An EU Recovery Fund: How to square the circle?

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

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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