After 4 days of epic talks, the Heads of State or Government of the European Union reached a unanimous agreement, early on Tuesday morning 21 July, on a €750 billion post-Covid-19 Economic Recovery Plan (see EUROPE 12531/1).
“Deal!”, the President of the European Council, Charles Michel, stated simply on Tuesday 21 July at 5:30 am via Twitter.
This agreement, which was sealed after an unforeseen marathon scenario, will certainly be criticised, starting with the European Parliament, for its imperfections, cuts, renunciations and the divisions that it has brought to light. But it is a first real success for Mr Michel, on this Belgian national holiday.
The third negotiating box proposal presented on 20 July contained the bulk of the agreement. Presented Tuesday 21 July at dawn, a fourth and final version, with some adjustments, was the right one. In particular, it allows the Danish rebate to be revised slightly upwards. An important element is that there will be no additional effort in 2020 of the €11.5 billion initially planned by the Commission to help combat the effects of Covid-19. “There will be no change in the 2014-2020 MFF”, the latest text specifies. The amount for cohesion policy is increased to €330.2 billion (€323.6 billion in the third compromise), as is the amount for the Common Agricultural Policy (CAP) €258.5 billion).
Unprecedented solidarity effort. The European Recovery Plan will be financed by a joint loan from the European Commission on behalf of the EU27. Its overall budget of €750 billion will be made up of €390 billion in grants (compared to the €500 billion originally planned). The share of repayable loans amounts to €360 billion instead of the initial €250 billion.
This balance satisfies the so-called ‘frugal’ countries (the Netherlands, Denmark, Sweden, Austria), supported by Finland, which are in favour of a drastic reduction in the ‘subsidies’ component of the European Recovery Plan. The main beneficiary countries, with Italy and Spain at the fore, as well as the Franco-German duo, which has put forward a proposal for a €500 billion recovery plan in grants (see EUROPE 12489/1), will be content with this.
Rule of law. In order to protect the EU’s financial interests, the question of a link between the EU budget and respect for the rule of law was one of the main topics of discussion at the dinner of the EU27 on Monday evening. Such an approach would provide new levers of political pressure at European level vis-à-vis Member States taking liberties with the fundamental values of the EU. The so-called ‘Article 7’ proceedings against Poland and Hungary, which were opened in 2017 and 2018 respectively, have so far produced only modest results.
Poland and Hungary, supported by Slovenia, have always been hostile to any binding European mechanism, for which they could pay the price.
At the end of the day on Monday, Germany, France, the Netherlands, Luxembourg, Poland, Hungary, Denmark and Latvia held a specific meeting on this issue.
In the end, Budapest and Warsaw won. The wording of the final agreement is much more vague than the one Charles Michel had previously presented, casting doubt on the urgency for the EU27 to have an operational mechanism in place quickly.
The last draft text had removed the detail of that mechanism, although the principle of conditionality remained. The decision-making procedure – qualified majority of Member States in the EU Council – necessary for the adoption of a specific proposal to be submitted by the Commission has not disappeared either.
On the other hand, the text no longer refers to the “manifest generalised failures observed in the good governance of Member States”. And it simply mentions the importance of protecting the EU’s financial interests, in accordance with the principles enshrined in the Treaties (Article 2 of the TEU).
Fewer subsidies, more loans. At the heart of the European Recovery Plan, the Recovery and Resilience Facility will be the temporary and targeted fiscal instrument that will directly help Member States to relaunch their economies affected by the pandemic.
All countries, first and foremost those most affected such as Italy and Spain, will receive aid from this instrument, although they will only reimburse grants received up to the amount of their national contribution to the EU budget.
The Facility will be mobilised during the first 3 years of the MFF and will be pre-financed in 2021 with 10% of its allocation.
For the 70% of the budget allocation to be committed in 2021 and 2022, the distribution key initially suggested by the Commission remains. For the remaining 30% to be committed in 2023, the unemployment criterion for the period 2015-2019 will be replaced by the fall in national GDP in 2020 and its cumulative fall over 2020-2021.
Mr Michel’s third proposal suggests endowing the Facility with €672.5 billion, of which €312.5 billion in the form of grants and €360 billion in the form of loans. The initial proposal provided for a lower allocation of €560 billion, of which €310 billion was in the form of grants and €250 billion in the form of loans. For each country, the grant allocation is expected to remain the same, while the loan allocation is expected to increase significantly, but will not exceed 6.8% of the gross national income (GNI).
Italy, the main beneficiary of the Facility, could thus pocket more than €81 billion in grants, while available loans would increase from €91 billion to €127.4 billion. According to French sources, France is expected to receive €40 billion.
Each Member State will be required to submit a national recovery plan for 2021-2023. This plan, which will include measures and milestones to measure progress, will be reviewed in 2022. The Commission will analyse each national recovery plan in light of the socio-economic policy recommendations it receives from the European level annually. In particular, a plan’s contribution to climate and digital transitions will be a prerequisite.
At the insistence of the Netherlands, a reinforced right of scrutiny by Member States has been introduced to ensure that a beneficiary state of the Facility respects its reform commitments. “If loans still have to become grants, then these reforms must really be enforceable by giving a decisive role to the EU Council”, said Prime Minister Rutte on Monday afternoon.
