On July 20, 2020, after a four-day negotiation marathon, the European Council finally reached an agreement on the 2021-2027 EU budget and the recovery fund. This blogpost takes a closer look at the changes made to the EU budget’s biggest item: The European Cohesion Policy (CP). Regarded as a key tool in the strategy to cope with the current Corona pandemic, policy makers will have to weight short-term objectives to fight COVID-19 with long-term considerations to reduce regional disparities within the EU.
The (probably) longest summit of the heads of the European member states culminated in a historic agreement: on July 20, 2020, after a four-day negotiation marathon, the European Council finally reached an agreement on the 2021-2027 EU budget and the recovery fund. The latter was initiated to top-up the financial resources in the fight against the immediate COVID-19 pandemic and support the post-corona recovery. For the first time, the European Commission (EC) will raise €750 billion on capital markets through the recovery fund called Next Generation EU. This comes on top of the EU budget with a volume of €1,074.3bn.
This blogpost takes a closer look at the changes made to the EU budget’s biggest item: The European Cohesion Policy (CP), which has been declared a key tool in the strategy to cope with the pandemic. CP is part of the European regional policy which supports an ‘overall harmonious development’ within the EU and aims at reducing socio-economic disparities between regions. Such disparities have been on the rise in recent years, especially amongst regions within member states. It is very likely that the growing divergence will be further amplified in the course of the Corona crisis. A number of European member states (MS) suffering from socio-economic problems following the European financial crisis and subsequent recession such as Italy or Spain have been strongly exposed to COVID-19. Therefore, an effective Cohesion Policy will be important to help crisis-ridden regions to recover.
In addition, regional authorities and administrations also play an important role in coping with the Corona pandemic. So far, Corona outbreaks have often been regionally confined. COVID-19 hot-spots in Cataluña in Spain, the city of Bergamo in Italy or the North-Rhine Westphalia region around Heinsberg in Germany had much higher infection rates compared to the countries averages. In order to prevent national-lockdowns in the future, identifying Corona infections quickly and being able to support regions through health-care equipment and the necessary financial means will be critical to curb COVID-19 contagion effectively. Therefore, Cohesion Policy in the 2021-2027 Multiannual financial framework (MFF) will need to balance the short-term goals of bolstering regions in the fight against Corona and the long-term objectives of reducing socio-economic disparities between regions. Let’s start by looking at the short-term measures already taken by the European Commission.
Short-term measures CRII & CRII+: Additional funds and more spending flexibility
Elisa Ferreira, the EU Commissioner for Cohesion and Reforms, reacted swiftly to adjust the Cohesion Policy funds for the fight against COVID-19 and its socio-economic effects on regional economies. The Coronavirus Response Investment Initiative (CRII) was adopted in early April 2020 to support the European member states’ efforts in channeling financial resources to crisis ridden regions. By tapping into unspent reserves of the current EU budget, the Commission provided an additional sum of €37bn. Member states are currently permitted to re-allocate money under the Cohesion policy funds to bolster health-care expenditures and the support of small and medium enterprises (SMEs). The subsequent CRII+ amendment added more flexibility. It allows for a higher transfer of funding between the three EU funds (ERDF, ESF and CF) and between different investment priorities financed under Cohesion Policy.
According to the Commission, CRII and CRII+ are successful. By the end of July, 97 amendments to regional operational programs were applied for or adopted. France, for example, utilized funding from the European Regional Development Fund (ERDF) to purchase face masks and finance SME activities. In two Italian regions, Emilia Romana and Tuscany, additional funding was provided for COVID-19 test cases.
The REACT-EU initiative will continue the two immediate CRII and CRII+ measures under the new EU budget. With an additional €55bn provided through the recovery fund, REACT-EU leaves leeway for MS to decide which regions or sectors can obtain funding. As a recovery instrument, it is scheduled for the upcoming two years. However, the stronger involvement of the national level in shifting funds between regions and investment priorities may come at the expense of the independence of regional managing authorities. The Assembly of European Regions therefore reminded the Commission that: “regions and local authorities are on the front line of the fight against the pandemic, and indeed as the level closest to its citizens, are the ones managing the daily needs”. Struggles over jurisdiction in addition to struggles over the size of budgets are legend in the EU, of course, and such re-centralization tendencies have been observed during the eurozone crisis in Spain and Italy.
