Eighteenth Report of Session 2019–21 Contents

6The EU’s €750 billion Coronavirus Recovery Fund14

These EU documents are politically important because:

  • they will establish the EU’s centralised €750 billion (£678 billion) fiscal stimulus plans to help its Member States recover economically from the coronavirus pandemic, which will be funded through the issuance of EU debt bonds on an unprecedented scale; and
  • while the Treasury has confirmed the UK will not contribute to or draw from the Fund, it may nevertheless have an indirect impact on the British economy as well as serving as a potential comparator for the Government’s domestic stimulus plans. It is also unclear if the UK may seek participation in “InvestEU”, a new multi-billion scheme under the Recovery Fund that will leverage investment from the European Investment Bank for infrastructure and research projects, and which is open to non-EU countries.

Action

  • Write to the Chief Secretary to the Treasury (Rt Hon. Steve Barclay MP) to seek information on the Government’s position on participation in the “InvestEU” economic recovery programme.
  • Draw the overall EU Coronavirus Recovery Fund to the attention of the Committee on the Future Relationship with the EU, the Business, Energy and Industrial Strategy Committee and the Treasury Committee.

Overview

6.1Throughout Europe, the social and economic costs of the 2020 coronavirus pandemic have been devastating, and the level of government spending required to counteract it — for example via income retention schemes, tax breaks for struggling businesses and emergency public health measures — unprecedented. Given the scale of the crisis, discussions within the European Union in recent months have focussed on the size and scope of a collective fiscal intervention to ensure all its Member States have access to the necessary investment to support their economies to recover.15 This has focussed on ensuring that those EU countries still burdened with high public debt, and therefore facing high costs to borrow the money, have sufficient fiscal space to respond to the crisis.

6.2After difficult discussions on an initial fiscal “safety net” for EU Member States facing potential difficulties in funding their short-term response to the pandemic concluded on 9 April 2020, the focus shifted to a longer-term EU-wide fiscal stimulus.16 Based largely on a joint proposal of the French and German Governments,17 the Commission on 27 May duly published draft legislation to establish a €750 billion (£678 billion) EU “Coronavirus Recovery Instrument” (hereafter the ECRI or the Recovery Fund), which would provide large-scale financial support to individual EU countries, in particular to support the EU’s “green and digital” economic priorities.18 At the same time, the Commission also presented a package of supplementary proposals on how the money would be raised and spent, the most eye-catching of which is the suggestion to fund the ECRI by the unprecedented issuance of EU debt bonds rather than by direct Member State contributions.

6.3Following four days of difficult negotiations about the conditionality attached to countries receiving money from the Fund,19 on 21 July 2020 the European Council — the EU’s Heads of State and Government — reached provisional agreement on the design of the Recovery Fund, maintaining its €750 billion endowment and the proposition to finance this by issuing EU debt. They however substantially altered the earlier Commission proposals with respect to both the purpose and allocation of the funds,20 and initiated discussions on new “own resources” — essentially EU taxes — to pay back the debt in due course. Further discussions on the technical detail of how the money will be raised, spent and managed will take place over the coming months, as the European Parliament must also give its approval to the package before the Recovery Fund can become operational.21

6.4The ECRI will come on top of ‘regular’ EU spending under its next long-term budget for the 2021–2027 period, on which EU leaders also reached broad agreement in July. Among other things, they endorsed the creation of a €5 billion (£4.5 billion) “Brexit Adjustment Reserve” to give financial support to countries like Ireland and Belgium, which are likely to be affected most by the UK’s withdrawal from the Single Market and Customs Union. In 2021, further negotiations are due to take place about the possible introduction of new EU taxes to fund all this expenditure, with options put forward including a carbon border adjustment levy, a digital services tax and a financial transactions tax.

6.5As we explore further in paragraphs 22 to 31 below, the UK — having left the European Union on 31 January 2020 — will neither contribute to the EU Recovery Fund, nor be able to draw on it. However, it may still have indirect macroeconomic and political implications for the UK, as well as serving as a potential comparator for the Government’s domestic fiscal stimulus plans. The introduction of new taxes to fund the EU budget may also impact on UK businesses with exports to, or operations in, the European Union post-Brexit. We have therefore provided a summary of the Commission’s proposals and the state of play in the negotiations in Brussels.

The EU’s Coronavirus Recovery Fund

6.6On the basis of the deal struck by the European Council on 21 July 2020, the Recovery Fund’s €750 billion endowment would mostly be spent from 2021 to 2024 on both grants and loans to EU countries,22 via a variety of different programmes:23

6.7The European Commission had also proposed a €26 billion “Solvency Support Instrument“ which would have aimed to leverage private investment for companies struggling because of the pandemic by using the EU budget as a guarantee.34 This proposal was scrapped altogether by the European Council.

