Since the Eurogroup meeting of 9 April took the decision to set up a Covid-19 recovery fund “commensurate with the extraordinary costs with the current crisis”, the debate at the European level has focused on the size and modes of financing of this new fund, and on the interplay between it and the EU’s next long-term budget.
The last European Council did not provide many details on these issues except for the last one: following the advice of the Commission, EU leaders decided to integrate this massive recovery effort into the upcoming Multi-Annual Financial Framework (MFF) covering 2021-2027.
There are many advantages of doing things this way. Placing the recovery plan into the MFF implies that it will be the Commission, not the member states, deciding how to distribute the money.
Furthermore, the use of these funds will be controlled by EU institutions such as the European Parliament, the European Court of Auditors or the European Anti-Fraud Office (OLAF).
This is key to ensuring not only that the amounts are well spent, but that Covid-19-related spending reinforces rather than weakens other EU strategic objectives, such as the much-needed green transition.
Yet, from a political point of view, putting the new Covid-19 fund and the MFF in a single ‘recovery package’ is a risky bet. MFF negotiations are already highly polarised and they will not get any easier with the economy at a halt almost everywhere.
Besides, whereas an intergovernmental instrument can be eventually set up by a ‘coalition of the willing’ in the absence of a consensus, the MFF cannot.
It requires the unanimity of the 27 member states, and ratification by all national parliaments if the own resource ceiling is to be raised (key in the strategy to borrow a huge amount of money by using the EU budget as guarantee).
There is nothing obvious about getting such ratification. A new Covid-19-adjusted MFF will inevitably shift funding from the east to the south – from Hungary and Poland to Italy and Spain.
We can expect some eastern European countries not to be happy with this – particularly if what they’re left with then comes with reinforced ‘rule-of-law’ conditionality attached.
Add to this the need to have the consent of the European Parliament, and the rumours that the European Council will not take any crucial decision before meeting physically in June or even later.
Overall, the risk of a no-deal MFF scenario, or that of seeing member states and the Parliament adopting a very modest and sub-optimal ‘MFF recovery package’ at the very last minute, is very high.
The Commission should get ready to table a “plan B” to avoid this scenario. If, in the following days, there are no clear signs that a Council agreement on a MFF recovery package is feasible by June, it should propose that EU leaders postpone the MFF negotiations until next autumn and take the time for a serious strategic reflection.
This decoupling would allow EU leaders to concentrate on the negotiation of a Covid-19 recovery fund as a standalone item, and if agreed by 2020, this new fund could be initially financed by member states’ guarantees.
The regulation could still establish a preeminent role of the Commission in the management of the fund and the possibility to use the revenues of the fund to extend existing EU budget programmes.
It could also leave the door open for a possible integration of the fund into the upcoming MFF later on, thus further raising the amount of money devoted to the recovery.
In parallel, the Commission should prepare a Covid-19 adjusted EU budget for 2021. Adopting this exceptional budget will be difficult in itself, but less so than adopting a new MFF with plenty of innovations.
It would require absolute majority instead of unanimity in the Council, and would only cover one year. The amount of money would not be enormous.
Following Article 312.4 of the Treaty on the Functioning of the EU, this exceptional 2021 budget will have to maintain the level of 2020 spending adjusted to inflation.
Most of it would have to be allocated to pre-existing programmes but there would be some capacity to shift spending to finance Covid-19-related measures, and some novelties introduced in the 2020 budget – such as the new EU solidarity instrument for health or more flexibility in the use of cohesion policy spending – could be maintained.
Furthermore, the rebates and corrections limiting the contributions of Denmark, Germany, the Netherlands and Sweden to the EU budget expire in 2020.
Unless there is an unanimous agreement in the Council to introduce new corrections, these countries which have been relatively spared from the crisis will make a bigger contribution effort in an exceptional 2021 European budget.
Last but not least, if the Brexit transition period is not extended – as seems to be the preference of the UK government – there will be approximately €6-7bn extra previously allocated to the UK which could be used to tackle the Covid-19 crisis.
It is true that the loss of the UK contribution will have to be compensated by increases of the remaining member states’ contributions.
However, GNI-based budget contributions are calculated on the basis of the GNI forecast for 2021, and so those countries suffering the largest shocks in their GNI – namely Italy and Spain – will have much moderate increases in their contributions than the rest of the countries.
Overall, the ‘plan B’ may end up being a first-best solution. It would allow the Council, under the German presidency, to concentrate on crisis management, including the negotiation of an exceptional Covid-19 recovery fund.
The Commission would instead have the time to lay out a new proposal for a seven-year EU budget that can take better stock of all the effects of the pandemic for the years to come and truly reflects EU’s long-term strategic priorities and challenges.