Politics, economics and finances: another 7 years in the EU’s integration

Financial, economic as well as political outcomes of the post-summit period will definitely have historic implications for the EU’s integration in the coming seven years, and most probably for several decades to come.    

Last month’s summit’s agreements are still on the agendas among the EU-27 leaders regardless the summer vocation. The outcomes will definitely influence the governance and growth structures in the member states; besides, the agreements have opened some new perspectives for a more active and probably a “slightly different” European integration.

Although the final adoption procedures are still ahead by both the EU legislative authorities (i.e. the Parliament and the Council of Ministers) and the member states, the European integration has turned a new page. An analysis of financial perspectives for a new style EU’s political economy is well-worth reading…

  “Never before” is a key word that is often used in post-summit’s revelations: first, due to some “technicalities” as the summit was expected to last a couple of days (instead it lasted four days); secondly by the substantial outcomes. The latter is really of a historic dimension: a) the leaders finally agreed on a multi-annual budget (with a new “own resources” structure), which reached the biggest ever in the EU’s history amount – over € 1,2 trillion (which is more than 5 percent of the EU-27 GDP; instead of “regular” about 1 percent); and b) the agreed “rescue package”, the so-called “next generation EU’s” recovery fund totaling € 750 bn to support “the states in need”. The latter fund is being divided into two: €390 bn in grants and €360 bn in loans (though in the summit’s official conclusion it is € 312.5 billion).  Thus, in total, the financial injections into a new seven-year stage in the EU’s integration amounts to about gigantic € 2 trillion! 

  And on top of this, it has to be mentioned that all these -enormous in sizes – financial “packages and funds” have been prepared during just a couple of months!

More on the MFF budget in: https://www.integrin.dk/2020/08/03/the-eus-long-term-budget-financial-and-corporate-implications-for-the-states/#more-418

 

From politics to economics: towards a “united theory”

  First of all, we have to keep in mind the EU’s political guidelines being generally adopted by the EU’s institutions every 5-7 years. Thus, presently, there are 6 Commission’s political priorities adopted for the next seven years at the end of 2019, as they are written in the Commission’s webpage (we leave intentionally the original text intact so that the readers can refer to the priorities of interest): 1. A European Green Deal; 2. A Europe fit for the digital age; 3. An economy that works for people; 4. A stronger Europe in the world; 5. Promoting our European way of life; and 6. A new push for European democracy.

Source: https://ec.europa.eu/info/strategy/priorities-2019-2024_en

  Actually, the seventh priority has been added – pandemic-health care efforts – after a widespread covid-19 effect on all walks of life in the EU member states.

  In the political priorities the hierarchy goes from sustainability to digital issues, to economics, to globalization’s effect on EU, to “European values”, and finally – to democracy.  

  Comparing these political priorities’ reflection with the “financing economy’s” issues in the long-term EU’s budget, MFF 2021-27 (below), one can see how different the political and economic priorities actually are…  

  The economic-financial “guidelines” in the new MFF (we are aware that economy and finances go closely together) are strikingly different from the political ones: from the “EU single market” (i.e. EU’s internal economic cooperation), innovation and digital, to cohesion and values; to natural resources and environment, to security and defence, to the “neighbourhood and the world”, and finally – to the EU’s administration.  

  I personally, don’t see much reason for such differences among seemingly “unified” in the EU political, economic and “supporting” financial issues in the EU’s budget priorities; I still think that the all three go hand-in-hand, haven’t they? Isn’t it more feasible to strive for a “unified EU’s political economy” with a sufficient financial support: the European integration is a straight-forward process, which just includes numerous facets of the same doctrine?

  Probably, these are rhetoric questions: politicians don’t want to lose fashionable places in the EU’s headquarters, and economists can’t change the old-style governing structures; besides it is often not in their power…

  

Next generation will pay…

  At the end of April 2020, the European Council tasked the Commission to draw a recovery package for the member states; after about two months of work, the “Next Generation EU-plan” package–dubbed NGEU- was presented for approval at the July’s summit.

  During four long days and nights – more than 90 hours – the EU-27 leaders agreed on a “generation’s plan” of measures, alongside an important for this plan another focal “pact”, i.e. the MFF-budget; both agreements have signaled to the states and the world that Europe is capable of taking prompt and adequate actions.

  The NGEU financing under the “Recovery and Resilience Facility, RRF”, as the main pact’s component, amounts to € 672.5 billion (increased to 750): with € 390 billion for loans (reduced to 350) and € 312.5 billion for grants (later increased to 360). The increased amounts included such additional programs as ReactEU, Horizon Europe, InvestEU, Rural Development, Just Transition Fund and RescEU, which added to the ultimate borrowing about € 78 billion making the whole NGEU € 750 billion (specific figures are seen below). About 70 percent of the grants provided by the RRF shall be committed during the first ten years 2021-22; remaining 30 percent shall be fully committed by the end of 2023.

