Will Cohesion Policy Recover from COVID?

With the inter-institutional negotiations on the Multinational Financial Framework still some distance from agreement, pressure is increasing on the Council and European Parliament to find a compromise that provides certainty on the EU’s contribution both to recovery and longer term objectives.  The delay is of particular concern for EU Cohesion Policy, which has played a crucial role in the EU’s response to the COVID-19 pandemic through the mobilisation of investment and greater flexibility for Member States to tackle the effects of the crisis. The EU Recovery Package provides additional funding to Cohesion policy on a temporary basis through REACT-EU, but the main budgetary winner is the new Recovery and Resilience Facility. Moreover, the Council agreement on the MFF 2021-27 has cut the cohesion budget by 9 percent compared to 2014-20, and there are concerns that the long terms goals of the policy are being weakened. Further, Member States are faced with the triple challenge of spending the funding for 2014-20, adapting programmes and interventions in response to the crisis, while preparing the 2021-27 programmes and new instruments to support recovery and territorial cohesion.

What still needs to be resolved?

The Special European Council on 17-21 July 2020 was significant for reaching agreement on an innovative and substantial Next Generation EU recovery package in response to the COVID-19 crisis. The package broke new ground by enabling borrowing powers, and it introduced new conditionalities relating to structural reforms and minimum spending to address climate change. Agreement by the Council was, however, only reached by cutting proposed spending on ‘flagship programmes’ championed by the European Parliament  (Table 1) such as Horizon Europe, InvestEU, Erasmus+, the Child Guarantee, the Just Transition Fund, Digital Europe and Connecting Europe Facility and the European Defence Fund

The Next Generation EU recovery plan will provide up to €750 billion through a mix of grants and loans. At its heart is the Recovery and Resilience Facility (RRF), requiring Member States to draw up national recovery and resilience plans setting out both investment and reforms over the 2021-23 period. The Multiannual Financial Framework 2021-27 will make available €1,074.3 billion in commitment appropriations. The largest shares continue to be allocated to Cohesion Policy and the CAP, though their share (at 54 percent) of the budget has fallen substantially, with increased funding for priorities such as innovation, migration and security.

There are several important issues that were not fully resolved in the Council agreement or are subject to interpretation. One is the ability of the EU to deliver on the expectations associated with the RRF in terms of spending the funds effectively, promoting structural reforms, ensuring coherence across instruments and providing sufficient accountability. A second issue is whether Member States can reach agreement on the application of a rule of law conditionality to expenditure. Despite the progress made by the German Presidency in narrowing differences between polarised positions, it is unclear how significant the influence of the conditionality is likely to be in practice.  Also challenging issue are the ambitious changes proposed for reforming the system of Own Resources especially the carbon and digital taxes given the implications for international trade and relations.

Table 1: Commitments to Next Generation – EUCO conclusions vs Commission proposal

Source: EUCO conclusions, 21.7.20, Commission proposal, Pillars of NGEU, https://bit.ly/3iXVmzQ

Who gets what?

The budgetary implications of the Council agreement for Cohesion Policy are significant, implying a reduction of 9.2 percent in MFF funds for cohesion for 2021-27 compared to 2014-20, with marked variations across countries (Table 2). A total of 17 countries are set to see a reduction in Cohesion funding in 2021-27 under the EUCO conclusions, while only four countries would see an increase compared to 2014-20 (Italy, Romania, Greece and Bulgaria).

Table 2: Cohesion Policy allocations in 2014-20 and 2021-27

Source: EPRC calculations from Implementing decision 2016/1941 (amending Decision 2014/190), using standard Cohesion Policy deflator and European Commission data. The totals concern only national allocations.

NGEU is legally distinct from the MFF as the resources are ‘externally assigned revenues’ which, in principle, are beyond the purview of the European Parliament. Nevertheless, NGEU funds are set to contribute to Cohesion Policy through REACT-EU, as well as to other funding sources with territorial implications (EAFRD and Just Transition Fund) or through Recovery and Resilience Plans (for the RRF grants). The redistributive effect of Cohesion Policy and other recovery instruments differs: 70 percent of the MFF Cohesion budget is allocated to Cohesion countries, compared to only 47 percent of RRF grants and an estimated 54 percent of React-EU.

