Questions and Answers: Commission proposes to reinforce long-term EU budget to face most urgent challenges
MAIN ELEMENTS
What are the main conclusions of the review?
The review has drawn several conclusions:
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-The EU budget has been very effective in responding to unexpected needs and crises since the adoption of the Multiannual Financial Framework (MFF) in 2020. This response has come through significant redeployments and reprioritisation, as well as use of the limited available flexibilities. For instance, existing funds have been used to respond to the energy crisis with REPowerEU. Cohesion Policy funds have been mobilised to support Member States with the reception of people fleeing the war in Ukraine. As a result, budgetary flexibilities are now largely depleted.
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-The EU budget has been instrumental to support Ukraine, in an expression of EU's unconditional support in the fight against the Russian aggression. However, the EU budget is not currently equipped to provide the additional substantial support that Ukraine needs for the remainder of the MFF period (to end-2027).
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-Implementation of EU funds is progressing, although with some differences. For some programmes - in particular under cohesion policy - implementation by managing authorities has started with some delay and an acceleration is now needed.
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-A quicker and targeted deployment of financial support is needed to support EU competitiveness. This could be achieved through the leveraging and reinforcement of existing EU instruments.
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-Interest rates have increased at an unprecedented pace as inflation rose and the economic environment has become less favourable. This affects borrowing costs, including those for NextGenerationEU.
In short, a targeted revision of the MFF is necessary to equip the MFF with the means to ensure that the EU can meet its legal obligations and address the most urgent priorities.
How much more money are you proposing? For which programmes?
The proposal covers a targeted set of political priorities and necessary technical adjustments to the 2021-2027 budget to ensure that it can deliver until the end of the period.
More concretely:
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-To cater for Ukraine's immediate needs, recovery and to support Ukraine on its European path, the Commission is proposing the creation of a flexible instrument with an overall capacity of €50 billion. This instrument will provide repayable (loans) and non-repayable support (grants and guarantees). The financial architecture for the support to Ukraine offers a balance between programmability and flexibility, with the possibility to calibrate the support annually in light of the evolving needs and situation on the ground, while facilitating reforms and investments in Ukraine in light of its EU integration path.
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-The Commission proposes the creation of the Strategic Technologies for Europe Platform (STEP), building on existing programmes such as InvestEU, Innovation Fund, Horizon Europe's European Innovation Council, European Defence Fund, EU4Health, Digital Europe, while incentivising further funding from the Recovery and Resilience Facility (RRF), and cohesion policy funds. This Platform will allow to direct existing funding towards STEP projects and speed up implementation in digital and deep tech, clean tech and biotech sectors which are crucial for Europe's leadership. To boost the investment capacity dedicated specifically to the priorities of the STEP, the Commission further proposes to allocate an additional €10 billion, which together with the incentives under cohesion policy and RRF is expected to leverage up to €160 billion of investments.
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-To address the needs related to migration pressures, to strengthen global partnerships and to respond to emergencies, the Commission proposes to increase Heading 4 of the MFF (“Migration and Border Management) by €2 billion, Heading 6 of the EU Budget (“Neighbourhood and the world”) by €10.5 billion and the Solidarity and Emergency Aid Reserve (SEAR) by €2.5 billion. This will also provide the necessary resources for the implementation of the New Pact on Migration and Asylum, support Syrian refugees in Türkiye and the region, guarantee further Macro-Financial Assistance in neighbourhood countries and replenish the cushion of the Neighbourhood, Development and International Cooperation Instrument (NDICI-GE).
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-To cater for the impact of the unprecedented increase of interest rates on NextGenerationEU funding costs in the most efficient way, the Commission proposes a new special instrument over and above the ceilings of the Multiannual Financial Framework. The new instrument will cover exclusively the additional costs relative to those already included in the financial programming.
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-To meet the Commission's legal duties and to deliver on the additional responsibilities assigned by the co-legislators to the Union, it is necessary to raise the ceiling of Heading 7 by €1.9 billion.
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-To equip the Union to respond to unforeseen needs over the remainder of the Multiannual Financial Framework, the Flexibility Instrument should be increased by €3 billion for the period 2024-2027.
Does this mean additional financing by EU Member States?
The MFF was decided back in 2020, since then, the world has drastically changed. The economic and social effects from Russia's war are tremendous, with impacts, among others, on energy costs, consumer prices, interest rates, supply chain disruptions. These effects are felt in Ukraine, in the Union as well as in the rest of the world including our close neighbours.
