The coronavirus pandemic has, in a few months, shaken Europe and the world to the core. People were faced with an invisible enemy that confined them to their homes. Some lost their job, and many are facing financial difficulties. Some lost their loved ones, and others will. And the clouds of uncertainty are still on the horizon. No one knows what tomorrow will bring – and the only certainty is that life will not be the same again.

Europe’s healthcare and welfare systems are being tested daily – and economies face huge losses.

This is the most drastic economic crisis in Europe’s history. The restrictions imposed to control the spread of the pandemic slowed down economies – in some cases, to a standstill. Household spending and private investment collapsed, demand-and-supply chains were disrupted, and the industrial ecosystem has, for months, been operating at a fraction of its capacity. When taken together, all these factors contribute to a slump in the EU’s Gross Domestic Product – which, based on estimates is expected to fall by some 15 per cent in the second quarter of 2020, according to the 2020 Spring Economic Forecasts. Overall, the EU economy is expected to shrink by seven per cent this year while unemployment is expected to rise to nine per cent. 

Such turmoil underlines the importance of a plan for recovery. 

Since the start of the pandemic, the EU has already taken several steps, with the aim that not one member state is left behind. The EU supported national efforts to tackle the crisis, including using its full flexibility in the budgetary and State aid rules. Since the start of the pandemic, the EU has already taken several steps, with the aim that not one member state is left behind. The EU supported national efforts to tackle the crisis, including using its full flexibility in the budgetary and State Aid rules. This has allowed the mobilisation of almost € €2.8trn in first response aid broadly made up of resources mobilized by the Member States thanks to the Commission’s temporary framework enabling state aid, unused EU budget funds, and ECB and EIB programmes. 

Last Wednesday, European Commission president Ursula von der Leyen presented a two-pronged plan to revive Europe’s economy: an updated blueprint for the EU’s Multiannual Financial Framework and a new Recovery Instrument. In total, the Commission is proposing €750 billion to be added to the next EU long-term budget, envisaged to be of €1.1 trillion, for a total of €1.85 trillion for the next seven years.

What is the Multinannual Financial Framework?
The MFF (Multiannual Financial Framework) is the EU’s long-term budget and usually covers a seven-year-period. It is an investment budget and cannot run a deficit – which makes it unique. 

The MFF pools resources to implement policies and assist member states deliver on common challenges such as fighting climate change, digital challenges, defence and border security. Some 93 per cent of the MFF benefits citizens, regions, cities, farmers, universities and businesses, with the EU’s administrative expenses accounting for less than seven per cent. 

The next MFF covers the period 2021-2027.

The MFF presented this week is an updated version of the original May 2018 proposal, in order to reflect Europe’s new reality and prepare the future challenges for a stronger and more sustainable Europe.

In an unprecedented move in response to the current COVID-19 pandemic and its devastating impact, this MFF is coupled with a recovery instrument on top of it, as called for by the European Parliament.

Next Generation EU 
On Wednesday, European Commission President Ursula von der Leyen proposed in Parliament to create a new recovery instrument, Next Generation EU, embedded within a powerful, modern and revamped long-term EU budget.

Worth €750 billion, this new Recovery Instrument would be rolled out in three pillars. The first is supporting member states to recover, repair and emerge stronger from the crisis. The second is kick-starting the economy and mobilising private investment. And the third pillar is learning the lessons of the crisis and addressing Europe’s strategic challenges.

The recovery instrument would use joint debt incurred by the 27 member states. President von der Leyen said the plan would provide €500 billion in grants to countries hit hardest by the pandemic, and make another €250 billion available as loans.

The grants are in line with an agreed initiative presented last week by German Chancellor Angela Merkel and French President Emmanuel Macron.

Presenting Next Generation EU, president von der Leyen said: “The recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: the European Green Deal and digitalization will boost jobs and growth, the resilience of our societies and the health of our environment.”

For Parliament’s President David Sassoli, “This is a 21st century European D-Day. Europe has recognised that solidarity and a common approach is the only way to support the rebirth of our economies, protect citizens and workers, provide for the coming years, and leave a legacy for future generations." Reacting positively to the proposal presented by the Commission, President Sassoli warned that “the Council must not put forward a proposal that lowers the ambition of what the Commission has outlined to the Parliament today”.