6.8The exact distribution of the €750 billion between the 27 EU Member States would vary for each specific scheme, because each has a different purpose and therefore different conditions attached to its use. This will be affected by the extent to which the Recovery Fund is distributed in the form of grants or loans, and the precise conditions which will be attached for disbursement of the funding (see paragraph 19 below); the type of projects the money will support;35 and the practical implementation of a existing proposal to suspend EU funding for countries where the rule of law is under threat, which has been under discussion since May 2018.

6.9Given the above, it is not possible to determine in advance which countries might be the largest beneficiaries of the ECRI as a whole. The European Commission had initially estimated that, under its original proposals,, the largest potential beneficiaries of grants from the Recovery & Resilience Facility would be Italy and Spain (accounting for roughly 20 per cent, or €67 billion each), with the average maximum national allocation amounting to €12.4 billion.36 The largest beneficiaries relative to their economic size would be Bulgaria, Croatia, Hungary, Poland and Romania (which, coincidentally, are also the EU Member States where the aforementioned “rule of law” concerns are most pressing, in particular Hungary and Poland). It is not yet clear at this stage how the likely allocation by Member State will be different under the deal agreed by EU leaders on 21 July 2020.

Financing the Coronavirus Recovery Fund

6.10The net benefit of the ECRI for each EU Member State also depends on how they must contribute to financing this new expenditure. Finding the money for such an increase in EU spending is not straightforward. Funding the ECRI under the EU’s traditional budgetary approach, where the bulk of the money is provided directly by Member States’ national treasuries when it is required for the EU to pay its bills, would require countries to contribute significantly more to the EU budget almost immediately, at a time when national budgets are already under pressure.37

6.11To avoid this the Commission has, as we noted, proposed to finance the Recovery Fund entirely by the EU borrowing the necessary money on the capital markets. The European Council endorsed this proposition in July 2020. These debt bonds would then be repaid from the EU budget gradually from 2028 onwards, over a period of thirty years.

6.12As this approach would still require the Member State to pay for the Recovery Fund, even if only at a later stage, the Commission has also announced that it intends to push new sources of revenue for the EU — called “own resources”, or in effect new kinds of taxation — whose receipts would legally accrue to the EU budget, and therefore reduce the need for direct national contributions.38 As a first step, there will be a new “own resource” from the start of 2021 under which each EU country is taxed based on its national volumes of unrecycled plastic waste..39 This proposal, like the borrowing operation underpinning the Recovery Fund, still needs to be approved unanimously by Member States, including through ratification by their national parliaments (see paragraph 18 below).40 In 2021, the European Commission will table further proposals for new taxes to fund the EU budget. These will be based around a “carbon border adjustment scheme” on goods imported from non-EU countries with higher carbon footprints, the taxation of companies in the digital economy, and the revenues generated by emissions auctions under the EU Emissions Trading Scheme (ETS). The EU may also revive discussions on a financial transactions tax (FTT), which could be used in part to finance the EU budget..41

6.13Although the proposed EU debt issuance to finance the ECRI is intended to be an exceptional occurrence because of the unprecedented nature of the pandemic, its longer-term implications for the EU’s approach to spending is unclear. It is not inconceivable that the EU could turn to debt bonds again if necessary to fund its activities during another crisis, or borrow more in the future to pay off this initial debt and defer the moment at which the Member States need to pay up. Reliance on borrowing to fund expenditure, as States do, could therefore become a permanent feature. The ECRI could represent a first step towards a more independent, and centralised, fiscal capacity at EU-level. The debt bonds to be issued to fund the EU’s economic recovery could, in this context, be seen as a type of European “safe asset” for investors, partially substituting for the sovereign bonds issued by individual EU countries.42

Link between the Coronavirus Recovery Fund and the EU’s Multiannual Financial Framework 2021–2027

6.14The Recovery Fund, a temporary measure aimed at mitigating the impact of the coronavirus pandemic, will sit alongside — but not be part of — the EU’s routine funding programmes under its draft long-term budget for the 2021–2027 period.

6.15Negotiations on this “Multiannual Financial Framework”, which sets the EU’s spending limits for specific policies and programmes for that seven-year period, are being held in parallel. The European Council on 21 July 2020 also reached provisional agreement on a €1.07 billion long-term EU budget.43 This deal included increases in the rebates for a number of net contributors to the EU budget, and ditched the increases the European Commission had proposed for EU funding for areas such as research, security and defence. Among other things, EU leaders also endorsed the creation of a €5 billion (£4.5 billion) “Brexit Adjustment Reserve” to give financial support to countries like Ireland and Belgium, which are likely to be affected most by the UK’s withdrawal from the Single Market and Customs Union at the end of the post-Brexit transition period on 31 December 2020.In practice, the agreement reached means that the €750 billion of crisis spending under the Recovery Fund will come on top of the EU’s planned expenditure for schemes like the Common Agricultural Policy and the Regional Development Fund under its next long-term budget. The deal struck at the European Council will increase planned EU spending over from 2021 to 2027 to approximately €1.85 trillion (£1.68 trillion).

