Letter from the Minister of Foreign Affairs, Stef Blok, and the Minister of Finance, Wopke Hoekstra, to the House of Representatives concerning the government’s assessment of the Commission’s proposals for the Multiannual Financial Framework 2021-2027 and the COVID-19 outbreak recovery strategy

Parliamentary document | 12-06-2020

This letter considers and assesses the two Communications and the Commission’s five proposals as a package since they are closely connected. These are the core elements of the proposed package. This letter fulfils the government’s undertaking, given at the meeting with the House on 6 May 2020 to discuss the European summit, to submit an assessment to the House before the Council and the European Council discuss the Commission’s proposals. This letter also addresses the requests of the Permanent Committee on European Affairs of 2 June 2020. It should be noted however that this letter is confined to the main points. The Commission has fleshed out the proposals in sectoral legislative proposals. The government will inform the House of these proposals separately in writing. A full overview of the Commission’s proposals is presented in the annexe.

This letter opens with a brief summary followed by an explanation and assessment of the needs assessment. There then follows an explanation and assessment of the new, temporary recovery instrument, Next Generation EU, with separate consideration of how it will be financed and the government’s assessment of the financing. The changes in the current Multiannual Financial Framework for 2014-2020 (MFF) and the amended and new proposals for the forthcoming MFF 2021-2027 and the Own Resources Decision are also explained and assessed. As this letter replaces the assessments by the Working Group for the Assessment of New Commission Proposals (BNC), it also considers the questions of competence, subsidiarity and proportionality in relation to the proposed package. Finally, the letter looks at the negotiation process.

Summary

The proposed package comprises a regular Multiannual Financial Framework (MFF) for 2021-2027 with a commitment ceiling of €1,100 billion, supplemented by a new temporary recovery instrument (Next Generation EU) amounting to €750 billion (funded by borrowing on the capital market) and an additional €11.5 billion for 2020 in the current MFF 2014-2020. The main component of Next Generation EU is the Recovery and Resilience Facility (RRF). The RRF amounts to €560 billion, of which €310 billion consists of grants and €250 billion of loans. The remaining €190 billion of Next Generation EU will be spent through EU programmes in the MFF.

The government is seeking, through European cooperation, to expedite a sustainable recovery from the exceptional crisis caused by the COVID-19 outbreak and to promote further economic growth. The measures taken to achieve this must lead to stronger member states and a stronger Union. This will require member states to show solidarity and take on the associated responsibility. The Union is facing the challenge of overcoming the crisis caused by the COVID-19 outbreak. To improve long-term economic strength and resilience, the government believes it is important that the necessary structural reforms are carried out in the member states and that investments help to sustainably strengthen the capacity for growth, in part through the realisation of green and digital ambitions, and thus lead to a sustainable recovery in employment. The functioning of the single market must also be restored and further strengthened. Modernising and future-proofing the EU budget remain of undiminished importance, as does the need to maintain European expenditure at a financially sustainable level and ensure the cost of financing that expenditure is shared fairly. Compliance with the principles of the rule of law and fundamental rights and the fight against fraud, including the close involvement of the relevant EU institutions, are important in this respect. This position is also set out in the non-paper the Netherlands drew up with Austria, Denmark and Sweden.

The package proposed by the European Commission is consistent with the Netherlands’ position on several points, such as the importance of reforms in the member states, the modernisation of the budget and the temporary nature of the additional funds. On several other important points, such as financing, the proposals are far removed from the Netherlands’ position. The government will work hard to promote its position in concert with like-minded member states. The government will regularly inform the House of the progress of the negotiations in the coming period.

The first discussion of the proposed package will take place at the European Council meeting of 19 June 2020. This meeting will be prepared by the General Affairs Council and by means of consultations between the President of the European Council and the member states.

