Recovery assistance to the EU states: first beneficiaries

The REACT-EU (Recovery Assistance for Cohesion and the Territories of Europe) package is one of the largest programs under new Next Generation EU financial instrument in the amount of € 47.5 billion. The package is additional to the EU’s cohesion allocations for 2021-27, making the EU Structural and Investment Funds the highest single-policy grant instrument in the EU budget. The member states can have additional support for the digital-SDGs’ transformations fully covered by the EU; two first examples are already mentioned with some recommendations for the Baltic States and Latvia.

The EU’s recovery assistance through REACT-EU regulation is aimed at the crisis-repair-recovery measures delivered through the Coronavirus Response Investment Initiative and the Coronavirus Response Investment Plan: both constitute supporting instruments to the national perspective recovery plan. These additional financial and technical resources should be used in the member states only for development projects that foster pandemic crisis repair capacities and support investments in growth strategies contributing to the sustainable, digital and resilient recovery of the national economies.

 

Implementing process

Resources to provide assistance to perspective grow agendas and new political economies are regarded generous and flexible; however, the implementing conditions for these additional financial resources are subject to certain requirements. As to the generous’ component, no national co-financing is required for this funding: it means that the EU will provide fill support for the states’ initiatives.  

Secondly, a high level of pre-financing is proposed to ensure that the lack of liquidity does not impose a bottleneck to the quick EU’s roll-out support. The EU states will be encouraged to use this additional high pre-financing to provide advance payments at the initial stages of the national recovery plans. Thirdly, the financial resources can be spent in any EU’s regions and the scope of support is wide with the necessary transfers among ERDF and ESF programs.  

Fourth, there is no ex-ante conditionality or thematic concentration attached to the EU financing, except that the national recovery planning is within the EU’s political priorities.

 

The European allocation methodology for this funding takes full account of the economic and social impact of the crisis in the member states, reflecting the GDPs drop, rise of unemployment including among young people, as well as the relative wealth of the member states.

The allocation’s partnership principle requires close EU institutions’ cooperation with regional and local authorities for the programming and implementation of these financial resources; similarly, additional focus on the less developed regions is applied which need more support and developmental assistance.

These additional financial resources will be distributed to the EU states during two years (2021-2022) from the European Regional Development Fund (ERDF), European Social Fund (ESF), European Fund for Aid to the Most Deprived (FEAD) and the Youth Employment Initiative (YEI)’ the final eligibility date for these expenditures is fixed for the end of December 2023.  

For example, from the ERDF, the additional resources shall primarily be used to support investment in products and services for health services and to provide support in the form of working capital or investment support to SMEs. In order to create the right conditions for recovery, it is possible to support investments contributing to the transition towards a digital and green economy as well as in infrastructure providing basic services to citizens, or economic measures in the regions that are most dependent on sectors most affected by the crisis (e.g. tourism, culture, hospitality services, etc.).

From the ESF, the additional resources shall primarily be used to support job maintenance, including through short-time work schemes and support to self-employed. Additional resources shall also support job creation; in particular for people in vulnerable situations, youth employment measures, skills development, in particular to support the twin green-digital transitions, and enhanced access to social services of general interest.  

 

Note: Regulation (EU) 2020/2221 of the European Parliament and of the Council of 23 December 2020 amending Regulation (EU) No 1303/2013 as regards additional resources and implementing arrangements to provide assistance for fostering crisis repair in the context of the COVID-19 pandemic and its social consequences and for preparing a green, digital and resilient recovery of the economy. The REACT-EU Regulation is available in all EU languages in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32020R2221&qid=1611824380100

More on REACT-EU facilities (Recovery Assistance for Cohesion and the Territories of Europe) in: https://ec.europa.eu/regional_policy/en/newsroom/coronavirus-response/react-eu

 

Two first beneficiaries

Funding available for investments of about €262 million for the Netherlands and Austria has become the first EU countries to make use of REACT-EU. Commissioner for Cohesion and Reforms, Elisa Ferreira underlined in memorizing the occasion that the resources under REACT-EU are of crucial importance for the recovery of the national economies. She called the member states to complete their internal procedures for the approval of the Own Resources Decision so that on one side, the EU can start borrowing, and on another sides, the states can receive needed resources.