Source: https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf

 

  The EU’s borrowing in the global financial markets will last until 2026 and the repayment shall be scheduled until the end of 2058. But the borrowing shall be repaid (though with a small interest rate) over a longer period of time, approximately between 2028- 2058, hence the name – the “next generation EU”!

 

 Besides, there are several other EU programs that are closely connected to the “generation’s plan” in the so-called outside the MFFsources, which include venture capital, international donors and support from the non-EU members, e.g. EEA. The most vital for seven years programs (see below) will totaled to over € 22,3 bn; hence the aggregate “injections” into the EU’s “generational survival”, i.e. MFF + Rescue package + outside MFF programs could come to about two trillions euros!  

 

  At the same time, annual GNI-based contributions for some wealthy states (Denmark, Germany, the Netherlands, Austria and Sweden) will be reduced by the following amounts: Denmark by € 377 million, Germany by € 3, 671 million, the Netherlands with € 1,921 million, Austria with € 565 million, and Sweden with € 1,069 million. Is it a “carrot” to silence the “frugal-states”, one wonders? However, these “gross reductions” shall be financed by all other EU member states according to their GNI and consequently, “the generation” …

 

MFF 2021-27: seven major directions   

  The multi-annual budget, MFF for 2021-27 is an extremely complicated issue, with several cross-sectoral interactions: thus, in the present analysis we’ve concentrated only on most vital and aggregate MFF’s “headings” visualizing perspective financial allocations for attention to the states’ decision-makers.

  These aggregate figures are important to know for all the national governance bodies, as the figures depict the main national growth directions that can be wholly or partially financed from the MFF. Thus, e.g. the “technical support instruments” will improve the EU states’ administrative capacity to design, develop and implement reforms; the EU’s financial support of € 767 million is available for all states.

 

The MFF for the period 2021-2027 will have the following structure:

1 “Single Market, Innovation and Digital”: about € 133-150 bn (or about € 19 bn/per year); for Horizon Europe program during this period will be about € 76 bn with a special digital program of € 6,7 bn;

Note: final appropriations can be different due to cross-sectoral interconnections among various headings, i.e. could be seen in a “complex table” below.

Research and innovation, R&I: Particular attention will be paid to the coordination of activities funded through Horizon Europe and other EU’s programs, including through cohesion policy’s instruments. In this regard, important synergies will be needed between Horizon Europe (with €76 bn for 7 years) and the EU’s structural funds for the purpose of “sharing excellence”, thereby enhancing regional R&I capacity and the ability of all regions to develop clusters of excellence. Reference to: Summit conclusions, p. 18

 

2 “Cohesion, Resilience and Values” (which includes a sub-heading for economic, social and territorial cohesion and a sub-heading for resilience and values): € 377, 7 -427 bn – from € 50 to 59 bn yearly, of which 330, 2 bn will be allocated for “Economic, social and territorial cohesion” and 47, 5 bn for “Resilience and Values”;

2.1. E.g. “Connecting Europe facility”, CEF – € 28, 4 bn (21,3 bn for transport, € 5,1 bn for energy and € 1,8 bn for digital issues); The amount of support from the Cohesion Fund to be transferred to the CEF will be € 10 bn; thus the Cohesion Fund allocations of each EU state will be reduced accordingly.

  

The main objective of Cohesion Policy is to develop and pursue actions leading to the strengthening of economic, social and territorial cohesion by contributing to reducing disparities between the levels of development of the various regions and the backwardness of the least favored regions. Through the European Regional Development Fund (ERDF), the European Social Fund Plus (ESF+) and the Cohesion Fund (CF), it will pursue the following goals: “Investment for jobs and growth” in states and regions, to be supported by all the Funds; and “European territorial cooperation”, to be supported by the ERDF. Cohesion policy will play an increasingly important role in supporting the ongoing economic reform process by the states by strengthening the link to the European Semester. The Commission and the states shall take into account relevant country-specific recommendations during the entire process.

Resources for the “Investment for jobs and growth” will amount to € 322,3 bn and will be divided as follows: a) € 202,3 bn for less developed regions; b) € 47,8 bn for transition regions; c) € 27,2 bn for more developed regions; d) € 42, 5 bn for the states supported by the Cohesion Fund; e) about € 2bn as additional funding for the outermost (art. 349 TFEU); and f) € 500 million for interregional innovations. The amount of resources available for the ESF+ under the “Investment for jobs and growth” will be about € 87 bn; € 175 million of the ESF+ resources for the “Investment for jobs and growth” goal will be allocated for transnational cooperation supporting innovative solutions under direct or indirect management.

