Leaked and Loaded

Bus stops all around Europe are filling with colourful advertisements of NextGenerationEU. This is your tax euros at work seeking to convince citizens that the flagship program of President von der Leyen’s first term has been an unqualified success. The recently leaked drafts on the EU’s next multiannual financial framework (MFF) verify that the Commission’s anticipated plan mimics the core features of the NGEU. This model should be subjected to serious and critical assessment, as it is ill-suited to addressing geopolitical and Europe-wide challenges and threats facing the EU today.

The Commission campaign gives visibility to the Commission President’s view that “enormous progress […] had been made thanks to NextGenerationEU” and implements her call that “[…] the Commission should be proud of its success and communicate this to citizens.” It is reminiscent what Giandomenico Majone used to call Brussels’s “political culture of total optimism”, which stands in contrast to the more cautious view of the President of the European Court of Auditors: “Halfway through the lifespan of the EU’s recovery fund, one should be careful about drawing conclusions on its achievements, as it is still too early to meaningfully assess its performance.”

The Commission – despite the claim at the time of its approval that NGEU would be a one-off and exceptional response to the Covid crisis – sees the programme as the blueprint for an ongoing transformation in EU governance. The view is supported by Mario Draghi, who, in his report, urged the EU to “build on” the NGEU model, which is centred on governance through national-supranational planning, following the model of the National Recovery and Resilience Plans (NRRPs) under the Recovery and Resilience Facility (RRF). As Ursula von der Leyen instructed in her mission letter to  Piotr Serafin, Commissioner-designate for Budget, Anti-Fraud and Public Administration, the EU must adopt a “simpler, more focused and responsive budget delivering on our priorities” that moves to a “policy-based budget from a programme-based budget”, with “a plan for each country linking key reforms with investments targeted to where EU action is most needed”. The same ideas are included in the political guidelines of the second von der Leyen Commission. Moreover, they are reiterated in the Commission’s recent communication on “the road to the next multiannual financial framework” and the leaked drafts of the next multiannual financial framework that are currently circulating in Europe, which are expected to turn into formal proposals by June-July this year.

But what does the “NGEU model” really mean, and is it a useful model at all for steering the future of EU finances in a direction that would efficiently promote European value added? Count me among the sceptics.

NGEU model in action

The NGEU model is characterised by a number of key features. First, it aims to overcome competence limitations through the use of financial incentives (a.k.a. buying influence) in areas of national competence. Legislative steer for the use of EU funds is kept extremely light and limited to highly general “common objectives” such as “digital” or “green”, with no concrete EU-level objectives for Member States to align with, and no coordination of national action to pursue European synergies. Within this loose framework, each Member State is given the freedom to plan its own set of national projects in its own national silo.

The Commission will insist for each Member State to come up with a decent amount of convincing-looking “milestones and targets” that tick the appropriate boxes and can then be used to justify disbursing its pre-allocated share of the funding, but that’s as deep as the scrutiny goes. Beyond that, the Commission will not second guess Member States’ prioritisations, nor does it require evidence that the intended uses for the funds are the “best” from the European or even the national viewpoint. In the context of the RRF, the lack of legislative steer and the emphasis on national ownership resulted in entirely nationally-focused programs, with few or no cross-border elements. The nearly 300 bn €  RRF allocation for “green” projects ended up financing lots of solar panels, electric vehicles and the infamous Italian superbonus, but it made almost no contribution towards a well-planned, integrated European energy system.

Second, to enable this process, the cohesion flexibility clause of Article 175(3) TFEU has been turned into a general EU spending power, both for “the general Welfare” and soon “the common Defence”. The requirements of earlier case law have been set aside, as has the focus of cohesion policy on disadvantaged regions. Instead, the EU transfers funds to central governments for nearly any purpose. An interesting tension arises here with the expectation of the German Federal Constitutional Court that the proceeds of borrowing, as “other revenue”, would only be “used for the exercise of competences conferred upon the European Union and, to that end, are from the outset strictly assigned to such specific purposes” (para 171).

Thirdly, the framework tries to avoid the low-compliance curse of the European Semester by emphasising “national ownership”. In practical terms, “ownership” here refers to national governments, and empowers a small set of technocratic and executive officials in Brussels and in national capitals to negotiate issues that fall primarily under national competence. This creates a tension with ensuring how the money is actually spent. Under normal circumstances, it should be national parliaments, not the Commission nor the national governments, that are supposed to exercise legislative competence under national constitutions. Under the NGEU model, national parliaments are now “incentivised” by the financial rewards to accept the planning commitments that their government has negotiated with the European Commission. The negotiation process is characterised by a foundational secrecy over how EU money is spent.

Fourth, there is no genuine peer scrutiny of RRF spending by other Member States, and even the Commission’s scrutiny remains, for the most part, highly superficial. It seems clear that the EU lacks the expertise, the information, and the resources properly to evaluate the merits of the thousands of investment and reform projects that constitute the RRF. The same applies to the absorption capacity of the Member States that are biggest recipients of funds. In some cases, support from the EU amounted to up to 17 percent of the recipient Member State’s GDP.