According to Mr Michel’s latest proposal, Member States would have to approve by qualified majority the Commission’s analysis of a national recovery plan. And their national experts meeting within the Economic and Financial Committee will have to give their opinion, “by consensus”, on whether the milestones set out in a national plan have been met.
Furthermore, if “as an exception, one or more Member States” considers that a State is seriously deviating from the course it has set itself, that country or those countries may ask the President of the European Council to raise the issue at the next European summit, during which the deliberations of the EU27 on the issue should be “exhaustive”, and no longer “decisive”, as Mr Michel’s third draft stated.
Any veto has been ruled out: a Member State will be able to refer to the European Council in the event of difficulties, without blocking the process of implementing the recovery plan, the French side stressed.
Significant cuts to other programmes and policies. In order to maintain an amount of €312.5 billion in grants under the Recovery and Resilience Facility, the agreement establishes cuts in the budgetary increases foreseen under the 2021-2027 MFF for certain new or symbolic Community programmes.
The following are affected: – the Horizon Europe research framework programme, which is being reduced from €13.5 billion in the first negotiating box to €11.5 billion in the second and €5 billion in the third; – the InvestEU programme (€5.6 billion in the fourth and final compromise, compared with €30.3 billion in the initial proposal); – the rural development programme, which has been halved since the first negotiating box (€7.5 billion, compared to €15 billion initially); – the Just Transition Fund has been reduced to €10 billion (down from €30 billion); – the amounts initially planned for both the public health programme and the new instrument to support business solvency will disappear; – the NDICI for Neighbourhood Policy, Development and International Cooperation is reduced to zero in the text of the agreement, compared to €3.5 billion in the third (€15.5 billion initially).
Only the React-EU budget increase for Cohesion Policy remains substantial, at €47.5 billion, compared to €50 billion at the outset.
‘Climate’ conditionality. The requirement for a 30% target for climate spending in the budget and the recovery plan has been incorporated so that national recovery plans include measures compatible with ecological transition objectives and commit to not financing spending that has a negative impact on the climate, a French source said.
Total amount of the MFF. Of the amount of the MFF excluding the ‘European Recovery Plan’, the latest draft provides for a maximum total amount of expenditure for the EU27 for the period 2021-2027 of €1.743 trillion in commitment appropriations, “including the integration of the European Development Fund”, and €1.6158 trillion in payment appropriations.
The financial envelope for the RescEU civil protection mechanism will be €1.1 billion, while the public health programme will be allocated €1.7 billion.
Special instruments outside the ceilings are increased by €5 billion. The €5 billion will be used for a new special new special ‘Brexit Adjustment Reserve’ to address the unforeseen and negative consequences in Member States of the UK’s exit from the EU.
In view of the effects of the Covid-19 crisis, a second so-called ‘flexibility’ envelope is added concerning the rules for implementing the Cohesion Policy and the Common Agricultural Policy (CAP), as well as the thematic concentration of ERDF support.
Rebates. On rebates, another thorny issue, the ‘negotiating box’ presented on Monday allows for an increase in flat-rate corrections over the period 2021-2027 for Denmark (€377 million), Austria (€565 million), Sweden (€1.069 billion) and the Netherlands (€1.921 billion).
This is another substantial victory for these countries, which call themselves “frugal” in the words of Austrian Chancellor Sebastian Kurz. They have been unwavering proponents of reducing expenditure and have obtained additional rebates, whereas a large majority of Member States wanted, after Brexit, the pure and simple end of individual benefits inherited from the Thatcher era.
The rebate allocated to Germany (€3.671 billion) remains at the same level as in the two previous drafts.
The rebates represent €7.6 billion per year, i.e., a total of €53.2 billion over the period (compared to €45.3 billion in the 10 July draft and €46.05 billion in the 18 July draft).
Another victory for the Netherlands, but also for Germany and Belgium: these three countries will retain 25% of the customs duties they levy in their ports on behalf of the EU (compared to 20% at present). On the contrary, the Commission had wanted to reduce this budget rebate in disguise.
Own resources. On own resources for the EU budget, Mr Michel’s latest draft stands by to the previous ones.
A new own resource related to non-recycled plastic packaging waste would be introduced from 2021. The Commission has been invited to come forward in 2021 with proposals for an EU border carbon adjustment mechanism and a digital tax (to be introduced no later than 2023).
European Parliament. It is now up to the European Parliament to examine the European Council’s agreement, perhaps as early as Thursday 23 July. MEPs are expected to have strong reservations about the planned introduction of a single own resource. And they will certainly criticise the weakening in the protection of the EU’s financial interests in the event of a breach of the rule of law.
On Monday morning, European Parliament President David Sassoli warned that Parliament would not give its approval if new own resources and measures to ensure effective defence of the rule of law are not created and if budget rebates are not abolished.
See the negotiating box dated 21 July: https://bit.ly/3fOWXGv and the one from 20 July: https://bit.ly/3fHCnYG (Original version in French by Lionel Changeur, Mathieu Bion and Solenn Paulic)