Note: Types of regions defined in the following way: a) less developed regions, whose GDP per capita is less than 75% of the average GDP of the EU-27; b) transition regions, whose GDP per capita is between 75% and 100% of the average GDP of the EU-27; c) more developed regions, whose GDP per capita is above 100% of the average GDP of the EU-27.

  Resources for the “European territorial cooperation” (Interreg) will amount to about € 8 bn and will be distributed as follows: a) € 5, 7 bn for maritime and land cross-border cooperation; b) € 1, 5 bn for transnational cooperation; c) € 500 million for interregional cooperation; and d) € 271 million for outermost regions’ cooperation.

 The ESF+ will provide comprehensive support to youth employment, up- and re-skilling of workers, social inclusion and poverty reduction, including child poverty, by merging existing programmes: the European Social Fund, the Youth Employment Initiative, the Fund for European Aid to the Most Deprived and the Employment and Social Innovation program. Total financial envelope for the ESF+ for the period 2021-27 will be about € 88 bn, of which: € 676 million for the ESF+ under direct and indirect management; € 87, 3 bn for the ESF+ under shared management in the Investment for Jobs and Growth goal. The shared management strand will remain under a sub-heading together with the ERDF and the Cohesion Fund.

   In the “resilience” program: there is financial support in the RescEU program of € 1, 1 bn; the EU-wide “health program” shall be established with about € 1,6 bn financing. Besides, the financial envelope for the Creative Europe program will be € 1, 6 bn and the financial envelope for the Justice, Rights and Values program will be € 841 million.

 

3. “Natural Resources and Environment”: the heading consists of agriculture and maritime policy, as well as environment and climate action with the budget of about € 356, 4 – 401 bn, of which € 258,6 bn will be allocated to market related expenditure and direct payments (about € 35-38 bn per year). Direct payments under regulation 1307/2013 and under the CAP Strategic Plan Regulation will be about € 249 bn. About 40 percent of CAP expenditures shall go to climate actions.

Notes: Direct payment: all EU states will have a “common level” of at least € 200 per hectare in 2022 and all states shall reach at least € 215 per hectare by 2027.

Rural development support: The allocation for EAFRD for the period 2021-27 is about € 78 bn; EU states facing particular structural challenges in their agriculture sector: e.g. in the Baltic Sea region Germany will get € 650 million and Finland € 400 million.

 

In order to address social and economic consequences of reaching EU climate neutrality goal by 2050, two funds will be created: Just Transition Mechanism and Just Transition Fund. Thus, allocation for the Just Transition Fund for 2021-27 will be € 7, 5 bn. Access to the Just Transition Fund will be limited to 50% of national allocation for the EU states that have not yet committed to implement the objective of achieving a climate-neutral EU by 2050, in line with the objectives of the Paris Agreement, the other 50% being made available upon acceptance of such a commitment.

 

4. “Migration and Border Management”; the “heading” includes effective control of external borders for ensuring more efficient migration management and a high level of internal security while safeguarding the principle of free movement of persons and goods within the Union. Programs under this heading will help the member states to deliver on a comprehensive approach to migration effectively. Appropriations for this heading will be about € 22, 7 -26 bn, i.e. € 2,3 -3,7 bn per year. Asylum and Migration Fund is established with € 8, 7 bn for 2021-27. The allocation for the Integrated Border Management Fund for the period 2021-2027 is € 5,5 bn, as well as a reinforced European Border and Coast Guard Agency (EBCGA), with a total envelope of € 5 148 million.

 

5. “Security and Defence”: the level of commitments for this heading will be about € 13,2-15 bn, i.e. € 1,2 – 2,2 bn per year. It will support the Internal Security Fund (with € 1,7 bn), which will contribute to ensuring a high level of security in the Union in particular by preventing and tackling terrorism and radicalization, serious and organised crime and cybercrime as well as by assisting and protecting victims of crime. It will also finance actions dedicated to external migration management in relation to combating illegal migration and trafficking of human beings.

For supporting EU nuclear safety, a specific support will be granted to the decommissioning of the following nuclear power plants: – € 490 million to Ignalina in Lithuania, with an EU contribution rate of 86%; – € 50 million to Bohunice in Slovakia, with a maximum EU contribution rate of 50%; – € 57 million to Kozloduy in Bulgaria with the same maximum EU contribution. In addition, € 448 million for nuclear safety and the decommissioning of the EU’s own installations will be provided.

