The EU’s ground-breaking deal on COVID-19 recovery funding

30 July 2020: ICAEW Head of European Affairs, Susanna Di Feliciantonio, takes a closer look at last week’s extraordinary EU summit and the comprehensive €1.8tn package agreed to tackle the socio-economic consequences of the coronavirus pandemic.

Building on two years of discussions, EU leaders finally agreed to a €1,074bn long-term budget for 2021-2027. This is accompanied by a recovery initiative, pushed heavily by France and Germany, which authorises the European Commission to issue up to €750bn in common debt for the first time in the Union’s history. The combined package aims to help post-pandemic rebuilding efforts while supporting the EU’s green and digital transition. These amounts are in 2018 prices and will be increased for inflation.

Recovery funding: where is the money going?

Known as the ‘Next Generation EU’ initiative in the initial proposals, the majority of the recovery funds will be allocated to a new Recovery and Resilience Facility, which will provide loans (€360bn) and grants (€312.5bn) to EU countries. The balance (€77.5bn) will go towards six other programmes, boosting private investment and reinforcing research and civil protection programmes. 

Expenditure must comply with the EU’s climate objectives, with 30% specifically targeted to climate-related projects.

The amounts disbursed under the Recovery and Resilience Facility are targeted at the countries and sectors most affected by the pandemic. Allocations to each country will depend on their population, how much GDP they have lost and unemployment rates. 

Individual governments will have to prepare national recovery and resilience plans by October, setting out their reform and investment programmes – with specific targets and timetables – for the next three-year period. The plans will be assessed by the Commission within two months. If deemed satisfactory, the Commission will propose a payment plan to the Council for approval by a qualified majority vote within four weeks. The plans will be reviewed in 2022.

Disbursements will be front-loaded, with 70% of grants committed in 2021 and 2022. The remaining 30% is due to be fully committed by the end of 2023. If necessary, 10% of the funds can be made available immediately. Pay-outs will be in twice-yearly tranches and only made available if governments hit their targets. Countries can also request loans until the end of 2023 but should not borrow more than 6.8% of their gross national income.

Following heated discussion between EU leaders, last week’s agreement foresees that deputy finance ministers will give their collective opinion to the Commission on whether reform targets have been met. Individual countries can pause the process for three months if they consider that there are serious deviations from the reform plans. In this case, EU leaders will need to ‘exhaustively’ discuss the payout – but the final say (on paper, at least) remains with the Commission. 

How will the EU pay for it all?

The initiative is characterised as being an exceptional measure, limited in size, duration and scope. Under the terms of the deal, borrowing on financial markets is due to stop by the end of 2026. Repayments should be completed by December 2058 and the amount due in a given year to repay the principal ‘should not exceed 7.5% of the maximum amount of €390bn for expenditure.’ How the funds will be repaid has not been fully clarified. 

EU leaders agreed on a new EU-level tax on plastics to be introduced next year and noted that the Commission is expected to put forward plans for a carbon border adjustment levy and digital tax in 2021. Other potential new sources of revenue could include an extension of the EU emissions trading scheme to cover aviation, maritime, fisheries and agriculture sectors or a financial transaction tax. Such measures could help raise revenue but remain controversial in a number of national capitals. 

What happens next?

While most of the focus has been on the recovery funds, the multi-annual budget agreement is not yet a done deal. EU countries need to formally vote on the budget and resources. National parliaments will also have to sign off on the guarantees given to the EU budget in order to issue joint debt for the Next Generation EU initiative. Delay in one capital could delay implementation of the whole recovery package.

The European Parliament also wants a greater say on the recovery funds and is currently ‘withholding’ consent on the long-term budget, which it has veto power over. In a resolution adopted at the end of last week, MEPs criticised the budgetary cuts foreseen by EU leaders while calling for a legally binding timetable for the introduction of new revenue sources by the end of 2027. MEPs also want to be fully involved in the governance of the recovery funds, via ex ante scrutiny mechanisms as well as ex post verification assessments. The Parliament’s room for manoeuvre is limited given the political risks of being perceived to hinder a hard-reached compromise aimed to help countries deal with the unprecedented economic impact of the coronavirus.

In the meantime, the Commission has already moved ahead with the establishment of a new task force, led by Ursula von der Leyen to more effectively deal with the recovery. Steps to reinforce internal capacity to manage and administer the new funds are also likely to now go ahead. The Commission is also expected to put forward proposals to accelerate infrastructure investment projects so that recovery funds can be deployed as quickly as possible.