Support from Brussels: The EU Recovery Plan and Budget

Cohesion and the Future of the European Union Put to the Test

The members of the European Council (i.e. Presidents and Prime Ministers) agreed in Brussels, after lengthy discussions, on the long-term budget of the European Union for 2021 - 2027 and a recovery plan for the economies of the regions and sectors most affected by the pandemic. The cohesion and future of the European Union was put to the test and has endured.

Under the name "Next Generation EU", the EU itself will borrow, for the first time, EUR 750 billion which will be allocated to different programmes. The major part will be allocated to the recovery plan. Some of the financial resources will consist of non-repayable grants, while the rest will consist of loans and guarantees.

This first borrowing by the EU will be limited in time and will be in addition to the normal long-term budget for the years 2021 - 2027. The long-term budget will amount to EUR 1,074.3 billion in constant 2018 prices. The distribution of the funds has remained highly controversial until recently.

What exactly is at stake? On the one hand, the size, content and financing of the budget allocated to the European Union. On the other hand, mutual aid for the recovery of the regions and economic sectors most affected by the pandemic. And for a third, it is about investing in the future. All issues are intertwined and require fundamental political decisions to be taken. As regards the recovery plan, it is not only a question of the amount and geographical distribution of the funds, but also of whether and how much money will be given in the form of grants, loans or guarantees and, equally important, what conditions and controls will be agreed. With regard to the multiannual financial framework, it is about the financial resources granted to the EU and their growth, despite the departure of Great Britain, and the distribution of resources between the tasks assigned to the EU. Finally, the aim is to put society and the economy on a more sustainable path which must be taken into account in all plans and expenditure.

The meetings were chaired and prepared by the President of the European Council, in this case for the first time by the Belgian Charles Michel, who will hold the Presidency for a period of two and a half years. The meetings were the longest European Council meetings to date, which should come as no surprise given the political choices and the different interests of the countries and their politicians.

Financial Resources for "Next Generation EU"

Several programmes are grouped together under the title "Next Generation EU". The largest programme involves support for member states in investment, reform, reconstruction and crisis management. The second is to boost the European economy and stimulate private investment capacity with a new solvency aid instrument. Finally, strategic challenges facing Europe will be addressed, with three main priorities: a new health programme "EU4Health", Union civil protection "rescEU" and "Horizon Europe".^[1]

These include, with the amounts now agreed

• Recovery and Resilience Facility (RRF) EUR 672.5 billion

• ReactEU: EUR 47.5 billion

• Horizon Europe: EUR 5 billion

• InvestEU: EUR 5.6 billion

• Rural Development: EUR 7.5 billion

• Just Transition Fund (JTF): EUR 10 billion

• RescEU: EUR 1.9 billion.

The reconstruction fund is of particular importance.

The Reconstruction or the Recovery and Resilience Facility, (RRF)

The President of the European Council, the Belgian Charles Michel, proposed the following key features on 10 July 2020:

1. Scope of the Reconstruction Fund: The European Commission is raising funds of up to EUR 750 billion on the capital market which will be used for back-to-back loans and for expenditure under the programmes.
2. Loans and financial assistance: Half of the Reconstruction Fund is to provide loans and guarantees and half direct financial aid.
3. Allocation of the Recovery and Resilience Facility: The money is to be allocated to the countries and sectors most severely affected by the crisis, and two thirds of the funds are to be spent in 2021 and 2022.
4. Management and conditionality: The affected member states are to draw up national reconstruction and resilience plans for the period 2021 - 2023 in accordance with the European Commission's country-specific recommendations on economic and financial policy. The plans would be reviewed in 2022 and approved by the Council by qualified majority on a proposal from the Commission. One third of the funds are to be used for climate-related projects.

For its part, the Commission had already made proposals, and the European Parliament had^[2] demanded that the EU member states make more funds available to the EU in order to meet current challenges and steer the EU towards the future.

The heads of state and government agreed on a volume of EUR 672.5 billion, of which EUR 360 billion will be provided as loans and EUR 312.5 billion as non-repayable grants. The distribution of the funds largely reflects the Commission's proposal.

The Standard Financial Resources of the European Union or the Multiannual Financial Framework

The long-term EU budget, Multiannual Financial Framework (MFF), defines how much money the EU can invest in different policy areas over a certain period of time. The European Commission presented its proposal for the EU budget for the years 2021 - 2027 in May 2018 and in May 2020 in a revised Version. The future EU budget 2021 - 2027 of the European Commission provides, among other things, for modernising the financial framework and adapting it more closely to the EU's priorities and to new common challenges. All key issues - such as migration, climate protection, digital innovation and research - are politically explosive topics.^[3]

The original objective of reaching an agreement on the EU budget 2021 - 2027 by the end of 2019 was not achieved. This was due to differences of opinion on the overall size of the budget and the Brexit. The consultations on the budget have traditionally been very controversial, with different coalitions, largely depending on the issue at stake.

One particularly controversial issue is the temporary increase in the cap on own resources from 1.4 percent to 2 percent of the EU's gross national income. The member states contribute to the Union's budget in varying degrees depending on their gross national income. This contribution, plus value added tax, amounts to about three quarters of EU revenue . Other sources of revenue include fines resulting from violation of unfair competition law by companies and customs duties on imports from outside the EU.

President Charles Michel had submitted two proposals. His last proposal was:

1. A budget of EUR 1,074 billion over seven years to meet the EU's long-term objectives.
2. The historic flat-rate rebates for Denmark, Germany, the Netherlands, Austria and Sweden would be preserved.

The heads of state and government agreed on an amount similar to the one proposed. However, there will be reallocations between the amounts budgeted for the policy areas.

Other Parameters for the Budgets

Expenditure should be consistent with the EU's objective of climate neutrality for 2050, the EU's climate change objectives for 2030 and the Paris Convention.

Finally, expenditure should be dependent on respect for the rule of law and European values.

The Time Schedule

EU budgets require unanimity in the Council and the consent of the Parliament. The member states and the European Parliament should agree on the recovery plan as soon as possible so that it can be implemented. The same applies to the MFF which should be adopted at least before the end of the year. Should the budget not have been adopted at the beginning of the new year, only one twelfth of the appropriations entered in the budget of the previous year may be spent each month (twelfth rule).

Dr Rainer M. Bierwagen

Dr Dietmar O. Reich

[1] https://edic-md.eu/next-generation-eu/.

[2] See, for instance, Speech President Sassoli's speech press information and the press information of the Parliament, Debate on EU budget and recovery plan: "Council agreement will not be the last word".

[3] https://www.auswaertiges-amt.de/de/aussenpolitik/europa/wisofin/finanzrahmen/mehrjaehriger-finanzrahmen/210030 .