Thus, the states have to move as quickly as possible with their submissions so that additional funding can start flowing for a green, digital and cohesive recovery.

See, e.g. budget allocations in 2021: https://ec.europa.eu/info/sites/info/files/about_the_european_commission/eu_budget/react-eu_allocations_2021_2.pdf

  

For example, in the Netherlands, the three projects are available for the EU financing to facilitate investments in the green and digital transition contributing to the resilience of the regional economy in North, East and South Netherlands. This is in accordance with the REACT-EU objectives and with the 2020 country specific recommendations.

General link: https://ec.europa.eu/info/publications/2020-european-semester-country-specific-recommendations-commission-recommendations_en 

 

Baltic States and Latvian example  

There are, of course, some limits to the EU’s financial support for the member states’ assistance: thus, for Estonia (in 2021), it is € 178 mln, for Latvia – € 211 and for Lithuania – € 275 mln.    

For example, the 2020 country report for Latvia (published on 26 February 2020) assessed Latvia’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019, the follow-up given to the recommendations adopted in previous years and Latvia’s progress towards its national European-wide 2020 targets.

On 30 April 2020, Latvia submitted its 2020 National Reform Program and its 2020 Stability Program; in order to take account of their interlinkages, the two programs have been assessed at the same time. In its 2020 Stability Programme, the Latvian government plans the headline balance to deteriorate from a deficit of 0,2% of GDP in 2019 to 9,4% of GDP in 2020. The government deficit is projected to decline to 5,0% in 2021 and to 2,7% of GDP by 2023, under unchanged policies.

After decreasing to 36,9% of GDP in 2019, the general government debt-to-GDP ratio is expected to peak at around 53% in 2022, based on the 2020 Stability Programme; the macroeconomic and fiscal outlook is affected by high uncertainty due to pandemic. Based on the Commission 2020 spring forecast under unchanged policies, Latvia’s general government balance is forecast at -7,3% of GDP in 2020 and -4,5% in 2021. This reflects a broadly similar effect of the stimulus measures as in the Stability Programme, but the drop in employment is projected to be lower and automatic stabilisers on the expenditure side are also assumed to be lower. Thus, the general government debt ratio is projected to remain below 60% of GDP in 2020 and 2021.

In response to the crisis, Latvia developed a comprehensive fiscal and economic policy response to the crisis. The authorities have targeted the response in three directions: a) support to workers, b) support to businesses, and c) support to the hardest-hit economic sectors.

Labour policy measures, aimed at maintaining employment and strengthening the social safety net include inter alia salary subsidies of up to 75% of a person’s gross wage, coverage of sick leave if a worker is diagnosed with COVID-19 or in quarantine, and extension of unemployment benefits. Support to businesses, facing temporary difficulties has aimed to extend liquidity to viable firms and to quickly boost supply of vital goods and services.

Latvia has taken measures to extend income support for workers and to avoid dismissals during the emergency situation. However, the support is limited in coverage and adequacy, mainly because it is dependent on social contribution payments and restrictive eligibility criteria; the scheme does not allow for partial idle time. A more gradual transition from income support to work income would allow for greater labour market flexibility during the downtime period and the economic recovery.

The European Commission agreed that additional efforts are needed to improve the adequacy, duration and coverage of the social safety net for all. However, these efforts are constrained by the low tax revenue as a share of GDP. Despite some slight improvement, the adequacy of the guaranteed minimum income, of minimum pensions and of income support for persons with disabilities remains low.

