Brussels, 25/05/2020

Two years after the first attempt, the European Commission will present, on Wednesday 27 May, an amended proposal for a Multiannual Financial Framework (MFF) for the 2021-2027 period.

The failure at the end of February of the Heads of State or Government to reach unanimous agreement on this dossier nevertheless has the advantage of adapting the developing proposal to the new circumstances that the European Union now faces after the United Kingdom’s departure.

In the past 2 months, numerous budgetary measures (freezing of the Stability and Growth Pact), economic measures (State aid granted within a lighter regulatory framework; safety nets for States, short-time workers and companies) and monetary measures (the ECB’s PEPP operation) were adopted at the European level to respond to the urgency of the health crisis resulting from the Covid-19 pandemic.

As restrictions are gradually being lifted, it is now necessary to reflect on how to coordinate the EU’s economic recovery in order to tackle what is being described as the most acute socio-economic crisis since 1945, while remaining faithful to political priorities (European Green Deal, Digital Agenda) and the fundamental values of the Union and preserving the integrity of the internal market in the face of the very different budgetary means available to Member States.

This is the whole point of the European Recovery Plan, centred on the European Recovery Fund and closely linked to the MFF, which will also be proposed on Wednesday.

The President of the European Commission, Ursula von der Leyen, is convinced that the MFF is the most appropriate instrument to respond to the current situation. Contrary to the intergovernmental nature of the euro area’s response to the 2012 sovereign debt crisis, the EU budget has the merit of placing the response to the crisis within the scope of the Community method, with the Commission as the driver and the European Parliament as the fully associated budgetary authority. This approach, if it comes to fruition, should provide Mrs von der Leyen with reinvigorated parliamentary support after a hectic start to her term of office.

The Commission may be tempted to slightly increase the overall envelope of the MFF, excluding the ‘European Recovery Fund’. But the February EU summit showed that this path is very narrow. The President of the European Council, Charles Michel, had in fact sought a lower point of equilibrium compared to the previous negotiating box that had been tried.

“There is limited room to expand the MFF. It would mean asking Italy, France and Spain to pay more, asking them to go to the market for more debt”, a senior Commission official said recently. If this is nevertheless the case, it could be proposed to Member States to smooth the path to an increase in national contributions over a long period beyond 2027.

The question of own resources for the EU budget is again being raised, and the Commission seems inclined to respond favourably to a strong request from the European Parliament. This requires the creation of a basket of new own resources (e.g. taxes on digital services, plastics and financial transactions). Problem: these funds are not available and the amounts collected remain hypothetical.

“We need more own resources” to ensure that all companies pay their taxes, said Margrethe Vestager, executive vice-president of the European institution, in an address to MEPs on Monday 25 May.

But new own resources alone will not be enough. Mrs von der Leyen has repeatedly indicated that the scale of the EU’s budgetary response to the crisis is expected to be on the order of a trillion euros.

The way to significantly increase the MFF’s firepower is to provide the Commission with large-scale borrowing capacity. As already mentioned at previous European emergency summits, the EU budget’s own resources ceilings could be increased (from 1.2% to around 2% of GNI) so that the margin thus created, combined with the granting of guarantees by Member States, would allow the EU to raise capital on the markets at a reduced cost. Such a debt waiver has already been tried, in particular to avoid default in Athens, but never before has the Commission acted on such a scale on behalf of the EU-27.

With regard to the EU budget, Member States will remain liable up to the amount of their contributions, which would only increase if the guarantees were activated. There will therefore be no real mutualisation of debt, thereby respecting the Northern countries’ red line. Nevertheless, European solidarity will be real: the budget envelope to be released will go to the sectors and territories of the countries most affected by the pandemic, according to criteria that are more economically oriented than health-related. And it will be disbursed in the early years of the budget cycle (‘frontloading’). 

A recovery plan in line with European political priorities

Ursula von der Leyen would like to see the forthcoming budget amounts redirected entirely to the 2021-2027 MFF and fed into pre-existing or new policies, programmes and instruments.

The future recovery plan is expected to include three major axes. The first axis, which will receive 80% of the resources of the European Recovery Fund, will aim to help Member States restart and modernise their economies through the ‘Resilience and recovery facility’ instrument and in line with the guidelines of the European Green Deal. As is planned for the euro area budget, each country will present national plans according to its sectoral priorities (tourism, automotive sector, etc.), which the Commission will examine in light of its non-binding country specific recommendations.

In addition, cohesion policy will have additional (‘top-up’) budgetary resources. This ReactEU envelope, the allocation key for which is still to be decided, will particularly target employment aid, especially for young people.

Mobilising 10 to 15% of the future fund, the second axis of the plan will aim to help the private sector recover from economic paralysis. In addition to an extension of the InvestEU programme, which will succeed the ‘Juncker’ investment plan, the Commission plans to set up two specific mechanisms.

The first instrument will support solvent European companies. “The Commission will not buy shares of companies. It will guarantee a certain share of the risk that the EIB is taking to incentivise the private sector to invest in healthy businesses”, the official said. The second instrument, the Strategic investment facility, will support industries considered essential because of the technologies they use and/or the strategic autonomy they promote, such as the pharmaceutical industry.

The remainder of the Recovery Fund envelope will be used to improve the EU’s capacity to deal with new crises such as coronavirus. A new European public health programme will be created, although this domain should remain primarily a national competence. With regard to ‘prevention’, the Commission is also expected to suggest increasing European stocks of protective medical equipment through the rescEU mechanism. The future research framework programme, Horizon Europe, will also be strengthened.

We need to reinvest directly and support businesses by introducing conditions - “greener, more digital and more resilient industry” - for the granting of aid, Internal Market Commissioner Thierry Breton told the European Parliament on Monday. “Autonomy and sovereignty will also be part of the conditionality criteria”, he added.

Finding the right balance between loans and grants

The 2021-2027 MFF and the European Recovery Fund seem so intertwined that it hardly seems conceivable for the EU-27 to negotiate these two elements separately. But this is what several observers are saying: only European summits with the actors physically present can reach unanimous agreement on a dossier when interests diverge strongly.

While Germany and France are suggesting the creation of a 500 billion euro fund that would help the worst-affected countries in the form of budget transfers, the four so-called ‘frugal’ countries - the Netherlands, Austria, Denmark and Sweden - presented their own vision for a recovery plan on Saturday 23 May that rejects support that is limited to grants.

These four countries certainly advocate the creation, in addition to a “modernised” MFF, of “a temporary and one-off emergency fund to support economic recovery and the resilience of our health sectors against possible future waves”, according to a joint note seen by EUROPE. But they continue to reject any instrument “leading to debt pooling or significant increases in the EU budget”. The aid is to be granted within 2 years in the form of loans ('loans for loans') on favourable terms. In addition, in return for the granted aid, the countries concerned would have to make a “firm commitment” to implement far-reaching reforms and to respect the imposed fiscal framework.

Aware of these divergent approaches, Mrs von der Leyen is seeking the right balance between grants and long-term repayable loans.

Com (2020) 442 - MFF Communication 

SWD 98 

Com 456