Major financing from this heading will include a financial contribution of about € 7 bn (about half of the whole commitment in this heading) for the European Defence Fund (EDF) aimed at fostering competitiveness, efficiency and innovation capacity of the European defence technological and industrial base supporting collaborative actions and cross-border cooperation throughout the Union, at each stage of the industrial cycle of defence products and technologies. The programme design will ensure participation of defence industries of all sizes, including SMEs and mid-caps, across the Union, thus strengthening and improving defence supply and value chains.

A financial contribution of € 1, 5 bn will be made to the Connecting Europe Facility to adapt the TEN-T networks to military mobility needs.

 

6. “Neighbourhood and the World”: allocations in this heading will finance the Union’s external action and assistance for countries preparing for accession to the Union. Stronger coordination between external and internal policies will ensure proper implementation of the 2030 Agenda for Sustainable Development, the Paris Climate Agreement, the EU Global Strategy, the European Consensus on Development, the European Neighbourhood Policy, as well as the external dimension of migration, including the Partnership Framework with third countries on migration.

A modernized external policy will demonstrate EU added value by increasing effectiveness and visibility and making the EU and the states better equipped to pursue their goals and values globally.  

Appropriations for this heading will be about € 98, 4 – 110 bn, i.e. about € 13-15 bn yearly; the allocation for the Instrument for Pre-Accession, supporting beneficiaries on their path to fulfilling the accession criteria, will be € 12, 5 bn.

 

7. “Public Administration”: professional European Public Administration, recruited on the broadest possible geographical basis, plays a crucial role in supporting the Union’s efforts to implement policies and programs in the common European interest with improved effectiveness. Appropriations for this heading, which includes also administrative expenditure of the EU’s institutions and European schools and pensions, will be about € 73-82 bn or about € 10 bn per year. Administrative expenditure of the EU institutions will be about € 7-8 bn per year.

 

Complex table: total appropriations for 2021-27, in €:

  1. Single Market, Innovation and Digital: about 150 bn.
  2. Cohesion, Resilience and Values: about 427; including two sub-headings: Economic, social and territorial cohesion – with 372, 6 bn and Resilience and Values – 54.1 bn.
  3. Natural Resources and Environment: about 401 bn; including payments for “market related expenditure and direct payments” –291 bn.
  4. Migration and Border Management: about 26 bn.
  5. Security and Defence: about 15 bn.
  6. Neighbourhood and the world: 110 bn.
  7. European Public Administration: 82 bn.

Total commitment appropriations: 1.210.894

 

Besides, there are several programs in the so-called “outside the MFF” sources, which include venture capital, international donors and support from the non-EU members, e.g. EEA. Appropriations are envisaged for the following programs in this heading for 2021-27, in mln euros:: = Solidarity and Emergency Aid Reserve: 9.467; = European Globalisation Adjustment Fund (EGF): 1.467; = Brexit Adjustment Reserve: 5.306; and = Flexibility instrument: 6.091.

 Total appropriations “outside MFF” – 22.331;

Total: MFF + Outside the MFF programs: 1.232,3 mln.

 

Tough decisions at tough time…

Remarkable enough, that above mentioned huge financial resources have been agreed on during a dramatic period in the Union’s socio-economic development: GDP for all EU-27 has fallen by about 12 percent already during the second quarter of 2020, which is “by far the sharpest declines observed since 1995”, acknowledged the EU’s statistical agency recently.

“These were by far the sharpest declines observed since time series started in 1995,” Eurostat indicated in a statement, flagging that the April-June period was “still marked by COVID-19 containment measures in most member states.”

 

Table: The general plan for MFF’s implementation  

= May 2020: Commission proposed a revised Multiannual Financial Framework (MFF) 2021-2027, a draft of “Own Resources” decision and some sectoral legislation;

= July 2020: European Council: Political agreement on MFF for 2021-2027 and Own Resources;

= During summer 2020: Consultation with the European Parliament Own Resources;

= Autumn 2020: European Council: final consultations…

= December 2020: Adoption of the revised MFF 2021-2027 with the European Parliament’s consent; adoption of the Own Resources Decision followed by the ratification by all EU states in line with their constitutional requirements;

= January 2021: The start of the MFF 2021-2027 implementation work.

 

The amounts under the “new generation EU”, NGEU are divided among the following programs: = Recovery and Resilience Facility (RRF) as a NGEU’s main part with € 672.5 billion: of which loans € 360 billion and grants € 312.5 billion.

Plus additional programs: = ReactEU: € 47.5 billion; = Horizon Europe: € 5 billion; = InvestEU: € 5.6 billion; = Rural Development: € 7.5 billion; = Just Transition Fund (JTF): € 10 billion; = RescEU: € 1.9 billion. Total: € 750 billion.

About 70 percent of the grants provided by the RRF shall be committed during 2021-22; remaining 30 percent shall be fully committed by the end of 2023.

Source: https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf

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