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An EU Recovery Fund: How to square the circle?

Author(s): Kajus Hagelstam, Alice Zoppè, Cristina Sofia Dias

Date published: May 2020

SUERF Policy Brief, No 5

by Kajus Hagelstam, Alice Zoppè, and Cristina Sofia Dias
European Parliament


JEL-codes: G38, H12, H63, H68.
Keywords: EU economic governance, the European Council, Corona crisis, Multiannual Financial Framework (MFF), Recovery fund, EU budget.

Download: SUERF Policy Brief, No 5SUERF Policy Brief, No 5 (0.55 MB)


Following the Heads of State and Government meeting on 23 April, this note provides a snapshot of the current and recently proposed EU budgetary and financial support instruments in view of the discussions on possible building blocks for a new European Recovery Fund. This note was originally published on 27 April 2020 as briefing for Members of the European Parliament. The views expressed in this article are solely those of the auhorts and do not represent an official position of the European Parliament.


On 23 April, EU Leaders agreed to work “towards establishing a recovery fund, which is needed and urgent. This fund shall be of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected, and be dedicated to dealing with this unprecedented crisis. We have therefore tasked the Commission to analyse the exact needs and to urgently come up with a proposal that is commensurate with the challenge we are facing. The Commission proposal should clarify the link with the MFF, which in any event will need to be adjusted to deal with the current crisis and its aftermath.”

The Commission indicated that it aims at presenting its proposal by 6 May, clarifying its link to a revised and more ambitious Multiannual Financial Framework (MFF).

Some elements that need to be taken into account are presented below.

Within the MFF, there are two main constraints:

  • In accordance with Art. 310 TFEU, the EU budget must be in balance. Therefore, all its budget expenditure must be matched by revenues (national contributions and EU traditional own resources). In other words, the EU budget cannot have deficits financed by borrowing on the market;
  • The EU can borrow on the market only to provide loans to Member States, and therefore not to finance other expenditures. Loans are provided “back-to-back”, i.e. with exactly the same conditions. Such borrowing is limited to an amount corresponding to the difference (“headroom”) between the maximum revenues and the planned expenditures of the EU budget.1

Therefore, for the new Recovery Fund to be within the MFF and respect the EU budget constraints, the EU revenue ceiling must be raised.2 This would allow:

  • to increase the amount of EU budget expenditures: new funds could be given as grants to the beneficiaries, within the new limits;
  • to increase the amount that can be borrowed and then lent to Member States (by increasing the “headroom”);
  • to increase the amount used to reinforce the European Investment Bank (that makes loans to companies) and/or European Investment Fund (that provides risk-capital, including by acquiring shares);
  • to establish any new EU financial instruments (e.g. a EU equity fund).

Once the general purpose of the Fund is agreed, at least three different dimensions of its design need to be considered, each of them with several options. These dimensions are: funding, spending, and governance.

Some options are presented below, together with the models that are currently applied (i.e. existing EU instruments). For each option, much more details could be specified, but they are not dealt with here.

(1) In what concerns the funding leg of the Recovery Fund, one can note the following options based on current EU instruments:

  • Increase the MFF appropriations earmarked for grants to beneficiaries;
  • Issuing bonds, backed by the EU budget, up to the amount given by the margin, e.g. EFSM model;
  • Issuing bonds backed by the EU budget and with back-guarantees provided by Member States, e.g. SURE model;
  • Possible additional funding provided by optional (or intergovernmental) Member States contributions (BICC planned model for euro area Member States).

(2) As to the spending leg, there are essentially the following current options, based on current EU instruments:

  • Grants from the EU budget, including e.g. grants provided under the Common Agricultural Policy; the structural funds (grants for investments, to be matched by national/private contributions); financial contributions (grants to be matched by “variable” national contributions on the basis of progress in reforms implementation (the planned BICC model);
  • Loans, as in the EFSM and SURE models, or EIB loans to companies, based on a EU budget guarantee (EFSI model);
  • Equity financing by the European Investment Fund, which is co-owned by the EU.

(3) The governance of such Recovery Fund could be:

  • Based on the “community method” (making use of the EU bodies and institutions as decision makers): that is the case for disbursements under the EU budget, where decisions are mostly taken by Council and Parliament and execution is left to the Commission; or disbursements under the SURE, EFSM or EIB;
  • Based on an intergovernmental method such as the ESM and the EFSF.

There are currently no mixed models of governance. Nevertheless, the BICC model (as proposed) is an example of a mixed governance model, insofar the Euro Summit and the Eurogroup provide strategic guidance on the scope of the spending priorities, implemented by the Commission.

The Annex presents, in tabular format, an overview of the current EU budgetary and financial instruments.


