Germany.69 The scale and design of “Next Generation EU” reflects the magnitude of this extraordinary emergency mechanism and aims at complementing national efforts, supporting the socioeconomic recovery throughout the whole bloc, stimulating the EU single market, and supporting urgent investments and reforms. As a matter of fact, incorporating the recovery funds to the EU budget structure will have the advantage to link disbursement to already existent programmes. Furthermore, as part of the traditional budget procedure, member states are requested to prepare recovery and resilience plans as part of their National Reform Programmes, which would be assessed in the European Semester process (i.e. macroeconomic conditionality). Thereby, the Commission, the Council and the European Parliament are expected to have a strong budgetary control over the allocation of the recovery plan funds. Nonetheless, less than a quarter of the “Next Generation EU” grants are expected to be paid in the next two and a half years while the bulk will be actually received between 2023–2024.70 The EU support would be released in instalments depending on progress made and on the basis of predefined benchmarks. However, it cannot be excluded that conflicts between the European Commission and member states or with the European Parliament would arise slowing down the disbursements or reduce the flexibility that will be required. Finally, only well-functioning financial markets can help bridge the gap between the need for urgent investments and the later EU payments. In fact, countries could borrow—also through the ESM—and spend immediately to support their economic recoveries, while the EU funds could be used when they will be available later, hence allowing countries to borrow less later.
WHAT HAPPENED TO THE EUROZONE BUDGET? Before being eclipsed by the introduction of the EU recovery fund, one of the most debated questions associated to the EU budget was the possibility of creating a separate budgetary instrument, under the European Commission’s control, reserved to those member states which adopted the Euro as currency. Currently, the Eurogroup is composed of 19 of the 27 Special Meeting of the European Council, 5.
69
Zsolt Darvas: Three-quarters of Next Generation EU payments will have to wait until 2023. Bruegel. 10 June 2020. <https://www.bruegel.org/2020/06/three-quarters-of-next-generation-eu-payments-will-have-towait-until-2023/ > Accessed: 16 July 2020. 70
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EU member states which amount to about 76% of the EU’s population and produce 85% of its GDP.71 The idea of a separate budget for the Eurozone has recently gained momentum following French President Emmanuel Macron’s proposal for a deeper fiscal integration and for the creation of the post of Minister of the Economy and Finance of the Eurozone. According to the supporters of this plan, separate resources for the Eurozone are necessary to fulfil three main specific functions, namely, investing in development, providing urgent financial support to member states, and responding to economic crises. A budget as such would ensure permanent fiscal transfers from the economically stronger countries to those having problems in fulfilling the single monetary policy area’s requirements with clear benefits for the stability of the whole Eurozone. In fact, a Eurozone budget could support the spending of a country in need either in the form of money for investment or as an insurance to back up unemployment spending. On the contrary, the European Stability Mechanism (ESM) offers financial assistance to governments which had lost, or were about to lose, access to financial markets by providing access to funding at below market rates. Even in its current form the ESM—reinforced with EUR 240 billion, with less strict conditionality and offering cheap loans for 10 years amounting to maximum 2% of the GDP of each Eurozone country to cover pandemic-related healthcare costs—does not represent an attractive option for many countries since it risks to expose the country to a stigma effect on the markets and does not help stabilizing the Eurozone which will see the gap between richer and poorer member states increased.72 However, the use of funds from a Eurozone budget would be conditional on compliance with common rules in the field of fiscal and social policies in order to avoid dumping in the euro area and the implementation of projects which do not constitute real European common goods. The Minister of Economy and Finance of the Eurozone would be responsible for these resources and prevent national parliaments from bringing forward unsustainable public budgets and would be subject to control by a specifically set up Eurozone parliament. This proposal, aimed at reinforcing the European fiscal union, one of the biggest missing pieces of the whole European project, has however the potential of being a source of future conflicts between member countries with different financial cultures as already experienced during the negotiates for the 2021–2027 MFF and the “Next Generation EU”.73 In fact, the leitmotiv is always the same, which is that more “fiscally responsible” countries are afraid that member state with looser fiscal policies might decide to pass the cost of their decisions to other member states and avoid carrying out structural reforms necessary to achieve higher economic growth. Despite the resistance of certain Northern and Western European countries, Macron’s proposal was followed by the formal French–German initiative of the Meseberg Declaration
Guntram B. Wolff: Eurozone or EU budget? Confronting a complex political question. Bruegel. 29 June 2017. <http:// bruegel.org/2017/06/eurozone-or-eu-budget-confronting-a-complex-political-question/ > Accessed: 10 July 2020.