The long-term goal: reducing regional disparities to remain at the core of Cohesion Policy?
No doubt, the agreement on the recovery fund can already be considered an important milestone in the history of EU integration. Yet, when it comes to the distribution of funds among the different programs covered by the EU budget, previous reform ambitions have been curbed. Lucas Guttenberg, Deputy Director of the Jacques Delors Centre, has compared the initial 2018 budget proposal of the European Commission and the Council agreement. The ‘modern budget items’, such as security/defense expenditure, migration and border management as well as spending for the single market, innovation and digital have been cut most strongly. The area of security and defense was reduced by almost 40%, expenditures under the heading of the single market and Innovation have been cut by more than 10% compared to the initial 2018 proposal. This seems like a windfall for the traditional budget areas such as the Cohesion Policy and the Common Agricultural Policy. After initial plans to cut both budget items, the Cohesion Policy saw an overall increase by almost 10% of financial resources.
However, the fact that innovation related expenditures under the EU budget are cut, does not mean that the principal idea of increasing regional competitiveness through innovation strategies is put into question under the Cohesion Policy. To the contrary, the overall cohesion strategy as spelled out already in the 2018 Commission’s proposal is maintained. Since the re-launch of the Lisbon strategy in 2007, increasing regional competitiveness through innovation and research and development has become a separate policy objective of the Cohesion Policy and had already been reinforced by the Agenda 2020. Thus, a certain amount of funding for less-developed, transition- and more-developed regions needs to be earmarked to projects promoting research and innovation. This exemplifies how the long-term objective of EU Cohesion Policy – namely reducing regional disparities through various budgetary programs – remains anchored in the July agreement.
Concerns by the European Parliament: Can’t sign a bad deal
The European Parliament (EP) has already voiced its concern over the Council agreement, stating that it “will not rubber-stamp a fait accompli”. Apart from demanding a stronger role in the control of the recovery funds, the European Parliament has criticized the Council agreement on several aspects. Besides the massive shift from grants to loans in the recovery fund as pushed for by the frugal four, and a drastic cut of funding for EU flagship programs such as the Green Deal, the EP also contends that as of 2024, the EU budget will be below the levels of the current 2020 EU budget. This is likely to limit the ability of the EU to continue the Cohesion Policy’s main objective, namely reducing regional disparities.
When it comes to the recovery fund itself, national governments take primacy, too, in the allocation and administration of funding. The lion share will be handled via the Recovery and Resilience Facility (RRF) with €312.5bn grants and €360bn loans in total. Yet, it remains unclear in how far sub-national or regional authorities will be able to retrieve funding from the RRF and in how far they can determine how to spend it. Thus, the chair of the EU regional development committee, Younous Omarjee, stated that “It is also essential that the recovery plan is directly accessible to the regions and that it can be controlled democratically”. This will be vital to support regional autonomy in the upcoming years and greater financial independence from national governments despite potential economic downturns.
The Council agreement is therefore not yet cut and dried, and we can expect fierce inter-institutional negotiations between the Council and the European Parliament in September 2020. So far, the EU has shown that it can move forward and find common positions to overcome the pandemic and prepare for socio-economic downturns in the years to come. It will now be important to take regional needs seriously. Different important objectives such as the fight against the pandemic and the fight against regional disparity do not necessarily align. Italy’s COVID-hot spot Bergamo belongs to one of the richest regions in both Italy and the EU. And some of the poorest regions in Italy such as Sicily or Calabria have been quite fortunate in terms of COVID-19 dispersion. Policy makers need to pay attention to the continuing need for greater regional cohesion in spite of the more pressing need to fight the pandemic. Given the importance of public health in the battle against the pandemic and the correlation of public health and economic prosperity, both, the immediate fight against Corona and the long-term objective of decreasing regional disparity need not to be pitted against each other.