How will the money be raised? 
According to the Commission proposal, Next Generation EU will raise money by temporarily lifting the own resources ceiling to two per cent of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. This additional funding will be channelled through EU programmes and repaid over a long term throughout future EU budgets – not before 2028 and not after 2058.

Apart from the individual programmes in the three pillars, the Commission is also proposing to reinforce the flexibility of the EU budget and emergency tools for the period 2021-2027.

The proposal would have to be agreed in the EU Council, among the different states including Malta, and achieve the consent of the European Parliament. The last MFF, which is currently in place, was adopted under the new provisions of the Treaty of Lisbon, according to which the Council must unanimously adopt the MFF regulation after obtaining the consent of Parliament - meaning that the Parliament has a de facto right of veto. The provisions also provide for the Council to decide on the MFF by a qualified majority, and voices have already been raised in Parliament calling for the Council to move from unanimity to qualified majority voting on the plan for the new MFF and recovery instrument just proposed.

Parliament’s lead negotiators for the budget, reacting to the Commission proposal, said that while Parliament shares the view that the recovery plan is to be channelled through the MFF and must be embedded in a reformed system of own resources, regrettably the Commission is only putting forward a menu of possible revenue sources rather than submitting concrete legislative initiatives for a basket of new own resources as requested by Parliament.

Political group leaders broadly welcomed the proposal, but raised questions not only concerning where the money would come from, but also what conditions may be attached. 

MEP Roberta Metsola, head of the PN Delegation in the European Parliament, said that the recovery package could be a watershed moment for Europe and Malta.

“We have managed to ensure that Malta and Gozo are eligible for a recovery package of close to €1 billion in grants and loans that we can use to transform our post COVID-19 economy into truly a circular, green and sustainable one. The figures being reported are €350 million in direct grants with an additional €642 million being made available, if needed, in lower interest loans. Per capita these are some of the highest figures across member states.

“This means Malta can protect jobs, rescue industries and save livelihoods –more importantly it can use this cash injection to revitalise our economy and put sustainability at the heart of our policy making. It is a one-off opportunity that we should not waste.

“Of course, one can always make the argument we could use more or that the funds could be financed differently – and I am sure we will keep making this point going forward. But the overall package for our country and our Union is positive. That does not mean there will not be negotiations in the near future. Member states will now need to agree and the European Parliament will have to be consulted.”

For Dr Metsola, there are still some open questions as to how the funds will be raised, whether the ‘own resources’ concept being proposed satisfies every State’s sovereignty, whether the overall €750 billion is enough to see us all through and whether the ratio of loans to grants is the right mix for everyone.

“These are all issues we will continue to negotiate on,” she said, adding how, “Malta’s red lines as a country, whether this is on taxation policy or competitiveness are clear, defined and accepted, they will not be crossed. That said, there is a clear path for this recovery package to move forward while respecting our red lines and I’m hopeful Government will join our delegation in making these points in the weeks to come.

“Now the challenge is to drive home that Europe is not only about funds but about democracy, rule of law and solidarity. This is a moment in our shared history and time and again Europe has shown that is stronger when it acts together and protects its values. We can do so again.”

MEP Miriam Dalli, Head of the Maltese Labour Party delegation and vice president of the Socialists and Democrats Group, described the recovery plan as “much awaited”.

“The €750 billion of this recovery fund are made up of a mix of loans and grants. Initial figures are allocating €992million to Malta. Out of these, only €350 million are grants, whereas the rest are loans. No country should rely excessively on loans, which must ultimately be paid back and have the potential of submerging countries into deeper debts.

“This recovery plan is incorporated in the Multiannual Financial Framework. Money has to be raised by member states themselves, in what is known better as “own resources”. In the European Parliament, we are currently discussing the form that these “own resources” should take. While many are pushing in order to introduce taxation such as the Financial Transaction Tax, Digital Tax and CCCTB under the umbrella of “own resources”, the Maltese PL delegation will never agree to this. We believe there are other ways that are better suited in order to raise money that can serve as the EU’s own resources, such as contributions from plastic and the Emission Trading Scheme.

“What we need to ensure is that the sectors that are hit the most are given the greatest support. As recently as last Tuesday, during a meeting held with Commissioner Paolo Gentiloni, I insisted on the need to help the tourism sector with grants, because it is by far the hardest hit and crucial to member states like ours. 

