EU recovery spending: what conditionality and accountability?

16 July: EU leaders are meeting this week to discuss the bloc’s long-term budget plans and the debate on the conditions to attach – and how to ensure accountability of spending – is heating up.

With the economic outlook across Europe continuing to deteriorate, there is pressure to agree the latest proposal for a €1.1tn multi-annual budget and €750bn of ‘Next Generation EU’ funds to support the economic recovery. Questions around the criteria for controlling future expenditure are becoming central to that debate.

‘Conditionality’ – key to some, outrageous to others

Presenting the package of proposals in late May, the Commission made clear that the focus of EU spending in the next years should be on a ‘green and digital’ transition, with public investments using EU funding following a ‘do not harm’ green oath. The ‘negotiating box’ published last week by the European Council President, Charles Michel, talks of three goals, including targeting 30% of funding on climate-related projects, anchoring rule of law conditions to EU expenditure, and attaching recovery spending to national recovery and resilience plans. 

The last condition is of particular sensitivity as it links recovery funding to the existing EU economic governance process, the European Semester framework, which is currently under separate review. For Michel, the plans submitted by member states should be voted on in Council on a qualified majority basis. 

Many are not happy. The so-called ‘frugal four’, already dismayed about the size and nature of the proposals, want stronger conditions and want access to recovery funding to be made contingent upon the implementation of concrete reforms, while also ensuring that disbursements can be halted in case of ‘non-compliance’. The Hague, in particular, is making clear that the quid pro quo of greater EU financial solidarity is increased EU involvement in national economic decision-making – and has been calling for any Council decisions to be based on unanimity, effectively giving any country a veto over another country’s plans. 

This is anathema to others. Referencing the country’s experience of oversight by the ‘Troika’ (Commission, ECB and IMF) since the Greek sovereign debt crisis, Athens has made it clear that it will not accept strict EU conditions on the recovery funds. Rome has signalled acceptance that spending should be in line with the European Semester but warned against attaching too many strings which might hinder disbursement, while the Italian parliament has been split over accessing pandemic healthcare support through the European Stability Mechanism fearing that use of the funds would require the introduction of austerity measures.

Institutional tensions are also surfacing with the European Parliament wanting to be more closely involved in defining the criteria for expenditure – a power it does not currently hold – and MEPs want inter-institutional acknowledgment of a binding role for Parliament.

How to ensure accountability?

Attention is also being paid to ensuring accountability of spending. For the Commission, this will be achieved by disbursing recovery funds under existing EU budgetary control rules. Although some strengthening is foreseen, including measures to enable greater flexibility in implementation, particularly during emergency situations. Transparency would be provided via an annual report on the recovery funds, including information on assets and liabilities arising from borrowing and lending operations, the aggregate volume of funds directed to EU programmes and the impact on policy outcomes.

In response, the Chair of the Parliament’s budget committee, Johan Van Overtvelt, has stressed the need for full accountability and transparency through parliamentary participation and oversight. 

Both the Commission and the Parliament agree that strengthening controls requires more resources. The centre-right EPP group has already called for MEPs to be given more competences, including more “documentation requirements and auditing possibilities”. 

The Commission wants to rapidly reinforce its internal capacity to manage and administer recovery funds. This includes the upgrading of accounting and reporting on distribution and use of the funds, administration and reconciliation of payments and transfers to / from countries and to beneficiaries – as well as greater IT support. 

In addressing the need for broader accountability, the Commission has identified some lessons from the sovereign debt crisis, noting, for instance, that concentrating control mechanisms only on output data may not be sufficient and needs to be accompanied by appropriate safeguards to ensure the quality and reliability of input data. This also links to ongoing efforts to enhance public accounting at country level, including the application of accrual accounting, better internal control measures and independent audits.