The hidden agenda behind the Recovery and Resilience Facility

Member countries will be continuously assessed for meeting targets and reforms in order to receive their share of the recovery fund. If European governments do not comply with the agreed recovery plan, the purse strings will be tightened.

European governments may be relying heavily on the 750 billion in financial aid from the recovery and resilience package, but its disbursement will not be easy, nor is it guaranteed. This is because the European Commission will implement reforms to continuously assess and monitor investments, with specific targets and milestones as conditions for the provision of the grants and loans from the fund. In case of non-compliance, the money tap will be closed...  

The mechanism of the said fund was the result of a political agreement between the leaders of the EU and the European Parliament, with the aim of helping repair the economic and social damage caused by the coronavirus pandemic. EU Member States have until 30 April to submit to the Commission for approval their National Recovery Plans detailing their reforms and investment projects that will be financed by the recovery fund.

The Recovery and resilience facility is the key financial instrument of the temporary NextGenerationEU Programme which came alongside the decision to provide targeted aid in the EU's long-term budget (Multiannual Financial Framework) for the years 2021-2027, constituting the largest package ever financed from the EU budget totalling €1.8 trillion. 

In particular, NextGenerationEU's 750 billion will be raised from borrowing on the markets (through a joint issuance of EU debt bonds to be repaid by 2058). The bulk of the €672.5 billion will be provided by the fund in the form of non-repayable grants and loans to member countries.

The allocation will be made up of 360 billion in loans and 312.5 billion in grants (338 billion in current prices), causing considerable discontent in countries with high deficits and public debt, such as the 'southern EU countries', which wanted larger amounts of grants. They also resent receiving loans that they will have to repay directly to the EU.  

However, the dissatisfaction is not only limited to the distribution between grants and loans, but also to the pre-allocation of the money that each Member State will receive and the allocation criteria which the European Commission decided on. This is because Italy and Spain, which were hit very hard especially in the first wave of the coronavirus, may be the top two countries in terms of funding, but France and Germany, the most robust and economically powerful countries in the EU, are right behind them. 

NextGenerationEU, apart from the recovery and resilience facility, includes the newest programme called "REACT-EU" – which is essentially the continuation of the first two Coronavirus Response Initiatives (CRII, CRII+) – while additional funds will be drawn from other European programmes such as Horizon 2020, InvestEU, European Agricultural Fund for Rural Development and the Just Transition Fund (JTF). 

All of the money mentioned earlier is also shared among the member states, with Greece for example being able to receive 1.7 billion from REACT-EU, 431 million euros from the Fair Transition Fund and 365.3 million euros from the European Agricultural Fund for Rural Development. Together with the 17.8 billion euros of funding from the recovery fund, this amounts to 20.3 billion euros of funds (€20,311,300,000).

In the same context, adding up the amounts of the 4 recovery instruments of the NextGenerationEU, from which we have drawn our data, Italy could receive up to 81.7 billion, Spain 81.6 billion, France 43.9 billion, Germany 29.5 billion, Poland 28.5 billion, Romania 17.3 billion and Portugal 16 billion.

In addition to the above, member states have additional access to the 360 billion loan pool, with each member state able to raise up to 6.8% of its Gross National Income (GNI) in 2019. As set out in the Regulation establishing the recovery plan, the European Commission signs a loan agreement with each member state, and a special account is created to repay the due capital principal, interest, etc. 

For Greece, the maximum amount of borrowing – which we calculated from Eurostat's databases on population and GNI 2019 for the 27 EU member states (from 2020), as set out in the plan’s directive – is €15 billion. As set out in the Directive, the amount of money borrowed by each member state cannot exceed the difference between the total cost of the Recovery and Resilience Plan and the maximum amount of the grant corresponding to the country under the mechanism.

The granting of loans is also conditional on the mobilisation of private funds, which will contribute to the implementation of the investments. For example, in the Resilience and Growth Plan presented by Greek Prime Minister Kyriakos Mitsotakis on 31 March, specifying that Greece will eventually use the 18.1 billion in grants and 12.7 billion in loans, it is stated that the loan financing should be structured as follows: 50% maximum financing from the recovery and resilience facility through the international financial institutions (European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), etc.), 30% from commercial banks and 20% from private investors' own participation.  

Finally, one should not forget that European countries are expected to receive money from the European Structural Funds as well. The maximum amount that Greece can receive in the coming years from that fund is 40.4 billion euros.