“From a personal perspective, I’m glad that objectives under the Green Deal are incorporated into various funding schemes. Ultimately, investments must be directed in the right path to ensure that the EU remains on track towards a greener economy.

“What we have in front of us is what the Commission is proposing and this is by no means the final, agreed position. This proposal is yet to be discussed in Parliament and at Council level, with the aim of reaching an agreement in July. Together with my colleagues, I will be participating actively in these discussions to make sure that we defend our national position strongly. 

Malta’s reaction
Malta’s first reaction came in Parliament, with Finance Minister Edward Scicluna saying that while the new budget is “good fruit”, like a prickly pear, it needs to be handled with care. He said it could lead to unsustainable debts, and also that the fund could spell trouble for Malta’s fight against tax harmonisation. Malta has been strongly objecting to such a harmonisation plan saying this would deal a severe blow to the financial services and gaming industry as they would no longer be able to reclaim up to 30 per cent of the 35 per cent corporate tax paid here.

While no official figures have been divulged on the €750 billion fund, and this figure is subject to change as Council and Parliament negotiate, pre-allocation estimates have been reported in the local media, including almost €1 billion for Malta, of which €350 million would be in grants and the rest in loans. International media report that Italy would be eligible for over €80 billion and Spain over €70 billion. In reality, allocations will depend on the figures finally decided on in the negotiations in Council and between Council and Parliament. Money is then distributed according to what the individual Member States apply for and how their plans are assessed by the Commission. 

Next steps
Parliament and Council will discuss the new proposals and decide on their final shape in upcoming negotiations.

Parliament is set to begin its assessment of the new Commission proposal in Committee stage next Tuesday. Council meets next in June, but according to German Chancellor Angela Merkel, EU leaders won’t reach a compromise then but should get a deal by autumn. Germany will have the EU presidency for the second half of this year. 

Next Generation EU: the three pillars

1. Support to member states with investments and reforms:

• A new Recovery and Resilience Facility of €560 billion will offer financial support for investments and reforms, including in relation to the green and digital transitions and the resilience of national economies, linking these to the EU priorities. This facility will be embedded in the European Semester. It will be equipped with a grant facility of up to €310 billion and will be able to make up to €250 billion available in loans. Support will be available to all member states but concentrated on the most affected and where resilience needs are the greatest.
• A €55 billion top-up of the current cohesion policy programmes between now and 2022 under the new REACT-EU initiative to be allocated based on the severity of the socio-economic impacts of the crisis, including the level of youth unemployment and the relative prosperity of Member States.
• A proposal to strengthen the Just Transition Fund up to €40 billion, to assist member states in accelerating the transition towards climate neutrality.
• A €15 billion reinforcement for the European Agricultural Fund for Rural Development to support rural areas in making the structural changes necessary in line with the European Green Deal and achieving the ambitious targets in line with the new biodiversity and Farm to Fork strategies.

2. Kick-starting the EU economy by incentivising private investments:

• A new Solvency Support Instrument will mobilise private resources to urgently support viable European companies in the sectors, regions and countries most affected. It can be operational from 2020 and will have a budget of €31 billion, aiming to unlock €300 billion in solvency support for companies from all economic sectors and prepare them for a cleaner, digital and resilient future.
• Upgrade InvestEU, Europe's flagship investment programme, to a level of €15.3 billion to mobilise private investment in projects across the Union.
• A new Strategic Investment Facility built into InvestEU– to generate investments of up to €150 billion in boosting the resilience of strategic sectors, notably those linked to the green and digital transition, and key value chains in the internal market, thanks to a contribution of €15 billion from Next Generation EU.

3. Addressing the lessons of the crisis:

• A new Health Programme, EU4Health, to strengthen health security and prepare for future health crises with a budget of €9.4 billion.
• A €2 billion reinforcement of rescEU, the Union's Civil Protection Mechanism, which will be expanded and strengthened to equip the Union to prepare for and respond to future crises.
• An amount of €94.4 billion for Horizon Europe, which will be reinforced to fund vital research in health, resilience and the green and digital transitions.
• Supporting Europe's global partners through an additional €16.5 billion for external action, including humanitarian aid.
• Other EU programmes will be strengthened to align the future financial framework fully with recovery needs and strategic priorities. Other instruments will be reinforced to make the EU budget more flexible and responsive.

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