Needs assessment

Content

The members of the European Council concluded on 23 April 2020 that the Commission should carry out a thorough impact analysis to get a clearer picture of the consequences of COVID-19 in the various regions and sectors. The Commission subsequently presented its needs assessment on 27 May 2020. In it, the Commission first describes the impact COVID-19 and the related measures have had and are still having on households, businesses and public authorities. In the Commission’s opinion, COVID-19 can lead to a substantial increase in unemployment, particularly among vulnerable households. The COVID-19 outbreak can also lead to corporate bankruptcies with the loss of tangible and intangible business capital, losses for shareholders and disruptions in value chains. Partly as a result of measures taken by national governments, public debt will increase in all member states.

The Commission then describes the differences in the loss of GDP and unemployment in various sectors and regions, and the extent to which member states can mitigate the impact. According to the Commission, some member states are less resilient and have smaller public and private buffers than others and therefore less policy space to mitigate the economic consequences. In the Commission’s opinion, the crisis is threatening to increase divergence, tilt the playing field between member states and disrupt cross-border supply chains. This, according to the analysis, would weaken convergence, unity and the single market.

Finally, the Commission considers the investment and financing needs. It first estimates how much equity businesses will lose as a result of COVID-19. Total corporate losses to the end of 2020 are estimated at €720 billion in the baseline scenario, rising to €1,200 billion in an adverse scenario. According to the Commission, the corresponding capital shortfalls will necessitate equity injections to prevent bankruptcies. The losses will occur mainly in accommodation and food services and the cultural/recreational sector and to a lesser extent in the wholesale, retail, transport, manufacturing and construction sectors.

Secondly, the Commission states that investment will be badly hit by lower demand, greater uncertainty, bottlenecks in supply chains and unfavourable financing conditions. According to the Commission there are four types of investment need: that caused by the sharp fall in private investment due to the impact of the crisis; additional investment needs revealed by the crisis with a view to strategic autonomy; existing investment needs for the green and digital transitions; and investments necessary to maintain the stock of public capital at a constant level. These needs can increase if an adverse scenario materialises, according to the Commission.

Thirdly, the Commission argues that COVID-19 is also having a major impact on social security and healthcare expenditure. Both short-term expenditure (e.g. on unemployment benefits and acute care) and longer-term investments (e.g. on increased capacity for infectious diseases and improved healthcare systems) will be affected. The Commission also considers the social consequences of the economic crisis caused by COVID-19.

The Commission concludes from its analysis that the total public financing need of the EU as a whole will amount to €5,400 billion in 2020 and 2021, of which €1,700 billion will be attributable to the coronavirus crisis.

Finally, the Commission analyses the potential economic impact of the proposed recovery instrument. A simulation it conducted found a positive impact at total EU GDP level in 2024 of 2¼ percentage points in comparison with the baseline scenario in the Commission’s Spring Forecast. The EU also expects the instrument to trigger a sharp increase in employment, with around two million additional full-time jobs by 2024 in comparison with the baseline scenario (without recovery fund). Furthermore, the simulation indicated that the EU recovery fund will lower the national debt ratio in member states with lower per capita GDP than the EU average, and slightly increase the debt ratio in member states with higher per capita GDP than the EU average.

Assessment

The government has argued in earlier discussions on the use of EU funds to support economic recovery that, first of all, a thorough impact analysis is needed to gain a clearer idea of the impact of COVID-19 in the member states, regions and sectors. In this light, the government welcomes the Commission’s analysis.

The government agrees in general terms with the economic picture painted by the Commission in the first part of its analysis. The government agrees that the COVID-19 outbreak will have a very serious impact on employees, self-employed persons without employees, businesses and public authorities. It also agrees with the Commission’s analysis that the impact on individual regions and sectors will differ sharply. The government notes in this regard that the analysis does not provide a clear view of the expected economic impact per member state.