6.16The direct relevance of the EU’s next Multiannual Financial Framework for the UK is limited, now that it has left the European Union. However, several of the EU’s ‘routine’ spending programmes are open to participation by non-Member States like the UK, in return for a financial contribution. The Government is known to be seeking continued involvement in several schemes, including notably the EU’s Framework Programme for Research and the Euratom nuclear research programme, but it has been unable to tell us how the UK’s financial contribution would be calculated or why other EU programmes were not selected for participation. In addition, the share of the EU long term budget allocated to the Common Agricultural Policy (CAP) in particular remains relevant for the UK, as this will form a subsidy for the European competitors of British farmers, whose financial support from the Government when the UK leaves the CAP from 1 January 2021 remains uncertain. We will continue to scrutinise the implications of EU agricultural policy for the UK separately.44

The negotiations in Brussels

6.17On 19 June 2020, the EU’s 27 Heads of State and Government first discussed the Recovery Fund proposals and the wider long-term EU budget, but took no firm decisions on its size or design. The key aspects of the Recovery Fund, including how it is funded, were eventually resolved after four more days of negotiations by EU leaders from 18 to 21 July 2020 as described above. However, this provisional agreement does not mean the ECRI is now ready to become operational., Under the EU Treaties, the legislation to establish the Fund and its different programmes still requires the formal agreement of the European Parliament and of the national governments in the Council of the EU. In addition, the authorisation to borrow €750 billion on the capital markets — and the new EU “own resource” based on plastic waste — also depends on national ratification, which may involve Member States’ national parliaments.45

6.18The European Council meeting in July took as long as it did because there were a number of difficult political issues to resolve. One of the key ones related to the process by which individual EU countries could receive funding — in particular grants — from the Recovery & Resilience Facility. While the Dutch Government had initially pushed for strict economic reform conditions in return for the money, and a veto for each other Member State to block further payments to a country if those conditions were not being met, the compromise struck on 21 July is less far-reaching.46 Requests for grant funding from the Facility will need to be approved by a qualified majority of the 27 Member States.47 Moreover, any individual EU country could raise concerns about how the Recovery Fund money is being used by any other Member State, in which case any further payments would be suspended until the issue had been “exhaustively” discussed by the European Council.48

6.19The EU leaders also agreed a target that 30 per cent of Recovery Fund expenditure should be linked to climate change adaptation and mitigation, but it does not appear this will be legally-binding.

6.20The European Parliament, which was not represented during the European Council discussions, still has an important role.. Under the Treaties, it has to approve both the EU’s long-term budget and the legal frameworks for each of the specific funding programmes under the Recovery Instrument, including the flagship Recovery & Resilience Facility. While it is expected to accept both the size and general design of the ECRI as set out by EU leaders, it may seek a larger role for itself in approving funding decisions for individual EU countries and to alter the allocation of funds between different schemes under both the Recovery Fund and the general long-term EU budget.49 The aim is for various pieces of legislation to formally establish the ECRI to be formally approved by the EU institutions, and the EU’s 27 national parliaments, by the end of the year at the latest, to allow for the bulk of the money to be released to Member States from January 2021 onwards.

The Government’s position

6.21The Chief Secretary to the Treasury (Rt Hon. Steve Barclay MP) submitted an Explanatory Memorandum setting out the Government’s position on the EU’s Recovery Fund on 6 July 2020. In this Memorandum, the Minister briefly summarises the different components of the ECRI. He also confirms that the UK, having left the European Union on 31 January 2020 under the terms of the Withdrawal Agreement, will not participate in the Recovery Fund: it will not have any obligation to pay off a share of any debt bonds issued by the EU to pay for this €750 billion of proposed expenditure, nor be able to receive any financial support from it.50

6.22More specifically, although the UK has agreed to a settlement in the Withdrawal Agreement of its residual financial obligations to the EU accrued during the UK’s membership of the European Union, this precludes the Treasury from having any exposure to expenditure or financial obligations the EU may enter into from 1 January 2021 onwards (including, therefore, the majority of the Recovery Fund).51 Although the settlement does require the UK to contribute towards spending made by the EU before 31 December 2020, its maximum liability is capped by the limits on EU spending for this year under its “Multiannual Financial Framework” 2014–2020 as it stood immediately prior to the UK’s withdrawal. In any event, the European Council has decided that the EU will not increase its spending in 2020 in relation to the Recovery Fund.52

6.23Given the above, the Minister adds that the “structure and direction of post-2020 EU funding proposals is a matter for the EU27”. He does not offer any commentary on the potential broader economic or political implications or relevance of the EU Coronavirus Recovery Fund for the UK.

