A vital part of the European multiannual financial framework (MFF) for 2021-27 has been finally approved; the other part aimed at supporting recovery and resilience efforts in the member states, (i.e. the NextGenerationEU facility, NGEU) is expected to be finilised during last days in 2020. Thus the whole set of the EU’s financial measures will be ready to help both to rebuild a post-COVID Europe and provide a solid ground for transition to the greener, more digital, more resilient and sustainable states’ economies better fit for the present and future challenges.
There is double meaning in the present long-term financial programs and those aimed to support recovery and resilience in the EU member states: in the financial sense the MFF of €1.074 bn plus €750bn from the NGEU represent the biggest in the European integration history a set of measures to assist the member states growth.
It has to be kept in mind that the MFF is working together with a finalised NextGenerationEU facility (NGEU), the temporary recovery instrument aimed at supporting European recovery and resilience growth. At the final approval, the total financial package of about €1.8 trillion will be the largest package ever financed through the EU budget.
The relevant legislation in the NGEU includes several sectoral acts concerning: Recovery and Resilience Facility, REACT-EU, Just Transition Fund, Rural Development, InvestEU, rescEU and Horizon Europe. For example, for the Recovery and Resilience Facility, it is also necessary for EU member states to approve and present their national recovery and resilience plans. On the other hand, the Commission needs to be able to start borrowing on the capital markets with a view to disbursing the funds under these instruments. To that end, the MFF’s “own resources” component needs to be approved by the EU-27 states in accordance with their constitutional requirements.
Recovery and resilience’s financial components
In order to finance the NGEU, the Commission will borrow about €750 bn on the global financial markets on behalf of the Union; this sum will cover the expected “headroom”, i.e. the difference between the MFF “own resources’ ceiling” and the actual spending.
More on “own resources” see: https://www.integrin.dk/2020/08/03/the-eus-long-term-budget-financial-and-corporate-implications-for-the-states/
Presently, a temporary increase of the “own resources, OR” ceiling is foreseen with the maximum amount of funds that the Union can request from the member states to cover its financial obligations by 0.6 percentage points, as the main part of the OR is the states’ share of contribution according to their GDP size. This increase will be limited in time and will only be used in the context of the recovery from the coronavirus pandemic; the increase will expire when all funds have been repaid and all liabilities have ceased to exist. This increase will come on top of the permanent own resources ceiling – 1.4 percent of the EU gross national income. “The difference between the OR ceiling and the payment ceiling under the MFF plus the amount of other revenue (e.g. taxes on the salaries of EU staff and competition fines) is referred to as the headroom”.
The new “own resources” include Commission’s proposals on a carbon border adjustment mechanism and on a digital levy by June 2021, with a view to their introduction at the latest by 1 January 2023. The Commission will also review the EU Emissions Trading System, ETS in spring 2021, including its possible extension to aviation and maritime; the own resource based on the ETS will be effective from June 2021.
In addition, the Commission would include in the new own resources a financial transaction tax and a separate financial contribution linked to the corporate sector or a new common corporate tax base; the Commission will present relevant proposals by June 2024.
Three main MFF priorities
- For the first time ever, the new types of “reinforced” priorities have been included in the MFF which occupy about one-third of the total budget. Thus two main budget positions: i.e. a) funds for the natural resources usage, agriculture and environment, as well as b) funds for economic, social and territorial cohesion make each for about 30 percent of the total. Each of these two main directions in financial support consists of over €400 billion.
- More than half of the total amount of the MFF and NextGenerationEU funds will be used to support the transition and modernisation in the states through policies that include research and innovation (via Horizon Europe); through fair climate and digital transitions (via the Just Transition Fund and the Digital Europe program); through the national recovery and resilience programs (via the Recovery and Resilience Facility, rescEU, as well as through the new health program.
- Finally, about one-third of the MFF and the NextGenerationEU facility will be spent on combating climate change programs, biodiversity protection and gender-related issues, which is the highest share ever of the largest European MFF ever.
Effects for the member states
In order for each member state to successfully progress in resilience and recovery efforts, which will be financed by NextGenerationEU, the Union will address the economic and social consequences of the coronavirus crisis in close cooperation with the states. Therefore:
= Within the MFF, it will include data on cohesion policy allocations, as well as on allocations under the Common Agricultural Policy with both direct payments and the European agricultural guarantee fund.
= Within NextGenerationEU, the Commission has published the grants allocation for all EU states under the Recovery and Resilience Facility, based on the methodology outlined in the European Council conclusions in July 2020.
In the loans, the allocations will depend on the states’ demand: as a rule, the maximum volume of the loans for each state will not exceed 6.8% of its GNI. Five Member States will benefit from a gross reduction in their annual Gross National Income-based contribution for the period 2021-2027. The Commission has also published the country allocations under REACT-EU and the Just Transition Fund. On grants allocation see:
As for the rural development component under NextGenerationEU, the money would be distributed across EU-27 states in proportion to the 2021-2027 allocation as foreseen in the May 2018 Commission proposal.
Main sources of revenue to the EU budget
The revenue sources of the EU budget have remained the same over the last decades: customs duties, contributions from the member states based on value added tax (VAT) and those based on gross national income (GNI) with the following modifications:
= the own resource based on custom duties (traditional own resources) is being modified in line with the European Council conclusions of July 2021; the member states shall retain, by way of collection costs, 25 percent of the amounts collected by them.
= the Value Added Tax-based own resource is being simplified, with a uniform rate of 0.3 percent which will apply to the VAT bases of all EU-27 states in accordance with a refined methodology.
= new national contribution based on non-recycled plastic packaging waste: the new own resource will represent a national contribution calculated on the weight of non-recycled plastic packaging waste with a call rate of €0.80 per kilogram. In order to avoid an excessively regressive impact, the lump sum reductions will be applied to contributions of the member states with a GNI per capita in 2017 below the EU average.
Making the MFF functional
In order for the European Commission to start administering the available funds under the MFF, two steps have to be performed: on one hand, the sector-specific legislation for the different programs under the MFF shall be adopted; on the other hand, the adoption of the annual budget for 2021(and annual budgets for the other years up to 2027, consequently) needs to be finalised.
For the most sector-specific legislation preliminary and/or final agreements between the European Parliament and the Council have already been reached.
As to the annual budget, the Commission is already working hand in hand with beneficiaries to approve commitments of the funds already as of 1 January 2021; the agreement is for commitments of €164 billion, and payments of €166 billion, which is currently being finalised by the European Parliament and the Council.
More information in the following Commission’s website: MFF website