Table 3: Proposed and estimated national allocations under ‘territorial’ funding streams (€m)

Note: Colour coding serves to highlight the most significant funding source in each country.

Source: Cohesion Policy and RRF grants: European Commission; REACT-EU: EPRC calculations from COM(2020)451, OECD forecasts, Eurostat and AMECO Online data adjusted for EUCO outcomes; EAFRD: EPRC calculations from COM(2018)392 as amended and adjusted for EUCO outcomes; Just Transition Fund: COM(2020)460; QANDA/20/931 adjusted for EUCO outcomes.

 

Are the funding flows manageable?

Programme authorities responsible for ESIF are dealing with a moving target for the current and future period with substantial administrative work required in a tight time-frame. At this point in the programming cycle, the priority is usually ensuring commitment of funding allocations (which in some Member States remains a big challenge), complicated this year because of the pandemic. Cohesion Policy provided a rapid response to the first pandemic wave through the Coronavirus Response Investment Initiatives (CRII and CRII+) to facilitate liquidity and spending under the 2014-20 programmes by introducing administrative flexibilities. By the end of September 2020, more than €13 billion ERDF/CF has been reallocated to interventions in health, SME support, employment and other relevant fields. Not all managing authorities has much flexibility for redirecting spending; where resources for 2014-20 were already largely committed, responses have focused on adjusting calls and supporting existing beneficiaries to adapt to the new context.

At the same time, Member States are preparing the next round of programmes for 2021-27. Most countries expect to finalise their 2021-27 PAs and OPs by in the first quarter of 2021, despite the delayed approval of the regulations, disruption to the programming process and, in some cases, adjustments to priorities to take account of COVID.  A key strategic concern is that there is insufficient coherence across the new EU recovery instruments with Cohesion Policy. The potential for synergies with the RRF is viewed positively by some countries, but there is also potential for overlap and competition for funding as well as fears that the prioritisation of the RFF could lead to a reduction of cohesion resources in the post-2027 period.

There are some important similarities between Cohesion Policy and the RRF suggesting there is strong potential for pursuing strategic coherence and synergies across the policies. They share a common legal basis in cohesion, are investment policies that are aligned with the European semester and have similar management and control obligations. The RRF could contribute to modernising the European semester and Cohesion Policy.

However, there are also inconsistencies in the territorial dimension, time-frame, management mode and financing, which could present difficulties in aligning the two policy domains and even competition for funding. The pressure to absorb the RRF in 2021-23 could conflict with the closure of the 2014-20 OPs and present implementation challenges in ensuring high-quality investments in mature projects aligned with the Green and Digital agendas. While the RRF does not have a place-based territorial focus like Cohesion Policy, the national objectives of the RRF are not irreconcilable with cohesion objectives given that national policies have spatial impacts on specific territories and can promote geographical spillover effects supporting both efficiency and equity goals.

Taking a longer term view, a fundamental issue is whether the Cohesion Policy response to the crisis is blurring the purpose and long terms goals of the policy. The need for administrative flexibility to deal with the economic and financial consequences of the pandemic is undisputed. However, several net payers and the Commission argue that Cohesion Policy responses should be exceptional and temporary to ensure that the long-term structural objectives and spending priorities on green and smart growth are not undermined.

The major challenge for the Member States and EU institutions is now to use the available resources to facilitate recovery from the COVID-19 pandemic, whose health threats continue to constrain economic activity – and may continue to do so until a vaccine is widely introduced. The pandemic has of course affected countries and regions differently. The risk is that it will further entrench territorial inequality, slowing a resumption of European regional convergence, especially in those parts of Europe that have yet to recover fully from the financial and economic crises of the late 2000s.

 

 

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