Saturday

13th Aug 2022

What happens now to the EU's post-Covid recovery fund?

  • Last December saw intense negoations among EU leaders on the recovery financing and the long-term EU budget (Photo: Council of the European Union)

The wheels have started to turn in the EU machinery to get the €800bn recovery package - designed to mitigate the economic fallout from the pandemic - rolling.

But it will take time before member states' budgets receive the first euros, at the start of the summer at best, almost a year after EU leaders agreed to issue joint debts to finance the continent's recovery.

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The EU Commission has started to receive the national plans that underpin the recovery financing, but clashes both between capitals and the EU executive and among member states' governments are expected to surface.

As the EU Commission gears up to scrutinise EU government plans, EUobserver takes a look at how the recovery policy and politics will shape the next months.

The plans

The commission has received a total of 14 recovery plans as of Tuesday (4 May) on what kind of reforms the money will be used for.

Belgium, Denmark, Germany, Greece, Spain, France, Italy, Latvia, Luxembourg, Austria, Poland, Portugal, Slovakia, and Slovenia have put forward their programs.

As the soft deadline of the end of April passed, the rest of the EU governments are expected to submit their plans in the next weeks.

Thu Nguyen, policy fellow at the Berlin-based Jacques Delors Centre, said it was not a "concern or a very big surprise" that not all member states had submitted their plans by the end of April.

Out of the 14 countries that did submit their programmes, four have opted for loans available under the recovery fund besides the non-repayable grants, according to the commission.

Member states can decide until the end of August 2023 if they still want to take the loans available to them, but then they will have to submit a revised national plan to justify the increased expenditure.

Nevertheless, the loans program under the recovery fund seems more attractive to member states than the €240bn available under the European Stability Mechanism (ESM), the financial institution set up to help euro area countries in financial distress.

"It has worked better than the ESM loan. The bad memories of the euro crisis that is attached to the ESM, and the political reputation attached to an ESM loan from the previous crisis is something the recovery fund does not have," Nguyen said.

Commission scrutiny

The commission has two months to recommend to the council of member states that the plans be approved.

The commission will assess the plans based on 11 criteria, including an objective to dedicate at least 37 percent of investments to support climate objectives, and 20 percent to the digital transition.

If the commission does not think the reform and expenditure plans live up to what was agreed, it could lock horns with EU capitals over the details of the schemes.

"The commission wants member states to get the money, and the fund to be a success. At the same time in order for the fund to be a success and the commission to be credible, it must be quite strict on the criteria and diligent in the assessment," Nguyen said

"I would not exclude that there will be criticism or request for changes. For the commission to be a credible actor in this instrument, it needs to be strict on rules and criteria. The most important for the commission is to go deep into the assessment to make sure member states only receive the money where they do fulfil the criteria," she added.

Peer review

One of the key demands of the so-called frugal countries, which are net payers into the EU budget, last year during the gruelling negotiations over the recovery fund was to have member states also check each others' reform plans before they were signed off.

The frugals' demand signaled swaying trust in the commission, which is seen by those fiscally conservative countries to be indulgent with member states that have high debt, but have lagged behind in implementing reforms, such as Italy, for instance.

The frugals wanted to keep a close eye on southern and central European member states in case they think money is misused.

After the commission checks the plans, it transposes them to legal texts and makes a funding recommendation to the member states, whose majority needs to approve it.

But while some EU governments might want tougher scrutiny, it is unlikely they would clog the process.

"Several member states need to flex their muscles at the same time if they want to stop one country from receiving funds. I am sure some member states will have a very close look at some other member states' plans, but I am not sure anybody interested in entirely stopping the process unless a plan really falls foul of the criteria," Nguyen said.

Any member state can then trigger an "emergency brake" on payments if it thinks that a particular government has not fulfilled its pledges. Deadlines will be attached to the reform plans for member states to deliver on their promises.

At first, an equivalent to 13 percent of each country's total allocated funds can be disbursed.

Own resources

However, EU countries need to take one crucial step before the recovery money becomes a reality.

Before the commission can go to the markets to raise money, all 27 member states need to ratify a legislation called the own resources decision, which increases the guarantees that back up the new debt.

So far, 19 member states have ratified the legislation, but Austria, Estonia, Finland, Hungary, Ireland, the Netherlands, Poland, and Romania still have to do so.

In some cases, the delay pointed to internal issues such as putting together a sufficient parliamentary majority, as in the Netherlands - which has just been through an election - or, recently, in Finland.

In Poland, the governing majority is split on the issue. In Hungary, the ratification will likely be held up until it loses its function as political leverage against the commission.

Orbán and von der Leyen to tussle on EU recovery funds

Viktor Orbán has one key card in his hands: Hungary has still not approved the legislation necessary for the EU Commission to raise money on the markets. However, it will be difficult to hold out on this.

Commission waiting on 10 states for recovery bonds

Budget commissioner Johannes Hahn said Germany, Estonia, Austria, Poland, Hungary, Finland, the Netherlands, Romania, Ireland, and Lithuania have not yet ratified the necessary domestic legislation.

EU leaders agree corona recovery after epic summit

After gruelling five-day talks, EU leaders agreed on €390bn in grants and €360bn in low-interest loans to hardest-hit member states - after much opposition from the Dutch-led 'frugal' bloc of countries.

First recovery euros could be paid out in July

Economy commissioner Paolo Gentoloni said the real challenge is whether member states can stick to their national plans and timelines. However, more than a dozen EU countries still need to ratify legislation to start the funding.

Commission to approve first Covid-recovery plans next week

This means that, following council approval, and after the financing agreement has been signed with EU governments, the first countries can receive pre-financing from the recovery fund, of up to 13 percent of their allocated funds.

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