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Guntram B. Wolff: What could a euro-area finance minister mean? Bruegel. 17 May 2017. <https://www. bruegel.org/2017/05/what-could-a-euro-area-finance-minister-mean/ > Accessed: 17 July 2020.
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Lucas Guttenberg: A new approach to Eurozone Reform. Jacques Delors Institute. 2 September 2019. <https:// institutdelors.eu/wp-content/uploads/2019/09/2-EUROZONE-Guttenberg-EN-1.pdf > Accessed: 13 July 2020.
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in mid-June 2018, together with a joint paper of both finance ministries. Surprisingly at that time, the French President managed to get German Chancellor Angela Merkel to agree to a stabilization function as a part of a “Eurozone budget within the framework of the European Union to promote competitiveness, convergence, and stabilization in the euro area, starting in 2021.” 74 Obviously, the French–German roadmap was met with considerable resistance by the frugal member states and only the Eurogroup report to the Euro Summit in mid-December 2018 put an end to the debate on whether to equip the Eurozone with a stabilisation instrument, destined to counter symmetric and/or asymmetric economic shocks. Eventually, it was agreed that rather than reacting to financial shocks, the euro area budget would concentrate on supporting convergence and competitiveness through awarded grants.75 In the final agreement, the Eurozone finance ministers decided to set up a rather limited budgetary instrument with the only aim of helping member states to move towards more convergence and increase their competitiveness. Just few months later, a Term Sheet including these principles was redacted and in October 2019 the newly designed Budgetary Instrument for Convergence and Competitiveness (BICC) was agreed.76 This instrument equipped the Eurozone with a small and unofficial budget of EUR 17 billion over seven years, far from Macron’s initial idea of increasing of some decimal points the funding base through regular contributions from Eurozone members only. Nonetheless, in the end Macron successfully secured the introduction of a clause according to which the size of the BICC can grow quickly, through an intergovernmental agreement, as its magnitude is not capped by the MFF budget.77 According to the Term Sheet, the BICC should have been included in the EU budget, in the context of the Multiannual Financial Framework, meaning that the Commission would retain the primary responsibility for its execution. The funds were mainly distributed using each country’s contribution in the EU budget and paid in the form of financing at least 70% of what each the country pays in. To get funding for a project linked to investment or reforms, a country would have to provide 25% of the money itself. Ministers agreed that most of the resources from the budget would be allocated using the population and inverse GDP criteria, while during a severe economic downturn, the contribution of governments to funding projects may be sensibly reduced. The priorities of the budget would be reviewed yearly by the Eurogroup
Meseberg Declaration. Bundesregierung. 2018. <https://archiv.bundesregierung.de/archiv-de/meta/ startseite/meseberg-declaration-1140806 > Accessed: 10 July 2020.
74
75 Report to Leaders on EMU deepening. European Council. December 2018. <https://www.consilium.europa.eu/en/press/press-releases/2018/12/04/eurogroup-report-to-leaders-onemudeepening/pdf > Accessed: 14 July 2020 76 Term Sheet on the Budgetary Instrument for Convergence and Competitiveness. European Council. June 2019. <https://www.consilium.europa.eu/en/press/pressreleases/2019/06/14/term-sheet-on-thebudgetary-instrument-for-convergence-and-competitiveness/pdf > Accessed: 14 July 2020.
New boost for job, growth and investment: Governance framework for the Budgetary Instrument for Convergence and Competitiveness for the Euro area (BICC). European Parliament. 24 June 2020. <https://www. europarl.europa.eu/legislative-train/theme-new-boost-for-jobs-growth-and-investment/file-mff-bicc-budgetaryinstrument-for-convergence-and-competitiveness > Accessed: 16 July 2020.