The government also notes that the Commission’s description of the member states’ policy space to mitigate the consequences of the crisis considers only public debt and not private debt, growth or, for instance, purchasing power, yet they ought to be included in any comprehensive economic analysis. Some member states with a high public debt have low private debt and vice versa. The Commission states that the crisis caused by the COVID-19 outbreak is a major challenge chiefly for member states with high public debt and deficit ratios. In the government’s opinion, however, it should be borne in mind that the Commission concluded in the context of the Pandemic Crisis Support provided by the European Stability Mechanism earlier this month that the public debts of all eurozone countries were sustainable in the medium term, with ‘historically low levels of interest rates’ being one of the relevant factors. In view of these points, there is no obvious reason to provide grants (instead of loans) from the Recovery and Resilience Facility (RRF). In the government’s opinion, more attention could also be paid to the way in which member states implement the structural reforms necessary to strengthen their economic foundations, for example by reducing levels of debt, reforming pension systems and improving their administrative capacity.

The government appreciates the fact that the Commission’s analysis approaches financing and investment needs from several angles. At the same time, however, the government considers that the analysis fails to explain what proportion of those needs should be financed by the member states themselves and what proportion by the EU. The analysis concludes that €1,700 billion in additional public finance will be needed both nationally and at EU level in 2020 and 2021 to recover from the COVID-19 crisis, but the government cannot see from the analysis how it relates to the €750 billion the Commission proposes for the EU recovery fund. It is also unclear whether the analysis takes account of the considerable volume of public financing already provided and planned by member states, the measures recently agreed in the Eurogroup – including making available the ESM Pandemic Crisis Support credit line – and the ECB’s measures. Hence there is no clear relationship between the analysis on the one hand and the proposed size of the fund on the other. In addition the government concurs with the Commission’s observation that some figures would be double-counted if they were aggregated. The government further notes that some investment needs cannot be attributed directly to COVID-19 but already existed before the COVID-19 outbreak, as the Commission itself acknowledges. They relate chiefly to the green and digital transitions, the wish to reduce reliance on third countries for critical processes and products, and the wish to maintain the stock of public capital. The government will therefore ask the Commission for further clarification of the needs assessment.

The government took note of the findings on the recovery fund’s impact. It is positive that the Commission’s analysis indicates that the recovery fund can contribute to economic growth, job creation and stronger public finances in some member states. The government observes that the economic impact will depend on the added value of the expenditure and the extent to which it relates to investments that raise productivity. The government also observes that structural reforms are essential for sustainable economic growth and resilience in the medium term, both in the hardest hit member states and across the Union as a whole. Together these factors underline the importance of appropriate conditions on the use of the recovery fund.

Next Generation EU

Content

The European Commission proposes to establish a temporary €750 billion recovery package (Next Generation EU). Next Generation EU will distribute the funds to the various Union programmes in accordance with the Union’s recovery strategy. Next Generation EU must contribute to the recovery and future-proofing of the European economy. The Commission proposes doing this by means of three pillars:

1. Economic recovery and repair through public investments: directed at financing reforms and investments in member states consistent with European priorities such as the green and digital transitions. This pillar’s main building block is the Recovery and Resilience Facility, which is specifically directed at mitigating the socioeconomic impact of the crisis and supporting public investments and reforms to achieve European priorities. In addition, a new initiative, REACT-EU, will be launched to strengthen the member states’ economic and social resilience and assist their sustainable recovery from the crisis through cohesion policy. Public investments will also be directed at strengthening rural development (the second pillar of the Common Agriculture Policy (CAP)) and the Just Transition Mechanism.
2. Mobilisation of private investment, especially in strategically relevant sectors: including support for healthy businesses that are nevertheless in danger of failing due to the crisis. The European Commission proposes that a new Strategic Investment Facility be set up to strengthen InvestEU. In addition, it proposes a Solvency Support Instrument.
3. Increased resilience to crises: a proposal for, among other things, a new health programme, EU4Health. Other crisis instruments, including RescEU and the Union’s Civil Protection Mechanism, will be extended and strengthened. Horizon Europe will receive additional funding to invest in research and innovation in healthcare and the green and digital transitions, in order to strengthen European competitiveness, including innovative SMEs.