Committee conclusions and action

6.24We thank the Minister for his Explanatory Memorandum, and his confirmation that the UK is not exposed to any liability to contribute towards the EU’s Recovery Fund (and, by extension, will also not be able to draw financial support from it). Moreover, while the Minister did not acknowledge so explicitly in his Memorandum, the Committee considers that the ECRI as agreed by the European Council on 21 July 2020 does have potentially significant economic and political implications for the UK for a number of reasons:

6.25The efforts to introduce new EU taxes to fund the EU’s expenditure, and pay off the debt incurred to establish the Recovery Fund, may also impact on the UK in the longer term, dependent on the final substance of these levies. For example, both the carbon border adjustment levy, the digital economy tax and the financial transactions tax, referred to in the European Council’s agreement as possible policy options, could impact on British businesses with exports to, or activities in, the European Union. This will be a matter for Parliament to scrutinise in more detail in due course in the light of the European Commission’s specific proposals to establish such new “own resources”.

The InvestEU programme and potential UK participation

6.26One particular element of the EU’s coronavirus recovery package deserves further scrutiny with respect to the potential relevance for the UK’s new post-Brexit relationship with the EU: the proposed InvestEU programme.

6.27InvestEU aims to leverage billions of euros in investment via the European Investment Bank (EIB) and other intermediaries into key sectors of the European economy, including infrastructure, research and small businesses. It will do so by offering a guarantee for such investments, using a €8.4 billion (£7.6 billion) Guarantee Fund, to be financed mostly from the Recovery Fund. While much reduced in ambition from the original Commission proposal, which foresaw an EU guarantee of €75 billion to back the programme, this is still a not insubstantial amount. Article 5 of the draft Regulation to establish InvestEU states that non-EU countries like the UK could participate in the programme.53 It is also noteworthy that applications for support under the programme will be decided by an independent “Investment Committee”, not the European Commission itself.

6.28While the UK was an EU Member State the EIB was a provider of substantial financial backing for major British infrastructure projects including to the Northern Powerhouse Investment Fund and social housing in Northern Ireland. Such investment tailed off following the 2016 referendum,54 and at the moment of its withdrawal from the EU on 31 January 2020, the UK automatically ceased to be a shareholder in the EIB and therefore largely ineligible55 for new financial support from it.56 The Government has not yet published the outcome of its “Infrastructure Finance Review“, which explored “institutional options for delivering government support” including in the context of the UK’s lack of access to the EIB. It also still maintains that is open to “exploring options for a future relationship” with the Bank,57 but has to date not made any public proposals in this respect. It is unclear what, if any, discussions on this matter have taken place as part of the negotiations on the future UK-EU relationship.

6.29As noted, the proposal for the “InvestEU” programme provides for the possibility of participation by non-EU countries like the UK, in return for a financial contribution to the Guarantee Fund. This would make such “third countries” eligible for EIB financial operations in line with the priorities and conditions to be set out in the InvestEU Regulation (but without a guarantee for a specific level of investment). However, the Minister’s Explanatory Memorandum does not refer to this possibility at all, from which we infer the Government has ruled it out. However, it is not clear on what basis it decided not to pursue the option of UK participation in InvestEU and, by extension, establish a new relationship with the European Investment Bank. We have written to the Minister to seek clarification on this point, and a copy of that letter is shown in the Annex to this Report.58

6.30More generally, we will continue to follow the negotiations on the EU Coronavirus Recovery Fund and the EU’s long-term budget closely. We intend to focus primarily on those elements which remain relevant for the UK post-withdrawal (in particular the EU funding programmes in which the UK is seeking continued participation, and the economic impact of the Common Agricultural Policy on British farmers). We will make further Reports to the House as and when appropriate.

6.31We also draw our summary and assessment of the Recovery Fund to the attention of the Business, Energy and Industrial Strategy Committee, the Committee on the Future Relationship with the EU, and the Treasury Committee.

Letter from Sir William Cash MP to the Chief Secretary to the Treasury (Rt Hon. Steve Barclay MP)

The EU Coronavirus Recovery Instrument: options for UK participation in the “InvestEU” programme

Thank you for your Explanatory Memorandum on the European Commission’s proposals of 27 May 2020 for a €750 billion EU Coronavirus Recovery Instrument.59 We have taken note of your confirmation that the UK will not be required to contribute to this new EU fund and, as a consequence, will also not receive any financial support from it. The Committee nevertheless considers that the Recovery Instrument may have political and economic implications for the UK, as we will set out in our forthcoming Report.