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through strategic guidance and will be defined in the context of the European Semester, so member states should submit their proposals for reform and investment on the basis of the strategic guidance. This means that a country would not be able to receive funds if it is subject to certain decisions under the Stability and Growth Pact and the Macroeconomic Imbalances Procedures. Moreover, non-euro-area member states participating in the Exchange Rate Mechanism II will also be able to participate in the BICC on a voluntary basis.78 While some aspects of this instrument need further clarification, there is without any doubt some scope for improvement. In fact, differently from other EMU reforms, which are entirely intergovernmental (such as the reform of the ESM), the BICC proposal is part of the European budget framework and, as such, depends on the Commission´s legislative proposal and must be approved by the European Parliament together with the Council. Thus, the European Commission has some degree of autonomy to increase the size of the current BICC and, with the help of the Parliament, could force member states to accept some adjustments.79 Nonetheless, as many pointed out, the BICC was mostly focused on the structural weaknesses of the EMU countries, as do other existing structural and regional policies of the EU. Thus the risk of duplicating existing structures and run into redundant resource spending programmes—mostly concerning Cohesion policies—was perceived by many. This problem could have been partially mitigated if the BICC focused especially on fostering innovation in low-performing countries, or if it provided more flexibility in the shorter term to change the allocation of resources in line with changing priorities.80 More recently, in a hearing before the ECON committee, the former Eurogroup President Mário Centeno said that “a possible part of our response [to the corona crisis] is the budgetary instrument for convergence and competitiveness, the so-called BICC. I believe there is a strong case to reflect about its potential role and, naturally, to rethink its size. The BICC would allow for a form of shared governance, a degree of flexibility and complementarity with other policies, which seems appropriate in the present context. Member states could provide strategic guidance on the spending priorities and be involved in the implementation monitoring, while fully respecting the competences of the Commission and the Parliament.”81 However, the “Next Generation EU” proposal apparently wiped out the weak BICC instrument from the budget proposal. In fact, the bold recovery fund proposed by the Commission would represent a similar instrument but with more impressive parameters, for example a broader coverage—since it will concern all EU member states—and a more far-reaching purpose. After all, leaving out a crippled Eurozone budget as the one proposed does not represent a big loss. Nevertheless, and this is the main point, the discussion around the BICC contributed to opening the door for potential future alternative to
What do we know about the BICC today? European Parliament, Economic Governance Support Unit Briefing PE 634.359. 24 April 2020. <https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/634359/IPOL_ BRI(2019)634359_EN.pdf > Accessed: 16 July 2020.
78
Guttenberg.
79
Berthold Busch–Jürgen Matthes: A Eurozone Budget – For Which Purposes Exactly? Ifo DICE Report. II/2019 Summer. <https://www.ifo.de/DocDL/23-27_FO_Busch_Matthes.pdf > Accessed: 17 July 2020. 80
What do we know about the BICC today?
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a separate Eurozone budget. In fact, while there is no better solution in the long term than to create a Eurozone federal budget, currently the most interesting reform proposals are focused in strengthening the ESM and transforming it into a European Monetary Fund (EMF).82 The main difference between the Eurozone budget and the EMF is that the first would be equipped with its own specific expenditure and means of revenue collection.83 On the other hand, the EMF would have resources raised just for some extraordinary purpose, but these funds would not come from taxes, rather from direct contributions from national budgets. Still, differently from the ESM, which is based on the intergovernmental principle, the EMF would be integrated into the EU law, it would be managed by the Eurozone Finance Minister, who should be a member of the European Commission, while also being accountable to the European Parliament.84 The establishment of an EMF would therefore ensure a more effective disciplinary action regarding the member states’ fiscal policies, which in turn would reduce the risk of crises in the Eurozone. Obviously, the EMF would just represent the first nucleus of the Eurozone budget, but in order to fulfil its mandate it needs to be big enough to support investments during periods of weaker economic conditions and to ensure at least limited temporary transfers through a special unemployment insurance scheme. Developing the ESM into the EMF will have profound implications for the legal order of the EU, economic resources and moral hazard in the Eurozone. In fact, a reform of this entity will raise major questions about legitimacy, the role of the European institutions, the role of national parliaments and the link between national fiscal resources, federal fiscal resources and the European Central Bank.85 The coronavirus pandemic has highlighted that the EU needs to move towards a deeper integration and to create solutions that would enable joint institutions to respond more effectively to the crisis bearing in mind the mistakes committed in the past. The current reluctance of some Eurozone member states to discuss a common budget will be optimistically reduced once the economic effects of the health crisis will be visible in every country. And hopefully a comprehensive anti-crisis mechanism might be established in time before the next crisis inevitably comes.
Wolff.
82
Wolff.
83
Vladimír Maňka–Pedro Silva Pereira: Economic and Monetary Affairs–Econ: Integration of the ESM into EU law by way of creating European Monetary Fund (EM). European Parliament. 24 June 2020. <https://www. europarl.europa.eu/legislative-train/theme-economic-and-monetary-affairs-econ/file-integration-of-the-esminto-eu-law-by-creating-an-emf > Accessed: 17 July 2020. 84
Oręziak.
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