The most important elements of Next Generation EU are explained below.

The main component of Next Generation EU is the Recovery and Resilience Facility (RRF). This facility, with a proposed size of €560 billion, is intended to support public investment and structural reforms. Its goal is to promote cohesion and resilience; reduce the social and economic impact of the COVID-19 crisis; and stimulate the green and digital transitions and job creation. The operation of the RRF builds on the earlier proposal for a Reform Support Programme, which the Commission has now withdrawn. That proposal comprised the establishment of a Budgetary Instrument for Convergence and Competitiveness (BICC) for eurozone countries and a Convergence and Reform Instrument (CRI) for non-eurozone countries; these two instruments have accordingly been scrapped. Member states applying for RRF funding must submit a coherent package of structural reforms and public investment projects. The plans will be assessed on their contribution towards the aforementioned goals and their compatibility with the European Semester country-specific recommendations. The public investments can be made in many areas. The plans must include agreed investment milestones and goals and structural reforms. Payment will be based on the progress against the goals. Funding is available to member states in the form of grants (€310 billion) and loans (€250 billion). Funds will be allocated on the basis of unemployment figures (2015-2019), population size (2019) and per capita GDP (2019). Member states can submit applications until the end of 2024.

The other component of Next Generation EU is REACT-EU, a new cohesion policy programme. This programme, which under the Commission’s proposals will total €50 billion in the period 2021-2022, is intended to contribute to member states’ economic and social resilience and their sustainable recovery from the crisis. Distribution of the funds will take account of relative prosperity and the latest statistics on the extent of the effects of the COVID-19 crisis on the member states’ economies. The Commission will work out the first distribution for 2020 and 2021 in autumn 2020. The funds for 2022 will be distributed a year later on the basis of the most recent statistics.

The Commission also proposes a €15 billion increase in the rural development fund (pillar 2 of the CAP, total budget: €90 billion) and a €32.5 billion increase in the Just Transition Fund (JTF) (total budget: €40 billion) to stimulate sustainable recovery from the crisis.

In addition to public investment, the Commission proposes mobilising more private investment by offering a combination of equity, loans and a guarantee package provided to the European Investment Bank Group (EIBG). Firstly, a Solvency Support Instrument (SSI) will provide solvency support to businesses hit by the crisis via financial intermediaries (€31 billion, including €5 billion in 2020, to mobilise €300 billion in private investment). This instrument will principally supplement national solvency support schemes and ensure a level European playing field. Secondly, a Strategic Investment Facility will develop and secure critical value chains (€15 billion, to mobilise €150 billion in investment). Thirdly, the InvestEU programme will be raised to €15.3 billion to mobilise additional investments (more than €240 billion), including investments in sustainable infrastructure and digitisation.

Finally, the Commission wants to increase resilience to crises by drawing lessons from the current crisis. It proposes a new healthcare programme, EU4Health, with a budget of €9.4 billion. This is a significant strengthening from the previous proposals in this area under the ESF+ (€413 million). The new programme is aimed not only at increasing resilience to crises but also at mitigating medicine and vaccine shortages and supporting national health systems. The Commission also proposes strengthening and extending other crisis instruments such as RescEU and the Union Civil Protection Mechanism (UCPM). Furthermore, Horizon Europe will receive additional funds (an increase of €13.5 billion to a total budget of €94.4 billion) to invest in research and innovation in healthcare and the green and digital transitions and so strengthen EU competitiveness, including that of innovative SMEs. As the final component in this pillar, the Commission proposes increasing the budgets for the Neighbourhood, Development and International Cooperation Instrument (NDICI) and humanitarian aid. The NDICI budget will be increased by €10.5 billion to €86 billion and the humanitarian aid budget by €5 billion to €14.8 billion.