Latvia has introduced the unemployment aid benefit for the most vulnerable, yet the unemployed are at a high risk of poverty, particularly when the duration of unemployment increases. Coverage gaps in access to social protection, including unemployment insurance, for self-employed and non-standard workers exist could be tackled. While its share is decreasing, undeclared work and envelope wages remain widespread, weakening affected workers’ social protection and increasing occupational risks. Vulnerable groups are likely to face the most difficulties in finding a job again. The integration of employment, education, health and social services and the provision of social services remain low. The share of people facing severe housing deprivation and that of people facing overcrowding are among the highest in the EU, while social housing is scarce.

Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Latvia is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

Providing support to small and medium-sized enterprises to help them quickly develop flexible work and teleworking capacities may significantly help mitigate the impact of the crisis. Low registration with public employment services and the low level of involvement of the unemployed in active labour market measures are of particular concern. The delivery and composition of active labour market measures have to be reinforced and adapted to reduce the duration of the unemployment spells and facilitate transitions back to work. Equipping people with the right skills is even more important to improve the resilience of the labour force in times of an economic downturn. Effective and easily accessible adult learning, reskilling and upskilling measures, together with the provision of social services and mobility support, could provide more people with the skills necessary for the labour market. Digital skills also need to be improved as only 43% of Latvians have basic or above basic digital skills. The COVID-19 emergency also highlighted the need to develop quality digital education and training and to ensure equal access to all learners. Strengthening the capacity of social partners is also important to ensure their meaningful and timely involvement in the COVID-19 crisis response and recovery.

A sizable liquidity support scheme was quickly set up and deployed through the national development institution, Altum. It has helped restructure loan repayment schedules for businesses and provided liquidity support through new loans. At the same time, most restructurings of bank loans take place without involvement of state guarantees. However, the eligibility conditions for state guarantees are relatively strict. As a result, there is a risk that smaller companies with weaker financial position or overdue tax payments will not receive support. Restaurants and hotels, which are among the hardest hit industries in this crisis, experience difficulties accessing liquidity because of their weak collateral and financial position. At the same time, it is important to sustain the resilience of the banking sector.

To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Policies to support the country’s digital transformation and green transition should take into account the significant regional disparities.

Most urban areas in Latvia have excellent digital infrastructure, but fixed broadband coverage in rural areas, especially last-mile connections, is low. Continued and strengthened efforts to deploy very high-speed broadband will help further improve the digital infrastructure. In order to tackle the challenges posed by the transition to a climate neutral economy, investments are needed to diversify the economy and make it more modern and competitive, including by strengthening investment in research and innovation and human capital and to alleviate the socio-economic costs of the transition.

Latvia’s environmental sustainability rests on making progress towards improved energy efficiency, implementing the national energy and climate plan, including in particular in transport and buildings, and mainstreaming environmental sustainability considerations in other economic sectors, notably in agriculture and forestry.

Improving intermodal transport infrastructure within and around Riga would both facilitate labour mobility and help curb growing energy consumption from passenger cars. Furthermore, the Rail Baltica project and the energy interconnection projects are Latvia’s key investment priorities aimed at improving its safety and integration into the single market. 

Making further investments in renewable energy, in particular wind power, and promoting the transition to a circular economy with significantly higher recycling rates can also improve both environmental and economic outcomes and help achieve climate change mitigation targets.

The programming of the Just Transition Fund for 2021-2027 could help Latvia address some of the challenges posed by the transition to a climate neutral economy that would allow Latvia to make the best use of that fund.

 

Commission’s four main recommendations for Latvia

  1. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and accessibility of the health system including by providing additional human and financial resources.
  2. Provide adequate income support to the groups most affected by the crisis and strengthen the social safety net. Mitigate the employment impact of the crisis, including through flexible working arrangements, active labour market measures and skills.
  3. Ensure access to liquidity support by firms and in particular small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on research and innovation, clean and efficient production and use of energy, sustainable transport and digital infrastructures.
  4. Continue progress on the anti-money laundering framework.

More on Commission recommendation for Latvia (20.05.2020) in:

https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1591720698631&uri=CELEX%3A52020DC0514

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