The Committee has also asked me to raise a specific issue with you in relation to one particular element of the Coronavirus Recovery Instrument: the draft “InvestEU” programme, which builds on an earlier proposal released in 2018 as part of the EU’s next long-term budget for the 2021–2027 period.60

As you will be aware, this scheme aims to leverage hundreds of billions of euros in capital for key sectors of the European economy, by providing investment and loan guarantees from the EU budget for the European Investment Bank (EIB) and other financial intermediaries. This would incentivise them to make investments that would otherwise be considered too risky, especially in the current economic climate. The guarantee, to be provisioned for in a multi-billion euro Guarantee Fund financed primarily by the Recovery Instrument, would be used to increase investment in five “windows”: public infrastructure; research and innovation; small businesses; social investment and skills; and — in response to the COVID crisis — a “strategic investment” window for projects in areas such as healthcare, critical infrastructure and security.

Notably, Article 5 of the draft InvestEU Regulation allows non-EU countries to participate in the programme, withthe exception of the strategic investment window. This means that, in return for a financial contribution to the Guarantee Fund — of a size to be agreed jointly by both sides — other countries would be eligible for investment from the European Investment Bank under the four aforementioned “windows” of the scheme (whereas the EIB normally invests primarily in EU Member States). The precise link between the size of the contribution and the share of investment a non-EU country could expect to receive under the scheme would be a matter for negotiation.

Despite this theoretical option for UK participation in the “InvestEU” programme, your recent Explanatory Memorandum did not refer to this possibility.61 While we take no position on whether participation should be sought, we have inferred that the Government is not actively pursuing involvement in the programme. The reasoning underpinning the Government’s decision to that effect — if our inference is correct — is unclear.

In particular, as you yourself told us in your recent letter of 9 June 2020, the Government remains “open to exploring options for a future relationship with the EIB as a non-EU country”. Participation in the “InvestEU” programme could provide a basis for this, since the investment it aims to leverage will come primarily from the EIB (subject, of course, to the negotiations between the European Parliament and the Member States on the final design of the scheme). Moreover, one of the focus areas of the scheme is scientific research. Given that the Government is already seeking to secure continued UK participation in the EU’s general Framework Programme for Research for the 2021–2027 period (“Horizon Europe”), involvement in InvestEU could potentially build on these existing efforts to strengthen the UK’s research links with its European neighbours post-Brexit.62

Therefore, we ask you to write to us by 10 August to clarify if the Government has indeed ruled out seeking UK involvement in the “InvestEU” programme, and if so, why on balance such participation has already been determined not to be of potential value (in particular given that negotiations on the final design of the scheme are not yet completed). We will consider the importance of the InvestEU proposal for the UK further in light of your response.


14 The documents covered by this chapter are: (a) Proposal for a COUNCIL REGULATION establishing a European Union Recovery Instrument to support the recovery in the aftermath of the COVID-19 pandemic; (b) Amended proposal for a COUNCIL DECISION on the system of Own Resources of the European Union; (c) Proposal for a REGULATION establishing the InvestEU Programme; EU references: (a) COM(2020) 441; (b) COM(2020) 445; (c) 8411/20; COM(2020) 403; Legal base: (a) Article 122 TFEU; special legislative procedure; QMV; (b) Article 311 TFEU; special legislative procedure; unanimity and national ratification; (c) Articles 173 and 175 TFEU; ordinary legislative procedure; QMV; Department: HM Treasury; Devolved Administrations: consulted; ESC number: (a) 41315; (b) 41303; (c) 41324.

15 European Central Bank, Financial Stability Review, May 2020: “While the large fiscal policy response mitigates the economic cost of the downturn, thereby providing a first line of defence against fiscal debt sustainability concerns, a more severe and protracted economic downturn could give rise to debt sustainability risks in the medium term”.

16 This ‘safety net’ consists of a last-resort loan facility from the European Stability Mechanism for Eurozone sovereigns, a separate loan facility to provide funds for any EU Member State’s national income retention scheme for furloughed workers, and a new European Investment Bank guarantee fund to leverage investment in struggling businesses. See for more information our Report of 26 March 2020.

17 On 23 April 2020, the EU’s 27 national leaders had asked the European Commission to “come up with a proposal” for a “recovery fund” to provide investment in “the sectors and geographical parts of Europe most affected” by the crisis.

