By Carmen Bell, Account Director
Yesterday’s European Council summit aimed at agreeing a long-term rescue package for the European economy. With the current Multiannual Financial Framework (MFF) ending in December, the Commission discussed with EU leaders how to reshape the next 7-year budget so that it feeds into recovery efforts. This includes a “recovery fund” to combine both the MFF for 2021-27 and an “additional fund” financed by the EU borrowing from the capital markets.
The latter would in practice imply lifting the MFF’s maximum budget cap. This cap – set at 1.2% of the EU’s gross national income – limits EU borrowing and spending capacity, which von der Leyen proposes increasing to 2% to meet recovery needs. Through this, the EU will have more “headroom”, or “firepower” as von der Leyen calls it, to underwrite new borrowing and “unlock massive public and private investment” in Europe of up to EUR 1.5tn.
At first glance, this seems to combine the best of both worlds – utilise a tried and tested instrument that acts as the primary source of investment for Europe (the MFF) and boost the EU’s financial capacity to underwrite the issuance of EU bonds, which add to the Recovery Fund. The concept echoes the Investment Plan for Europe launched by von der Leyen’s predecessor, Jean-Claude Juncker, and the InvestEU programme.
Both are however fraught with problems. MFF Council talks were already stalled for various reasons, from agricultural funds to social cohesion to the rule of law. Central and Eastern Europe, often feeling marginalised by “core” EU priorities, is likely to be protective of cohesion funds. As for joint bonds, there is still no agreement on how the aid flowing from them would be distributed – as grants awarded to Member States (which the South wants) or loans to be repaid (preference of the North)?
It is this distinction between grants and loans that underscores German Chancellor Angela Merkel’s recent support of common debt. The South’s ask of grants – e.g. Spain’s proposal of a “perpetual bond”, where only interest is paid with no maturity date, or France’s proposal for grants issued outside the MFF (i.e. a special purpose vehicle) – are unlikely to pass muster. To quote Merkel, grants “do not belong in the category of what I can agree”. Backed by the frugal Netherlands, Austria, Denmark and Finland, this vision of solidarity is one where the EU, through its collective strength, obtains the money, but where recipients must accept certain conditions and pay it back – a form of “Union financial assistance” that remains faithful to Article 122 of the EU Treaty.
Financial divisions aside, last night’s video summit also gave some insight into the EU policy agenda. Through high-level conclusions, Council President Charles Michel announced a Roadmap to Recovery that reaffirmed commitment to Europe’s green and digital transitions, as well as strategic autonomy through a “dynamic industrial policy”. The transition plans will revisit the circular economy and digital’s potential for improving supply chain resiliency and diversification. Industrial policy will aim at modernising infrastructure, health and crisis management. The financial sector will maintain its investor role, presenting opportunities for capital markets advocates and the FinTech sector.
The Eurogroup’s 9 April rescue package was also approved. On 1 June, three important funding mechanisms relying on loans will be launched: for workers, the Commission’s SURE programme valued at EUR 100bn; for businesses, a guarantee fund through the European Investment Bank aimed at mobilising EUR 200bn; and, for Member States, an extra EUR 240bn through the European Stability Mechanism (2% of the eurozone’s GDP).
What is clear (and perhaps most important for businesses) is that consensus around a recovery plan is forming. The next step is for the Commission to revamp its MFF proposal, which EU leaders may review in May or June. According to Michel, the fund will target “sectors and geographical parts of Europe most affected”, and von der Leyen confirmed a “special focus” on tourism. It will be key for businesses to ensure they are noticed as “most affected”, but also to have the market-based evidence – which the Commission so often likes to see – to back up these claims.