ANNEX

Table: A simplified overview of current, proposed and discontinued EU financial and budgetary instruments providing loans and grants

Instrument

Legal basis

Funding

Disbursements

Decision-making / Implementation

Capacity

Addressees

EU programmes (based on the headings of the MFF)

Multiannual Financial Framework (MFF) based on Article 312 of TFEU

EU own resources and contributions from Member States (based on GNI and VAT)

Mostly grants (depending on the specific programme)

Adopted by the European Parliament and the Council, on a proposal from the Commission

Around EUR 148bn per year (2019 figure; EU 28 level of payments)

All EU Member States (a variety of final beneficiaries)

BICC + CRI (RSP + BICC governance

(proposals)

RSP: Arts. 175/3 and 197/2 TFEU

BICC governance: Arts. 136/1/b and 121/6 of TFUE

MFF spending programme based on the EU budget + possible inter-governmental agreement for BICC

Grants

Eurogroup

and

Council (qualified majority)

To be decided in MFF 2021-2027

BICC - Euro Area (EA) Member States

CRI - non EA Member States

SURE (proposal)

Art. 122 TFEU

Borrowings by Commission, guaranteed by the EU budget and back-guaranteed by EU Member States

Loans

Council (qualified majority)

100bn

 

All Member States

EFSI (InvestEU)

Articles 172 and 173, the third paragraph of Article 175 and Article 182(1) of TFEU

Borrowing by EIB based on guarantees by the EU budget and EIB and EIF capital

Loans

EIB + Steering Board, an Investment Committee and a Managing Director

EUR 85.4bn financing approved (EUR 466bn investment mobilised) in 2019

All EU Member States (companies)

EIF

Statute signed by the shareholders

Company owned by EIB, EU and national financial institutions

Borrowing on the markets based on EIF capital (including back-guarantees EU budget)

Equity investment

Board of Directors

EUR 10.1bn used in 2018 (€ 58.9bn leveraged for SMEs)

SMEs in all EU

MFA

Article 212 of TFEU and Joint Declaration by the EP and Council

Borrowings by  Commission guaranteed by the EU budget

Loans and grants

Co-decision procedure

Depending on EU Budget limits

Third countries

BoP Facility

Art 143 TFEU; Council regulation 332/2002

Borrowings by Commission guaranteed by the EU budget

Loans

Council (qualified majority)

EUR 50bn

 

Non-euro area Member States

EFSM

Art 122 TFEU; Council regulation 407/2010

Borrowings by  Commission guaranteed by the margin of EU budget

Loans

Council (qualified majority)

Depending on EU Budget limits (EUR 60bn in 2010)

Euro area Member States

ESM

Intergovernmental agreement based on Art 136 TFEU

International financial institution

Borrowings in international capital markets guaranteed by ESM capital

Loans

ESM Board of Governors

Around EUR 704bn (704 798.7 million)

Euro Area Member States

EFSF (discontinued)

Intergovernmental agreement between EA MS

Company by shares owned by EA MS

Borrowings guaranteed by EA MS on the basis of ECB capital key

Loans

Unanimity of EA Member States

EUR 440bn

Euro Area Member States

Greek Loan Facility (discontinued)

Intergovernmental agreement between EA MS

Each MS funding

Loans

Unanimity of participating EA Member States

EUR 80bn (minus EUR 2,7 bn)

Greece (created in 9 May 2010)

 

About the authors

Kajus Hagelstam prior to working in the Economic Governance Support Unit of the European Parliament (EP), Kajus worked as a civil servant in the Secretariat of the Economic and Monetary Committee of the EP, in the Permanent Representation of Finland to the EU, in the European Commission and in the Ministry of Finance of Finland. He studied economics at the University of Helsinki.

Alice Zoppè before working at the Economic Governance Support Unit of the European Parliament, Alice worked in the Policy Department for economic, employment and scientific policies of the EP, at the DG Economic and Finance of the European Commission and at Eurostat. In her previous life (1990-2000), she was faculty member at Trento University (Italy) and Neuchatel University (CH). She graduated in Political science and holds a PhD in Statistics.

Cristina Sofia Dias joined the European Parliament in September 2018. Between 1995 and 2018 she held various positions in the Portuguese securities regulator, CMVM, namely as Secretary General. Cristina was Chief of Staff in the Portuguese Finance Ministry from 2012 to 2015. Between 2007 and 2012, she was Financial Attaché in the Portuguese Permanent Representation in Brussels. She graduated in Law (1990-1995), holds a masters in Law (2001) and a post graduation in financial markets (2000).


Disclaimer and Copyright

The content of this document is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. It is addressed to the Members and staff of the EP for their parliamentary work. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. © European Union, 2020. Contact: egov@ep.europa.eu 

1.     The EU own resources ceiling determines the maximum amount of own resources (revenues) in a given year that can be used for EU payments (expenditures) and operations guaranteed by the EU budget. The so-called headroom is the difference between the own resources ceiling and the MFF payment ceiling. The headroom is needed for many purposes, e.g. risks of non-repayment on EU lending, a safety margin in case of an unexpected drop in EU gross national income etc.
2.     Increasing the revenue ceiling requires amending the EU own resources decision (involving a Council decision by unanimity, consultation to the European Parliament and ratification by national parliaments).

SUERF Policy Briefs (SPBs) serve to promote SUERF Members’ economic views and research findings as well as economic policy-oriented analyses. They address topical issues and propose solutions to current economic and financial challenges. SPBs serve to increase the international visibility of SUERF Members’ analyses and research. The views expressed are those of the author(s) and not necessarily those of the institution(s) the author(s).

Editorial Board: Ernest Gnan, Frank Lierman, David T. Llewellyn, Donato Masciandaro, Natacha Valla.

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