18 From a legal perspective, the proposal to establish the ECRI is based on Article 122 TFEU, which allows the EU to “grant […] financial assistance” to any Member State which “is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”.

19 The European Council’s discussions focused in particular on the extent to which EU payments should be tied to a “rule of law” mechanism, where funding to countries where judicial independence is being eroded, as well as economic reform conditions that would be attached to countries in receipt of Recovery Fund payments.

20 In particular, important funding decisions on granting support from the ECRI to individual EU Member States will require the approval of a Qualified Majority of all 27 Member States.

21 The precise legislative procedures applicable to the different proposals of the Recovery Fund package vary on a case-by-case basis. For example, while the Recovery Instrument itself is subject to a Qualified Majority vote in the Council only, the European Parliament has co-decision powers over the sectoral proposals determining how the money would be spent.

22 The European Commission has proposed that a small proportion of the funds would be used to support non-EU countries in addressing the impact of the coronavirus crisis, but there are doubts whether the Recovery Instrument — which is based on a provision of the EU Treaty which relates to situations “where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control” — could be used for such purposes.

23 Amounts are in 2018 prices.

24 Specific funding decisions from the Recovery & Resilience Facility would be made on the basis of “recovery and resilience plans”. In these, each EU government will set out specific reforms and projects for which it is seeking financial support from the Facility. These national plans would be integrated into the existing “European Semester”. This is an annual process that ostensibly serves to coordinate national economic policies across EU countries, on the basis of policy recommendations issued by the European Commission. It has, to date, largely been a technocratic exercise. Under the Recovery Instrument however, those Commission recommendations would ultimately determine how much a country would receive from the Facility in a given year, meaning the Semester process is set to acquire significant distributional consequences.

25 The Recovery & Resilience Facility would also encompass a “Technical Support Instrument“, a mechanism to ensure that the European Commission can “provide tailor-made expertise on the ground to ensure that the Member States have the necessary institutional and administrative capacity to develop and implement growth enhancing reforms” that the Facility will aim to support.

26 The acronym stands for “Recovery Assistance for Cohesion and the Territories of Europe”.

27 The European Council scrapped a proposal to begin disbursement from REACT-EU before the end of 2020, which would have necessitated an increase in the EU’s spending limits for this year as its annual budget is already fully committed.

28 The European Commission had proposed €30 billion in Recovery Fund support for the Just Transition Mechanism, but this was reduced to €10 billion by the European Council.

29 The total EU guarantee (i.e. exposure for claims against guaranteed investments) would be capped at €75 billion. The Commission proposes to provision for €33 billion of this from the Recovery Fund, setting the money aside in advance in anticipation of having to pay for claims.

30 The InvestEU was already part of the EU’s long-term budget plans for the 2021–2027 period, as our predecessors discussed in their Report of 12 September 2018. The European Commission published an amended proposal for the legal framework of the InvestEU programme alongside its Coronavirus Recovery Instrument proposals, which would insert a new “strategic investment facility” into the programme. This would seek to leverage investment specifically for “strategic activities”, including healthcare, critical infrastructure and manufacturing of information technology components or devices. It also replaces the funding for the programme that would have come from the EU budget almost entirely by funding from the Recovery Instrument.

31 This amount consists of providing the following ‘top up’ funding for EU schemes above and beyond their allocation from the EU long-term budget 2021–2027: €15 billion for the Rural Development Fund; €13.5 billion for the Framework Programme for Research; €10.5 billion for the Neighbourhood, Development & International Cooperation Instrument; €5 billion for the Humanitarian Aid Instrument; €7.7 billion for the EU Health Programme; and €2 billion for the Civil Protection Mechanism.

32 These amounts are substantially less than originally proposed by the European Commission, which — for example — had set aside €13.5bn from the Recovery Fund for scientific research. Moreover, under the original Commission proposal, other EU programmes which would benefit from a financial top-up from the Recovery Fund included the EU4Health Programme; the Civil Protection Mechanism; the Humanitarian Aid Instrument; and the Neighbourhood, Development & International Cooperation Instrument. Those funding increases have been scrapped.

33 The Committee wrote to the Treasury about the UK Government’s position on such participation in EU schemes, and the required financial contribution, on 26 March and 21 May 2020. The legal service of the Council of the EU had initially argued that it is not clear if the Recovery Fund — which will be based on a Treaty article relating to “severe difficulties caused by natural disasters or exceptional occurrences beyond its control” — can be used to provide money for these routine spending programmes. See for example Politico.EU, “Council lawyers flag problem with recovery fund proposal“ (25 June 2020).