While the multiannual nature of the EU budget provides stability and predictability, it has limited capacity to respond to major unexpected events, and its flexibilities are being depleted as extensive use of redeployments and reprogramming, on top of existing budgetary flexibilities, has been necessary to address the unforeseen challenges. Faced with this situation, the Commission sees no alternative to ensure that the EU can deliver on all its objectives, especially the most urgent ones, until the end of 2027, than to propose a targeted revision of the Multiannual Financial Framework 2021 - 2027.
How is the Commission proposing to support Ukraine?
The Commission is proposing the creation of an integrated and flexible instrument, the Ukraine Facility, with an overall capacity of €50 billion over 2024-2027. The amounts will be defined on an annual basis depending on Ukraine's evolving needs and implementation capacities.
Underpinned by a Ukraine Plan to be presented by the Government of Ukraine, the Ukraine Facility will support Ukraine's efforts to sustain macro-financial stability, promote recovery as well as modernise the country whilst implementing key reforms on its EU accession track.
The financing will be provided in the form of loans and non-repayable support (‘grants' and guarantees), with the actual distribution being determined annually. Thanks to this construction the instrument will provide certainty for a multiannual commitment and flexibility to adjust annually to evolving needs on the ground.
This translates into stable and predictable funding under a framework that ensures the protection of the EU budget and the sustainability of the Union's and Ukraine's finances.
The loan support will be financed by borrowing on the financial markets and guarantees through the headroom of the EU budget. The headroom is the difference between the own resources ceiling (i.e. the maximum amount of resources that the Commission can ask Member States to contribute in a given year) and the funds that the Commission actually needs to cover the expenses foreseen by the budget. The non-repayable support will be financed through the EU annual budget under a new special instrument, the Ukraine Reserve, with resources over and above the MFF expenditure ceilings.
What are the key principles of the financial architecture for support to Ukraine?
A dedicated maximum amount for 2024-2027 will be established for both loans and non-repayable support in form of grants and guarantees.
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-The funds for the grants and guarantees will be mobilised annually via a new proposed Special Instrument (Ukraine Reserve) that can finance all pillars of the instrument: Pillar I (Ukrainian plan), Pillar II (guarantees), Pillar III (technical assistance).
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-The loans will be directly guaranteed by headroom, similar to MFA+ and can be used for financing only Pillar I (i.e. the Ukrainian plan).
The level of support would be calibrated annually, including the share of loans and grants. The instrument gives balance between flexibility and predictability according to the evolving needs on the ground given war developments, Ukraine implementation, absorption and debt capacity.
How is the Commission proposing to reinforce competitiveness?
The Commission proposes the creation of STEP to support the EU's industrial competitiveness through investments in the development and manufacturing of critical forward-looking technologies in the fields of digital and deep tech, clean tech and biotech.
Across programmes, the Commission proposes a ‘Sovereignty seal' enabling projects eligible under one programme but not fully funded to have better access to funding under other instruments.
To boost the investment capacity dedicated specifically to the priority of promoting European sovereignty, the Commission further proposes to allocate €10 billion.
Finally, the Commission is setting up of a new ‘One-Stop-Shop' and a Sovereignty Portal to support project promoters access information about EU funding possibilities available at EU and national level. This should reinforce the possibilities for companies seeking to invest in Europe to have rapid and easy answers to funding and regulatory questions to facilitate their investment decision-making.
What exactly is the Commission proposing to respond to global challenges beyond the war in Ukraine?
In view of the increasing number of crises and respective needs, the Commission is proposing to reinforce the EU budget with a view to:
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-Implement the New Pact on Migration with €2 billion for Heading 4 Migration and Border Management).
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-Deliver on absolute necessities in a context of extraordinary geopolitical tension with €10.5 billion for Heading 6 Neighbourhood and the world.
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-Reinstate the Union's capacity to respond to crises and natural disasters with €2.5 billion over the period 2024-2027 under the Solidarity and Emergency Aid Reserve.
How will the Commission make sure that the budget is fit to react to future crises?
The EU budget flexibilities and the possibilities for redeployments and reprioritisations are severely diminished after a few years of implementation. The MFF needs to be revised to cope with future crises and unexpected needs.
For this reason, the Commission proposes a reinforcement: the Solidarity and Emergency Aid Reserve (SEAR) and the Flexibility instrument.
