React-EU and reality

On May 27 the President of the European Commission Ursula von der Leyen proposed the creation of a new EU recovery plan (Next Generation EU) for 750,000 million euro (in 2018 prices ) to boost the EU budget with new funding obtained from the financial markets .

In just two months many taboos have been blown up. In line with the more idealistic proposals from Spain and the Franco-German one the funds raised in the financial markets would then be channelled by existing European programmes (this will also allow their scrutiny by MEPs). Contrary to the demands of the so-called net contributing ‘frugal’ countries, most of this (500,000 million) will be covered in the form of grants, with the remaining covered by loans.

While it is not the first time that the EU budget has resorted to financial engineering (notably the Juncker Fund) we should not forget that Article 310 of the Treaty on the Functioning of the EU demands a balanced EU budget. Another taboo that has been breached is the relatively little Member State pushback to the Commission perennially refreshed calls for “own resources”: in short, EU taxes on issues such as emissions (reportedly 10,000 million per year), carbon exports (5,000 million), large enterprises (also 10,000 million), digital (1,300 million), possibly plastic waste, etc. As with the rest of the package, it remains to be seen if this will be accepted by National governments, who have always been wary of taking that step as it is a significant power transfer to the EU level.

This EU debt should be refunded after 2027 and no later than 2058 so that Member States would not have to make significant additional contributions to the EU budget for the period 2021-2027. Next Generation EU is a fitting title given that it will be repaid for at least one generation.

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The EU Budget ceiling will be raised from the current level of 1.20% of EU GNI to 1.46% of the EU Gross National Income. It shall not be forgotten that in February the European Council’s position of the net contributing Member States was to reduce the EU budget 2021-2027 to as close as possible to 1% of EU GNI. The Commission revised proposal for the main budget 2021-2027 is maintained at 1,100 billion euro, but with the additional headroom of 0.6% of EU GNI the Commission expects to raise from the markets the additional 750.000 million.

Support for structural reforms

Most of Next Generation EU is made up by the new Recovery and Resilience Facility. With a budget of no less than 578,000 million euro (of which 250,000 in loans), it would be as big as the spending of EU Cohesion Policy and CAP combined, the largest EU budget programme ever created.

Good Governance has been increasingly identified as the key need for Member States to deliver the European priorities that each year they commit in their National Reform Programmes. The Secretariat General of the Commission had also grown wary of the slowness in expenditure of the EU Structural Funds and of the CAP.

The newly created DG Reform was expected to manage just 18,000 million euro of the new Reform Support Programme (RSP) 2021-2027 to finance “structural reforms” in a very wide sense, particularly in the Eurozone, against the institutional barriers that prevent Member States meeting their EU commitments. The present Structural Reform and Support Programme (SRSP) did not even exist three years ago and it is worth just 223 million euro.

[Escuche el ‘podcast’ de Agenda Pública: ¿Qué pasa con la solidaridad en la Unión Europea?]

In short, contrary to public perception in the most indebted countries, the aim is not to finance current expenditure but to invest in long overdue reforms working as a pay-as-you-go fund, as summarised by Federico Steinberg. Gil Tertre offered a good overview of the proposals.

React-EU and territorial cohesion

The cohesion policy will have a key role in supporting the recovery through a new React-EU initiative, with 55,000 million euros (5,000 in 2020 and the rest in 2021-2022) to address the most pressing economic and social needs as a result of the ongoing economic fallout. It will be disbursed through the EU Structural Funds, which, alongside the Common Agricultural Policy, have been the two largest EU programmes, amounting to two thirds of the EU budget.

A bridge of the current 2014-2020 rules is proposed to speed up expenditure and give time to prepare the new 2021-2027 programmes. There will be 100% match-funding: i.e., governments will not have to finance EU-funded projects.

The European Regional Development Fund (ERDF) will support regions affected by Covid-19 such as granting subsidies to hospitals, establishing youth employment measures or providing liquidity and solvency to SMEs, as well as preparing for the recovery of their economies such as supporting tourism and culture. The European Social Fund plus (ESF) will target youth employment and children, and provide additional support for the so-called green labour force and digital transitions.

React-EU will be distributed to the Member States (i.e. nationally, not regionally) through a special allocation key.