34 More specifically, the Solvency Support Instrument would form part of the existing European Fund for Strategic Investments (EFSI). It would offer the European Investment Bank a guarantee to either invest directly in struggling companies or provide funds to financial intermediaries to do so, meaning the EU budget would partially indemnify either the EIB or those intermediaries for losses they incur on such investments where covered by the guarantee.

35 20 EU countries had called for it to be a “Green Deal“ which “accelerat[es] the green transition in a cost-efficient way.

36 The smallest beneficiary of the grant component of the Recovery & Resilience Facility would have been Luxembourg, with a maximum allocation of €109 million. The European Commission’s estimates relied on a proposed cap on the maximum financial support each Member State could receive. This would be calculated on the basis of each EU country’s relative economic size, population and unemployment rate.

37 At present, the EU budget is principally funded through three different revenue streams: the customs duties collected by Member States on goods imported into the EU; a contribution based on each Member State’s national VAT base; and a balancing contribution to ‘top up’ these other two revenue streams to ensure the EU has the necessary funds to service its financial obligations, which is calculated on the basis of each Member State’s relative economic size (i.e. richer Member States pay proportionally more). This latter, “GNI-based” contribution has become the EU’s chief source of revenue, accounting for approximately 70 per cent of its funding.

38 To facilitate the borrowing necessary to resource the Recovery Fund, the European Council also accepted a proposed amendments to the Own Resources Decision (beyond the authorisation to actually borrow the money) would also temporarily raise the legal cap on the Member States’ payments to the EU from 1.2% to 1.8% of EU GNI (and permanently to 1.4%). The aim of this is not to enable the EU to require the Member States to pay more now, but to create more headroom in the EU budget to be used as a guarantee against the borrowed money (lowering the risk to lenders and therefore the cost to the EU), and providing additional EU spending flexibility during difficult economic conditions.

39 The European Commission already tabled legislative proposals to create such “own resources” in May 2018, but they have made very little progress in the intervening years.

40 Amendments to the EU’s sources of revenue must be made via the “Own Resources Decision”, which under Article 311 TFEU can only be made after they are “approved by the Member States in accordance with their respective constitutional requirements”.

41 In the meantime, the Commission has proposed that the EU could request additional contributions from Member States when, in a given year, its annual budget is not sufficient to cover its Recovery Fund debt repayment obligations. Article 6(4) of the amended proposal for an Own Resources Decision states: “Where the authorised appropriations entered in the budget are not sufficient for the Union to comply with its obligations resulting from borrowing […], the Member States shall make the resources necessary for that purpose available to the Commission. The cash resources shall be made available in accordance with [the Financial Regulation], as applicable at that time, under the same conditions as those applying in the event of default on a loan contracted pursuant to regulations and decisions adopted by the Council, or by the European Parliament and the Council.”

42 However, the Recovery Fund debt bonds will not replace existing sovereign debt issued by EU Member States, nor prevent them from issuing their own sovereign debt going forward.

43 As part of its package of proposals, the European Commission not only issued an updated proposal for the EU’s spending limits for broad policy areas for the 2021–2027 period — the Multiannual Financial Framework itself — but also updated its proposals for various ‘routine’ EU spending programmes during that period, to reflect the “lessons learned” from the coronavirus crisis. These relate to the European Social Fund, the Regional Development Fund, the Cohesion Fund, the European Fund for Sustainable Development, the EU Health Programme, the Civil Protection Mechanism and the Fund for Aid to the Most Deprived. The Committee is considering some of these proposals in more detail separately given their specific implications for the UK.

44 We have assessed the potential impact of the CAP for UK farmers separately, most recently in our Report of 26 March 2020.

45 The formal legal proposal to authorize the EU to borrow €750 billion to finance the Recovery Fund requires an amendment to the so-called “Own Resources Decision”, which under Article 311 TFEU can only be done with the approval “by the Member States in accordance with their respective constitutional requirements”. The proposition of the EU borrowing money to finance the Recovery Fund is not without its detractors however. For example, Finland’s Constitutional Law Committee has argued that the proposal exceeds the EU’s competences because it does not respect the principle that the EU’s budget should be in balance (i.e. grant payments to Member States should not be financed by the EU issuing debt).

46 The original Dutch approach was not foreseen by the European Commission’s proposals and also strongly resisted by countries including Greece and Italy, which argue that the economic shock of the coronavirus was beyond their control and not comparable to the domestic practices which played a part in the Eurozone sovereign debt crisis a decade ago.

47 The European Council’s agreement envisages the adoption of funding decisions from the Recovery & Resilience Facility by means of “implementing acts”, meaning there is no role for the European Parliament but the approval is required of a qualified majority of EU Member State governments. MEPs are likely to push for the use of “delegated acts” instead, which take effect automatically unless vetoed by either the European Parliament or a qualified majority of Member States.