What the European Commission says about how the funds will be allocated

MIIR wrote to the European Commission to ask what were the criteria that led to the specific allocation of funds per Member State and whether it took into account factors other than economic figures, such as the state of the National Health Systems in each country or their budgetary situation. In response to our question, a Commission spokesman on 04 March gave us the following answer: 

"The allocation key for the grants under the RRF, as agreed by the co-legislators, is the following: For 70% of the total of €312.5 billion available in grants (in 2018 prices), the allocation key will take into account 1) the Member State’s population, 2) the inverse of its GDP per capita 3) its average unemployment rate over the past 5 years (2015-2019) compared to the EU average. For the remaining 30%, instead of the unemployment rate, the observed loss in real GDP over 2020 and the observed cumulative loss in real GDP over the period 2020-2021 will be considered.

The formula used to allocate the grants is aligned with the objective of the RRF facility: foster resilience, reduce the economic divergences between Member States and thereby facilitate the recovery. As a result, the allocation key channels a very large share of the funds to countries which have been very severely affected by the crisis." 

However, after the European Council’s meeting on  21 July 2020 – when EU heads of state and government reached a negotiated political agreement on the Mechanism package – criticisms were raised about the introduction of the 70% and 30% rates, as it was not included in the Commission's original proposal for the recovery mechanism on 27 May 2020. In an excellent article analysing the allocation published on bruegel.org, it is shown that while the initial proposal favoured countries with lower national income, however, after the political agreement and the implementation of the 30% by replacing the unemployment rate by the GDP loss rate, countries with higher national income were favoured. This is because the calculation of the GDP index is linked to the size of each country, whereas the unemployment index is independent of size and was a criterion that dealt with this obstacle, making the distribution fairer.

Continuous assessment of targets and milestones up to 2026

The Commission will subject the member states to a continuous assessment of their effectiveness in implementing reforms/investments and whether the agreed targets and milestones are being met. The Facility will only finance mature projects (at an advanced stage of design approval, siting, etc.) so that they can be completed within the recovery plan’s provisional duration. If it is found that the objectives are not met, the Commission will cut off all or part of the recovery funding. 

In fact, the efficiency and the subsequent disbursement will not only be assessed by the Commission, as the possibility of a "veto" by one or more member countries has been introduced. They will be able to block the money if they consider that there are serious deviations from the satisfactory fulfilment of targets and milestones of a member country! 

Once the Commission receives the final Recovery Plans, it must then within two months approve them and agree on the targets/milestones. Once the assessment is completed, the Council's approval follows within one month. The front-loaded disbursement of an amount equal to 13% of each country's total financing will then be approved. This means that first disbursements can start from mid-2021, and thereafter countries can submit requests for continued disbursements twice a year until 2026. These requests will again be assessed within two months by the Commission, and if it considers after an assessment that the objectives and milestones of the Plans are being satisfactorily implemented, only then will it authorise continued disbursements. 

The extension of remote work and reduced working hours

In order to receive both grants and loans, the member state’s national reform plan must meet the criteria linked to the six pillars of the recovery and resilience plan: 1. green transition; 2. digital transformation; 3. economic cohesion, productivity and competitiveness; 4. social and territorial cohesion; 5. health, economic, social and institutional resilience; 6. policies for the next generation. 

In particular, the recovery and resilience plans must cover at least 37% of funding to investments and reforms linked to climate objectives, and 20% to actions supporting digital improvement and transformation of public administration and businesses. 

However, an extremely critical and so far, a relatively obscure criterion is the implementation of reforms linked to the Council's annual country-specific recommendations (CSRs) to each country, included in the European Semester, on the economic and structural changes they are required to implement in their National Reform Programmes. 

The European Semester is considered crucial especially for countries that are struggling financially like Italy and Spain, but most especially Greece which is already under enhanced post-monetary surveillance, as it includes recommendations for structural changes in the economy and finances. For example, in the specific recommendations for Greece for 2020-2021, the Commission urges 4 key actions to ensure debt sustainability, provide liquidity to the economy, complete its post-memorandum commitments and mitigate the impact of the crisis on employment, “including by implementing measures such as reduced working time schemes and ensuring effective support for participation in active working life”.