Beyond React-EU, the additional 15,000 million euros for Rural Development (EAFRD) partly offset the cuts proposed by the Commission back in May 2018. But the Commission’s decision to take, post 2020, EAFRD outside Cohesion Policy remains unchanged. This has much to do with competition between Commission Directorates-General, national and regional ministries. It will herald the return of duplications and overlaps of EU investments, away from the notion of integrated, place-based approaches.

The Just Transition Fund, which was proposed only earlier this year and will now be allocated additional 30,000 million euro, to 40,000 million for regions facing the greatest challenges in energy transition.

Impact at regional NUTS 2 level excluding the impact of policy measures

Source: Joint Research Centre and Committee of the Regions.

Impact in Spain

What Spain and the Latin countries had in mind during the emotionally charged recent months was that the EU subsidised current spending to pay for maintaining public services and pensions due to their high level of national debt. This would be too far a federalising leap in the void for other Member States. Instead the EU offers funds for investments.

This poses several problems. Spain in particular has already enormous difficulties to spend even over half of the 40,000 million euros Structural Funds allocated 2014-2020. Absorbing an additional 77,000 million euro in grants (and reportedly up to 63,000 million euro in loans) in just two years is not self-evident. The more so as investments must be made before the EU reimburses them.

Source: European Commission EU open data.

The Directorate General of Community Funds of the Finance Ministry will have to manage a real flood of funds. It is already facing problems to answer the requests of the 17 regional governments to adapt the current programmes to the flexibilities granted by the EU as a result of the coronavirus (the CRII+ package). Also, the Ministry of Agriculture will manage the EU Regional Development Fund post 2020 separately, submitting to the Commission its own CAP Strategic Plan whereas the Ministry of Finance will submit the ERDF/ESF Partnership Agreement 2021-2027.

With the new Recovery and Resilience Facility, the Vice-Presidency of Economy becomes a key player in the management of EU funds; the Spanish spending priorities will be submitted to the Commission through a separate national programme for structural reforms.

The Vice-Presidency for Ecological Transition and Demographic Change will also join the fold in aiming to manage the Just Transition Fund and deliver the National Energy and Climate Plan 2021-2030 and any funds currently managed by Finance and particularly Agriculture to demographic decline, a topic high on the Spanish agenda, foregrounding the forthcoming EU Demographic Strategy.

The Ministry of Transport has been rebranded as and Urban Agenda, a clear sign that it has its eyes set on managing the 6% ERDF that has been earmarked for Sustainable Urban Development 2021-2027 to deliver Spain’s new Urban Agenda.

Last but not least, the Vice Presidency for Sustainable Development Goals (led by the minority partner of the coalition) will be keen to use this opportunity to deliver the Spanish SDG Voluntary National Review to the UN.

Furthermore, with the separate agendas of the corresponding line ministries of the 17 Autonomous Communities the spectre of further lack of coordination, inconsistencies and duplications is self-evident.

This will only be exacerbated by the need to spend so much money in just two years. It will make Next Generation EU a driver for centralisation, the more so as the EU allocation of funds is national rather than regional. This is particularly sensitive in a country with weak intergovernmental arrangements.

However, opportunities also exist. There is so much money available that longstanding public demands to target EU Structural Funds investments to Demographic Decline, Climate change, Localising the UN Sustainable Development Goals, is now even more feasible.

The enormous Recovery and Resilience Facility also offers unique opportunities. The present SRSP is so light touch in its requirements compared to these other EU funds that some Spanish managing authorities, which mainly staffed by professional auditors and lawyers, actually were reticent to apply as it as too good to be true. While there are centralising concerns, it can allow for significant and long overdue reforms such as the digitalisation and interoperability of public services and to reinforce the transparency, independence and digitalisation of public administrations. Something that the coronavirus crisis has proven as imperative as the recent manifesto of Lapuente, Jiménez Asensio, Ramió and others has highlighted.

Beyond the domestic caricature of the European Semester requirements as just being the impositions from frugal EU men in black, in fact these recommendations are rather generic, particularly since the Juncker reforms to this process. Each year Spain makes such commitments in its National Reform Programme. However as many authors ranging from Ibsen’s An Enemy of the People (1883) to Acemoglu and Robinson’s ‘Why Nations Fail’ (2012) the main barrier for structural reforms are the vested interests that benefit, actively or passively, from the status quo.

The 2019 European Commission Country Report, included the so-called Annex D, listing what the EU believes are the areas and issues that Spain should focus its EU funded investments for 2021-2027. What is missing are good ideas, management skills, coordination and time.

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