Five things to know about the new pot to support EU economies

Commission vice-president for the euro Valdis Dombrovskis, and commissioner for Economic Affairs Pierre Moscovici, last May during the presentation of the Reform Support Programme. [European Commission]

The European Commission will play a key role in deciding what reforms and investments are supported by a new financial instrument expected to be in place in 2021, whose amount is yet to be decided by the member states as part of the negotiations on the EU’s long-term budget (MFF).

The Commission unveiled on Wednesday (24 July) additional details of the new budgetary instrument for convergence and competitiveness.

The new plan is far from the eurozone budget that French President Emmanuel Macron proposed two years ago. But Paris is still hopeful about turning it into a fully-fledged instrument to support national economies hit by sudden economic shocks.

Rutte: 'I will never support stabilisation mechanisms at euro level'

In an exclusive interview with after the European Council, Dutch Prime Minister, Mark Rutte, said on Friday (21 June) that he “will never support” new budgetary instruments to stabilise the euro area if an economic shock hits the region.

These are the main features of the new instrument, which should be in place on 1 January 2021, once the next multiannual financial framework (MFF) is approved.

Who decides? The Commission will call the shots, as part of the European Semester cycle, on the mechanism to coordinate the countries’ reforms and fiscal plans. Every November, it will include in its eurozone recommendations some strategic orientations for the region. Based on this orientations, the EU executive will propose to member states in May country-specific recommendations for reforms and investments. National governments could follow up in late summer with specific proposals to be supported by the EU funds.

An EU official admitted that, under the Commission’s proposal, the institution will have a “fair amount of discretion”.

“Member states have indicated that they want to have a bigger say in the approval process”, the same source added. “It is a matter of calibration”.

Member states would only intervene in an early stage (January) to adopt the strategic recommendations made by the Commission, and to approve the national proposals for reforms and investment plans (July).

No agreement on euro budgetary tool- ministers send ‘hot potato’ back to leaders  

EU finance ministers failed to reach an agreement in the early hours of Friday (14 June) on an anti-shock instrument to shield the euro, as they continued to clash over almost every feature on the agenda, including the source of funding.

How much? The size of the new instrument is still unclear, but it won’t reach the “several percentage points of the eurozone GDP” that Macron envisioned. Rather, it will be close to the figure proposed by the Commission for its Reform Support Programme, which constitutes the basis of the new budgetary instrument. In May 2018, the EU executive suggested €25 billion for all EU member states, which would come down proportionally to around €17 billion for the euro area region.

The rotating presidency of the EU, currently held by Finland, will put forward a proposal in autumn to amend the reform support programme and turn it into the new instrument.

Finland softens opposition to eurozone budget as it takes over EU Presidency

On the eve of assuming the EU’s rotating presidency, the new centre-left Prime Minister of Finland, Antti Rinne, accepted on Wednesday (26 June) the possibility of a “small” eurozone budget to support investments, as long as it remains part of the EU’s long-term spending plans.

The final figure will be discussed as part of the MFF negotiations later this year. EU officials say it is “not excluded” that an intergovernmental agreement could be attached to inject additional funds outside the MFF. France and the group of countries fighting for a proper eurozone budget are pushing for this option in order to increase the firepower of the new instrument.

Another group of countries led by the Netherlands are opposing this possibility, as they were sceptical of the new budgetary instrument from the outset.

No financial engineering. In contrast with the Commission’s flagship investment plan, where the EU funds were used as guarantees to attract private sector capital, the EU money will be directly allocated to member states in the form of grants. National governments may have to co-finance a small part of the investment projects (around 25% of the total amount). But this percentage could be reduced if the national economies are facing difficulties.

No stabilisation function. The new instrument’s ultimate goal is to support the convergence among eurozone countries and their competitiveness.

But France, Spain and a few other countries are still hopeful that the new instrument could also play a role in stabilising national economies suffering an economic shock. That could be the case of Ireland in the aftermath of a disorderly Brexit.

EU fiscal board insists on stabilisation mechanism

Any systemic shock will not affect just some countries but the whole euro area so if member states want to counter it adequately, they need to have a central fiscal capacity, European Fiscal Board (EFB) president Niels Thygesen told reporters on Tuesday (25 June). 

EU officials, however, explained that the discussions on the stabilisation function are not expected to bear any fruit any time soon. The talks will continue at a technical level, given that there is no sufficient consensus among the national capitals to reach a political agreement.

The same sources were not aware of any technical discussion planned on this issue.

The stabilisation role of the new fund could materialise in the form of the EU’s unemployment reinsurance scheme, proposed by new Commission president Ursula von der Leyen for the next mandate.

Who’s in? The new legislative proposals will only cover eurozone countries, as the package is part of the euro area governance.

But officials added that there is an “understanding” to mimic the new tool so non-eurozone countries could also benefit. Although the concrete formula still needs to be designed, soft loans could be provided to countries outside the euro block to back their reform and investment plans.

The Franco-German proposal for a 'eurozone budgetary instrument', in detail

France and Germany tabled a joint proposal on Thursday (21 February) to establish a new “eurozone budgetary instrument” that would support national reforms and investments in the single currency bloc.

[Edited by Zoran Radosavljevic]

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