The SEAR can help non-EU countries with emerging needs stemming from conflicts, the global refugee crisis. Its resources can be used also to help tackling emergency situations due to major natural disasters or public health crises in Member States and accession countries. In 2021 and 2022 the requests received were far above the budget availability. As a result, not all needs could be met. A similar situation is expected for 2023. For this reason, the Commission proposes to increase the SEAR by €2.5 billion over the period 2024-2027.
The Flexibility Instrument can top up any programme for unforeseen needs and has been used extensively since 2021. Moreover, 75% of all budgetary margins for the 2021-2027 period have been used or earmarked. Therefore, reinforcing the Flexibility Instrument is necessary in an uncertain and volatile environment. The Commission therefore proposes to increase the Flexibility Instrument by €3 billion for the period 2024-2027.
How does the Commission intend to deal with increasing borrowing costs?
Since the beginning of 2022, due to increasing uncertainty in financial markets and monetary policy tightening to respond to high inflation, bond market rates in the EU and beyond have risen significantly.
The pace of the increase in interest rates for all bond issuers, including the EU, has been one of the steepest witnessed in financial markets in the past decades. Interest rates on 10-year EU-Bonds have increased from 0.09% at the time of the inaugural 10-year NextGenerationEU bond in June 2021 to 3.09% in the most recent issuance in April 2023. Comparable increases have been observed for highly rated euro area sovereign issuers.
The sudden and sharp increase in interest rates has substantial budgetary implications. For the MFF 2021-2027, an amount of €14.9 billion (in current prices) under Heading 2b had been planned for covering the interest payments for NextGenerationEU non-repayable support. This was based on interest rate expectations back in 2020 (when long-term interest rates were historically low) and locked in the funds for the future 7 years.
Given the volatility of interest rates, planning those costs over the long term is prone to large deviations.
Therefore, the Commission proposes to create, for the period 2024-2027 a new special instrument, over and above the ceilings, to cover exclusively the funding costs of NextGenerationEU in excess to what is currently planned in the MFF.
Why is there a need to increase expenditure for administration?
The new initiatives on which the EU had to deliver over the last two years came with substantial additional tasks for the European administration, without a corresponding increase in staff. Examples include the Digital Markets Act und Digital Services Act, support to Ukraine, the Health Emergency Preparedness and Response Authority (HERA), Fitfor55, the Carbon Border Adjustment Mechanism (CBAM), REPowerEU. This has pushed the resources of European administration to the limit.
Rising inflation has put extra pressure on administrative resources and the EU's capacity to fulfil its legal obligations. The Commission has made exceptional efforts to reduce administrative costs and redeployed more than 900 posts internally since 2019. A new building policy, covering the 2022-2030 period, has significantly reduced office space. Drastic cuts have been introduced for missions, meeting and representation costs. While the Commission will continue to work in this direction, the leeway for reallocation is being used up. The current ceilings of heading 7 will not be sufficient to accommodate the actual needs triggered by the inflation and an update is needed.
NEXT STEPS
What is the timeframe for reaching an agreement on the MFF mid-term review?
The negotiations, including the Parliament's consent, must be concluded before the end of the year to alleviate the current budgetary pressures and release funds in support of Ukraine, migration and external needs, and competitiveness from January 2024.
Timely approval of today's proposal is of the essence. The Commission counts on the incoming Spanish Presidency of the Council of the European Union to take work in the Council forward in view of a swift compromise immediately after the summer. This compromise could then be endorsed by the European Council in October.
What is the impact of this proposal for the 2024 annual budget?
The Commission presented its proposal for an annual budget for 2024 on 7 June 2023.
The draft budget seeks to provide key funding to the EU's political priorities, with green and digital spending continuing to be prioritised to make Europe more resilient and fit for the future. However, it does not provide the necessary funding for Ukraine, competitiveness, the new Pact on Migration and Asylum and sustained external challenges and new emergencies.
Today's proposal gives the EU the ability to act as a global partner, a conscious neighbour and in support of our businesses and citizens.
On the basis of the feedback received by EU Member States in the Council, the Commission stands ready to amend its proposal for a draft budget 2024 to reflect the outcome of the negotiations of today's MFF revision.
For More Information
EU budget: Commission proposes to reinforce long-term EU budget to face most urgent challenges
Factsheet - A New Ukraine Facility