48 This suspension mechanism applies only to the Recovery Fund, not the general EU long-term budget. Given the “rule of law” concerns with respect to Hungary and Poland, the European Council also resolved that — where such breaches are identified — “the Commission will propose measures in case of breaches for adoption by the Council by qualified majority”. What such measures may mean in practice is not yet clear.

49 MEPs are expected to be critical in particular of the European Council’s substantial decreases in EU future funding for programmes related to research, health and climate change compared to the original European Commission proposals.

50 The Minister’s Explanatory Memorandum also states that “the Government believes the proposals are consistent with the principle of subsidiarity”, a position it would be unlikely to have taken if the UK were still an EU Member State given the unprecedented nature of the proposed EU borrowing arrangements.

51 The UK’s legal exclusion from having any shared exposure to new EU financial commitments entered into from 1 January 2021 would have been the case even if the post-Brexit transition period had been extended beyond the end of 2020, as per Articles 132(2)(a) and 132(2)(b) of the Withdrawal Agreement. Instead, an extension of the transition under the terms of that Article would have required the UK to make a one-off contribution to the EU budget, the amount of which would be subject to negotiation. The option for an extension of the transition period under Article 132 expired on 30 June 2020.

52 While the European Commission had proposed €11.5 billion increase of the EU budget in 2020 as part of the Recovery Fund, this proposal was not taken forward by the European Council. As we explored in our Reports of 7 May 2020 and 2 July 2020, there is an outstanding matter of contention between the UK and the EU on a COVID-related amendment to the Multiannual Financial Framework 2014–2020 which modified an existing EU financial reserve so it could be used for healthcare-related spending. The Government says it is “discussing” whether the UK needs to pay for a share, estimated to be approximately £200 million, of this new EU spending for 2020, under the terms of the Withdrawal Agreement. However, the EU spending plans are not made under the Recovery Instrument and therefore not directly relevant to this chapter.

53 The other components of the Recovery Fund, as described in paragraph 5, are not open to participation by non-EU countries.

54 EIB records indicate investment projects in the UK which were approved in 2015 amounted to €7.036 billion, but nosedived to €456 million in 2019. The EIB has not approved any UK projects in 2020.

55 The EIB’s Statutes provide that “the Bank shall grant finance [...] for investments to be carried out in the territories of Member States”, but its Board of Governors — i.e. the EU’s 27 Finance Ministers — “may grant financing for investment to be carried out, in whole or in part, outside the territories of Member States”. At the end of 2019, 9 per cent of the EIB’s stock of loans involved countries outside the EU (excluding, for the purposes of calculating this figure, the UK).

56 Under the Withdrawal Agreement, existing EIB projects in the UK are not affected by its withdrawal. The Treasury will receive back its €3.5 billion in paid-in capital with the European Investment Bank in twelve annual installments, but it has also offered a guarantee to provide capital to the Bank if necessary for the latter to cover its financial obligations in relation to financial operations entered into before the UK left the EU on 31 January 2020. The Agreement does not provide for the UK to receive a share of the profits generated during its EU membership.by the EIB.

57 Letter from the Chief Secretary to the Treasury (Rt Hon. Steve Barclay MP) to Sir William Cash MP, 9 June 2020.

58 With respect to the negotiations on the EU’s routine long-term budget more broadly, we note there are also potential financial implications for the UK with respect to those EU programmes in which the Government has confirmed it is seeking continued British participation as a non-Member State (in particular the “Horizon Europe” Framework Programme for Research and the Euratom nuclear research programme). Such participation would require the Treasury to make an annual financial contribution, which would be calculated based of the EU’s own budget for these programmes (which, in turn, are dependent on the outcome of the discussions on the next Multiannual Financial Framework). The Treasury has to date refused to provide an update on its negotiations with the European Commission on this matter, despite two requests for information. We will continue to pursue this matter with Ministers separately.

59 EU documents: (a) COM(2020) 441, (41315); (b) COM(2020) 445 (41303).

60 EU Document 8411/20; COM(2020) 403, (41324).

61 In October 2018, the Government told our predecessors that it was “encouraging the Commission and Member States to design future EU programmes in a way that keeps options open for future UK and EU cooperation opportunities” (Letter from the Rt Hon. Elizabeth Truss MP to Sir William Cash MP, 4 October 2018).

62 We note in this respect that InvestEU will replace the EU’s existing “InnovFin Equity” scheme under its current Framework Programme for Research (“Horizon 2020”) to leverage investment into research projects, which can be used for investments in non-EU countries that participate in Horizon 2020. The UK is automatically eligible for this scheme until the end of 2020 under the terms of the financial settlement in the Withdrawal Agreement.




Published: 29 July 2020