It is worthwhile to dwell a little on the announcement about reduced working time schemes, already implemented by the Greek government through the SYN-ERGASIA Programme, which is funded by a loan from the SURE programme. They outline a bleak future for the labour sector in Greece, against the backdrop of the labour bill that the Greek government is expected to submit on the increase of the daily working time (10 hours), unpaid overtime, remote work, changes in the trade union law, etc. 

As stated in the text of the recommendations, Greece has already introduced a temporary system that reduces labour costs for companies, "however, the implementation of a comprehensive system of reduced working hours would be a more sustainable and flexible solution and the authorities have taken steps in this direction". At the same time, "the expansion of flexible working arrangements, such as remote working, which in Greece have so far been limited compared to other member states, will also contribute to maintaining economic activity and jobs during the period of lockdown and social distancing."

MIIR sent a question to the Commission asking to what extent the extension of the reduced and flexible working hours scheme is linked as a criterion to the disbursement of the Facility's money to Greece. A Commission spokesperson directly avoided linking this criterion – although central to the specific recommendations of the European Semester – to the Mechanism, replying that "the Commission will assess the recovery and resilience Plans based on eleven transparent criteria set out in the regulation itself. In particular, the Commission assessment will consider whether the investments and reforms set out in the plans:

- represent a balanced response to the economic and social situation of the Member State, contributing appropriately to all six RRF pillars

- contribute to effectively address the relevant country-specific recommendations

- contain measures that effectively contribute to the green and digital transitions

- contribute to strengthening the growth potential, job creation and economic, institutional and social resilience of the Member State

- do not significantly harm environmental objectives

As regards the financing of short-time work schemes, there are other instruments that Greece can use and is already using for that purpose. The SURE scheme, for instance, assists Greece in covering the costs related to its short-time work scheme and other similar measures that have been introduced in response to the coronavirus pandemic. Once all SURE disbursements have been completed Greece will receive €2.7 billion in loans." 

It is worth noting that in the concise 67-page Resilience and Growth Plan, presented by Prime Minister Kyriakos Mitsotakis, interventions on labour are presented only in headings as axes of the "labour law reform". In particular, it mentions "the modernisation of collective labour and trade union law" and "Adjustment to teleworking", with no specific reference to the reduced hours regime.  

At the same time, however, in the more detailed text with the Strategic Guidelines for the National Recovery and Resilience Plan, the extension of the reduced and flexible working hours regime, teleworking and interventions in the pension system are analysed as a milestone target. 

Specifically, under the pillar 'Employment, skills, social cohesion' under axis 3.1 'Increasing jobs and promoting labour market participation', it is described as an objective: 'In addition, through the short-term Coworking work programme and reforms promoting flexible working arrangements such as teleworking, the axis mitigates the impact of the COVID-19 pandemic on the labour market and incomes' (p. 37).

Special reference is also made to the specific recommendations for Greece on 'the implementation of measures such as short-time work schemes (SYN-ERGASIA)' (p. 27).

It should be recalled that under the SYN-ERGASIA scheme, which started in June 2020 and is still in force today, companies can unilaterally reduce the hours during which they employ their workers by up to 50%. The employer is required to pay only half of the employee's salary, and the latter will receive from the state 60% of half of the net earnings lost. The total insurance contributions (employer and employee contributions), corresponding to the time during which the workers are not employed, are also paid by the State Budget.

Finally, the same axis (3.1) also includes "the reform of the current supplementary pension system, in particular the transition from a non-capitalised system of mixed pre-defined benefits and notionally defined contributions to a fully capitalised system of pay-as-you-earn withholding payments.

As our in-depth research on the Mechanism thus shows, the National Recovery Plans may seek “ownership” of reforms and investments on the part of European states, but the link to the European Semester and the setting of targets and milestones that will also determine the evolution of funding is a major challenge for European governments, especially within such a tight binding implementation timeframe defined by the temporary duration of the Mechanism. At the same time, the reforms being promoted pose risks for labour rights, as is the case in Greece, while national borrowing, as well as grants, will affect national budget figures and budget deficits, which is of great concern, especially when the EU's fiscal discipline rules, currently suspended due to the pandemic, are reintroduced. If the above risk is not taken care of in time, the recovery that the EU is seeking may not be possible...

Available translations
Thursday 29 April 2021

Author/s:

Nikos Morfonios

Source/s:

MIIR

Translation by:

L. Buhain | Voxeurop
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