COVID-19: a Roadmap to recovery – what does it mean for the EU budget?

On 26 March the Joint Statement adopted by members of the European Council contained firm demands for a coordinated exit strategy, a comprehensive recovery plan and an unprecedented level of investment. It invited both the Presidents of the European Council and Commission, in consultation with the other institutions, and particularly the European Central Bank (ECB), to start working on a political and financial roadmap.

Almost a month later on 23 April, after the initial adoption of a Joint European Roadmap to lift COVID-19 containment measures on 15 April, EU leaders held their fourth video meeting, during which they instructed the European Commission to draft a proposal for an economic rescue plan to take the edge off COVID-19’s outbreak implications.

Thus, the summit saw the European Council welcoming two things: first, the action plan towards lifting COVID-19 containment measures (“Joint European Roadmap towards lifting COVID-19 containment measures“); and second, a recovery strategy regarding financial aspects (“A RoadMap for Recovery”).

In addition, we have also seen the Eurogroup agreement, which contains three safety nets: for workers via SURE; for businesses via the European Investment Bank (EIB); and for member states via the ESM. Taking the two roadmaps together, as described on the Council’s website, this represents an agreement amounting to a package worth 540 billion Euros, to be operational by 1 June 2020. This recovery strategy is based on four pillars of action, meant as a strategic response that promotes solidarity, flexibility, inclusion and right and values.

Funds, initiatives, loans, grants – what type of financial instrument?

Progress has certainly been made in terms of coordination at the EU and Euro level through, for instance, the suspension of the Stability and Growth Pact and the proper use of the EU budget for the Coronavirus Response Investment Initiative (COM (2020) 113 final). In addition, we have seen the establishment of additional crisis response instruments such as the Emergency Support Instrument (ESI) and the temporary-loan based instrument SURE. However, the European Council meeting on 23 April failed to reach a common EU level response concerning the exact form of the Recovery Fund.

The Recovery Fund is intended as a means to underpin investment and help spread the costs of the crisis over time through an adequate financing system. Although EU leaders seem to be coalescing around the proposition of establishing this Recovery Fund, the size of the proposed instrument, the implied ‘mutualisation’ of existing debt, and the amount of cash involved, are all topics still very much open to debate. This struggle to reach a common univocal agreement over the setting up of the Recovery Fund reflects a divide between Northern and Southern countries’ on the issue of mutualising (i.e. sharing) debt.

North versus south?

Northern creditor countries such as the Netherlands, Germany and Finland already dismissed the idea of ‘Coronabonds’ advanced by France, Italy and Spain, as this option would bind taxpayers in the ‘cautious’ North to guarantee lending to the ‘licentious’ South. This clash concerns the question of: what is the most appropriate form of financial response?. One could provides grants to member states, which would certainly help the hard-hit Italian and Spanish economies, or one could offer investment loans, which is the option supported by the fiscally conservative ‘Frugals’. Which is the most suitable path to pursue in order to boost competitiveness?

Despite the  difficulties, an agreement for the Economic Response package of 540 billion Euros was reached, by overcoming the differences: between the Netherlands and Italy with regards to the ESM’s ‘light’ conditions; and between Netherlands and Spain regarding the Commission’s SURE mechanism. However, at the end of the meeting French President Emmanuel Macron claimed that “there is no consensus today” when it comes to the shape of the Recovery Fund, “

Yet, European Commission President von der Leyen reassures us that for the Recovery Fund a “sound balance” between grants and loans will be reached and that additional “innovative financial instruments” will be employed.

The EU’s response: too little, too late?

The European Council is aware of the need for common unambiguous action and the dangers of being perceived as delivering an EU response that is too little, too late. However, the re-allocation of 37 billion Euros from EU structural funds to EU countries and the expansion of the European Solidarity Fund (ESF)’s scope to up to 800 million Euros, can be seen as a remarkable attempt to provide economic and financial support to the EU’s most hard-hit countries. Beyond the debate on the mutualisation of debt, with regards to financial accountability several things remain to be specified: how substantial this Recovery Fund will be, how it will function in practice; and who will be responsible for auditing expenditure.

Beyond the debate on the mutualisation of debt, with regards to financial accountability, the key question remains: how to define the capacity, functioning and the deployment auditing of this Recovery Fund.

Considering the size of the ESF, European Commission President Ursula von der Leyen has argued in favour of employing the EU’s next seven-year budget (MFF 2021-2027) as the basis for the recovery in the aftermath of this coronavirus pandemic. The size of the Recovery Fund will need to vast and some Commission officials believe that an amount between 1 and 1.5 trillion Euros will be needed.

In order to reach this amount, the MFF will have to be adapted to reflect the current crisis and the size of the challenges ahead, firstly, by enacting von der Leyen’s proposal of increasing the ceiling for EU spending to 2% of GDP, up from a current maximum of 1.2%. This ceiling change would be enacted only for two or three years, and implies a temporary new role for the EU budget’s new role, which won’t necessarily please all member states.

How best to use the money?

The second issue relates to how this money will be deployed. Likely models are past Commission’s schemes such as the Juncker Plan (now re-branded as InvestEU), employed after the Eurozone crisis, and more recently this year’s Green Deal Investment Plan, which involves EU guarantees to provide support for investment initiatives, an option highly encouraged by Nordic countries.

As for the deployment of the funds, who should used them, and how? This has yet to be laid down in a proposal. For now, Commission President von der Leyen has stated that an assessment of the hardest-hit EU economies will be carried out throughout the crisis, and that much more direct budgetary support will be provided to those Member States with a higher fiscal impact due to the crisis. This suggests that those EU countries most in need will eventually benefit more greatly from the Recovery Fund compared to those states whose economies are healthier.

The future shape of the MFF?

The European Parliament (2020/2616(RSP)) has been calling for urgent action to decide on the next MFF in light of the pivotal choices to be undertaken that will determine the EU’s future in the years ahead. The risks of further delays to a budget deal potentially jeopardises the implementation of several EU programs, which may find themselves blocked on 31 December when the current multi-annual budget plan runs out.

In a context of diverging national positions, and with a gap already foreseen in the EU budget due to Brexit and other controversial issues, a key challenge for the future MFF will be to protect and distribute appropriate resources to address the aftermath of the pandemic, while preserving a level of resources sufficient for the EU administration to function efficiently, and its policies to be delivered.

The future action plan is in the hands of national capitals: while the EU is already forging an extensive and solid response to the economic crisis, national sensitivities continue to linger, persistently constraining its capacity to act. By 6 May, the date of the next video meeting, national leaders will have to have put aside their diverging positions on the Recovery Fund’s financing, to show solidarity and deliver a strong, rapid EU response.

by Costanza Marcellino

Costanza Marcellino is currently a Research Master student in European Studies at Maastricht University. She holds a BA in Politics and Economics from the University of Milan. Her research interests include European identity, political participation and voting behaviour. She can be contacted at c.marcellino@student.maastrichtuniversity.nl

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