In the early morning of July 21, 2020, the European Council (EC) agreed on the new long-term European Union (EU) budget and recovery fund. After a 4-day marathon meeting, the leaders of EU member states found a political compromise on the Multiannual Financial Framework (MFF) budget of EUR 1,074 billion and a specific Next Generation EU (NGEU) recovery fund of EUR 750 billion. Both are the key EU instruments for the socioeconomic recovery in Europe after the pandemic.
At the start of the European talks, there were deep divides between member states on the financing mechanism and the share of loans versus grants within the budget. The compromise is historic in that it will be the first time the EU has been permitted to collectively raise capital with the members’ backing. Whether it will be historic in successfully providing direction toward a resilient and sustainable recovery in Europe remains to be seen.
What’s in the deal?
Next Generation EU (NGEU)
The NGEU is the recovery fund for which the EC will borrow up to EUR 750 billion on the capital markets on behalf of the EU. This “Own Resources Decision” is limited in time (until 2026) and scope. It will address the exceptional challenges of the COVID-19 crisis. The funds can be used for loans totalling EUR 360 billion and a maximum direct expenditure (in grants) of EUR 390 billion.
Member states’ recovery and resilience plans must be submitted to the EC, which will assess them within two months based on their consistency with country-specific recommendations, ability to strengthen growth potential, job creation, and economic and social resilience. The EC will also assess the plans’ contributions to the green and digital transitions.
To respond to concerns about monitoring the spending of the recovery fund, the deal includes an “emergency brake” mechanism: any EU member state can request the President of the Council to address concerns about serious deviations on targets and milestones at the first Council meeting following the use of the “emergency brake.”
For a green recovery, addressing climate change must be mainstreamed in the NGEU and the MFF and given a target of 30% of all expenditure. The recovery plans also have to demonstrate compliance with a carbon-neutral EU by 2050 and respond to the new climate targets for 2030 that the EU is expected to formulate at the end of this year.
The MFF 2021–2027
The MFF budget is EUR 1.074 billion and, together with the recovery fund, is determining the direction of EU funding over the next 7 years. Apart from EU member state contributions, on which Austria, Denmark, Finland, Germany, the Netherlands, and Sweden received significant rebates, the EU will also reform its own resource base and implement, among others, a tax on non-recycled plastic waste, a carbon border adjustment mechanism, and a digital tax. It will also revise the EU Emission Trading System, potentially by extending coverage to the maritime and aviation sectors and looking into a financial transaction tax. The proceeds of these taxes will be used for the early repayments of the NGEU debt.
A few flexible special instruments
In addition to the MFF and the NGEU, a few special, extra-budgetary instruments were included in the deal as well, in response to unforeseen events. One of these is a Brexit fund of EUR 5 billion to address adverse consequences of the Brexit in the worst-affected EU member states. The EC will work out a more detailed proposal by the end of 2020 for its implementation.
What’s not in the deal?
This article highlights that the cuts in the budget for the Common Agriculture Policy (CAP), the Just Transition Mechanism, and Research and Development (Horizon Europe) are noteworthy and potentially a bottleneck to getting approval from the European Parliament. These cuts are also problematic because agricultural reform, just transition, and innovation are three essential components to delivering Europe’s Green Deal and Digital Agenda.
The reduced budget for agriculture is already being heavily criticized by farmers’ associations. The significant budget cuts in the Just Transition Mechanism from EUR 40 billion to EUR 17.5 billion will be hard to digest for the countries that will suffer most from the transition to a climate-neutral Europe. In addition, the EU’s flagship innovation fund, Horizon Europe, which is important for spending on health and education, was reduced from the EC’s originally proposed EUR 100 billion to just under EUR 76 billion.
Conditionalities in relation to respect for the rule of law were also significantly weakened or are close to absent in the final version of the Council’s agreement. The European Parliament is critical of this move and will be voting at the time of writing on a resolution to withhold its consent “until a satisfactory agreement is reached.”
And now, what?
The Council’s deal is up for approval by the European Parliament, which will be debating and potentially renegotiating it in the coming weeks. It has already affirmed that it will not approve a budget with unjustified cuts that threaten the European Green Deal and Digital Transformation Agenda.
Whether this proves to be a historic agreement for Europe’s recovery remains to be seen. In any event, as this piece in the Financial Times points out, the governance and financing mechanism of the NGEU is so fundamentally different from the EU response after the financial crisis that it may well put the EU on a new trajectory of economic policy-making with a lot more room for common fiscal policy.
However, deploying these fresh sources of finance through public administrations that have barely recovered from austerity policies after the financial crisis will be a key challenge to overcome. It will require investment in the public sector and the modernization of the state itself.