Finally, the “incentive” money paid by the EU under the performance-based “funding not related to costs” (FNLTC) model has no relation to the actual costs (if any) of the reforms that Member States include in their plans. The “value” of each reform is based on a discretionary assessment of the Commission. After disbursement, the money lands in a national budget and can be spent on anything, which has of course helped many States that, in the early days of the pandemic, were seen to be at risk of financial distress, to maintain fiscal support for their economies. In this respect, it is a pure transfer.

The European Court of Auditors has repeatedly expressed concerns about how to subject the “money-for-reforms” model to proper financial accountability. While “designed to deliver results efficiently and simplify financial management”, the ECA does not

expect administrative burden and the costs of control to be reduced as compared to traditional cost-based instruments. We have previously emphasised that simplification must not be at the expense of accountability. So far, the Commission has not sufficiently clarified how to design control systems that both account for the RRF’s FNLTC delivery model and provide reasonable assurance on the absence of double funding at member state and final recipient level.

So, what can we credibly say about the NGEU model today? It certainly had an impact in the early days of the pandemic and may even have saved the EU from another Euro crisis. That, of course, was the key reason for its establishment and the main yardstick against which its success should be measured. But measured against the yardsticks of democratic governance, financial accountability and efficient allocation of the limited Union resources, the model does not look like a blueprint to emulate.

New Commission Communication

The recent Commission Communication reminds us that, surprisingly, debt is not free money:

to reimburse the principal and interest of NextGenerationEU debt, about EUR 25-30 billion per year may be needed over the next multiannual financial framework. This is almost 20% of the current [EU] annual budget. This is twice the annual budget for Horizon Europe, and twice the total amount of the budget for security and defence under the current multiannual budget for the whole 7 years.

While the budget is being squeezed by interest payments, new genuinely European funding needs keep emerging, not least in the area of security and defence. The proposals for new own resources remain stalled in the Council, and Member States are unlikely to welcome higher GNI-contributions either. The EU is faced with a serious need to prioritise and make sure that the limited resources are truly directed to serve vital Union wide interest. The obvious lesson from the RRF is that spending the budget through 27 performance-based national plans is not going to deliver that.

There is no trace of such recognition in the new Commission Communication. Commission plans build heavily on the key features of the RRF, arguing for a “plan for each country with key reforms and investments, and focusing on our joint priorities, including promoting economic, social and territorial cohesion”. The Commission is dreaming of a bigger budget, and makes no secret that the new budget will require significant debt-financing. The Draghi Report argues that “the EU should continue – building on the model of NGEU – to issue common debt instruments, which would be used to finance joint investment projects that will increase the EU’s competitiveness and security.” However, debt is not free, and comes with duties of re-payment that will be carried jointly by us, EU tax payers. Therefore, we need safeguards to ensure that our money is actually put to good use.

Mega-RRF in the making

The leaked Commission MFF documents concretise the ideas presented in its earlier documents. A number of current funding programmes (including cohesion, climate and the environment, agriculture, migration and security) would be replaced by a new mega-RRF “name to be defined” programme, based on pre-allocated national envelopes that are distributed on the basis of national plans. Some of the current funds would continue without pre-allocated shares under direct management. Financial programmes in the areas of research, digital, clean transition, defence & space and health & biotech would be brought under a new European Competitiveness Fund (following the Draghi Report), while a number of other funding programmes such as Connecting Europe Facility and Erasmus would continue independently.

The leaked parts of the Communication do not indicate any allocation of funding between the different programmes. Therefore, it remains undefined whether for example the EU’s much-needed energy union would be funded through the national plans under the new mega-RRF or perhaps under the Connecting Europe Facility. If the former, past experiences offer little hope of big steps in the near future. Neither is the new mega-RRF likely to be any more inclusive, transparent, respectful of parliamentary prerogatives or more capable of ensuring European value added than the RRF model has been.

The RRF planning model, and its quest for “national ownership”, was born out of the specific mindset and diagnosis related to the euro crisis: that the main reason for the Union’s ills were structural deficiencies in the Member States. The challenges and threats facing the EU today are different. They are geopolitical and Europe-wide and require a common response. And yet, the Commission is stuck in the same rabbit hole, trying to respond to European challenges through 27 national plans. When the only tool you have is a hammer, then every problem looks like a nail.

The leaked Commission documents indicate no effort for self-scrutiny as to whether the performance-based model of national plans is a sensible and sustainable way of using EU public funds in directing EU funds to good uses. Subsidiarity, together with scarcity of public funds, require that the EU focuses on what it can do best, and where its efforts are most crucially needed and bring value added. Other things are best left to national and local levels.

The free world needs more Europe, and there are plenty of things that we can only do together. What stands clear is that the NGEU model, without further deep analysis and reconsideration, is not an efficient means to realise these objectives. Indeed, upon closer examination, it may rather hinder their realisation.