Assessment

The government believes the implementation of structural reforms is an essential precondition for achieving sustainable economic recovery and convergence. It therefore welcomes the linking of structural reforms to funds for public investment. Public investment is under pressure from the economic crisis and member states are not all equally able to maintain investment levels. This is threatening to further increase divergence in the EU and jeopardise common EU goals. This justifies joint European action, partly to strengthen our global position in a context where global economic relations are coming under increasing pressure. The government will seek to ensure structural reforms are a clear precondition for access to funds for public investment. The European Semester’s country-specific recommendations can serve as a basis, provided they retain both the same level of ambition as in previous years and the use of funds is conditional on the effective implementation of structural reforms to increase resilience. The government also welcomes the proposal’s inclusion of the green and digital transitions as transversal themes. The government is critical, however, of the reasons given for the size and distribution of the facility. The size, distribution and wide area of application cannot be determined from the investment needs to which the crisis has given rise. In the government’s opinion, the impact of the COVID-19 outbreak must be a factor in the distribution of the facility. In addition, the government is critical of the provision of grants through the RRF, as the EU will raise the funds by means of borrowing that will be repaid from the EU budget and member state contributions.

The government is also critical of the proposed increase in the cohesion budget with the REACT-EU programme, the maintenance of the additional flexibility provided through the Coronavirus Response Investment Initiative Plus CRII+ measures and the increase in the second pillar of the CAP budget for rural development. As in the case of the RRF, the size and distribution cannot be determined from the investment needs to which the crisis gave rise. The government questions the extent to which the funds could be used in a timely manner for direct crisis recovery. Another important issue is that there is no thematic concentration (for instance on innovation) in the proposed increase in the cohesion budget.

The government agrees with the substantive focus the Commission wishes to place on recovery through investment in research, innovation, the climate and the green transition. It is in keeping with the government’s earlier position on modernisation. At least 25% of the investments from the Next Generation EU package must be climate-related and help achieve the Green Deal goals and implement the national energy and climate plans. The government also agrees with the Commission’s analysis that a rapid recovery in employment is essential. Member states must prevent temporary unemployment becoming permanent. The proposal for a separate and stronger health programme also meets the need the government has identified to increase the resilience of the member states’ health sectors. However, the investments proposed by the Commission in these areas must be aligned with the actual financing needs arising from the COVID-19 crisis. The government will consider the budgetary aspects of the proposals in the context of the Netherlands’ wider stance on the MFF.

The government agrees that the member states varying capacity to offer solvency support to businesses hit by the COVID-19 crisis can lead to an uneven playing field, but at the same time it supports the introduction of concentration limits. The government welcomes the fact that the Solvency Support Instrument (SSI) will in principle support only businesses that were healthy before the COVID-19 outbreak and that the instrument will be temporary. The government would observe, however, that the proposal’s implementation must not distort the market or keep afloat businesses that are not viable. Clear rules are needed on which businesses qualify for support and how this is assessed. The task proposed for the European Investment Bank Group (EIBG) (European Investment Bank and European Investment Fund), which will implement the instrument, is in line with the EIBG’s role under the current regulation on the European Fund for Strategic Investments (EFSI) and with the goals of both institutions. The proposal must be worked out in more detail (particularly regarding the products and intended beneficiaries). The government also wonders whether the EIBG can sustain the SSI operationally and financially given its current capital base.

In principle, the government favours the use of the InvestEU programme; any increase in its funding should be assessed in the light of the overall funding. Regarding the establishment of a Strategic Investment Facility, the government believes the COVID-19 crisis shows the need to invest in reducing healthcare dependency on third countries. However, a bespoke approach should be taken in each sector and unnecessary distortion of the single market and disruption of trade relations with third countries must be avoided. Vulnerabilities in value chains must be analysed and addressed proportionally. Strategic autonomy is not a goal in itself. The government will take a critical look at the definition of strategic activities, the design and implementation of the support and the efficacy of the governance structure. The government also recognises the instrument’s potential to stimulate innovation and the EU’s green transition and to strengthen the EU’s competitiveness and resilience. As regards the implementation of these substantial changes to InvestEU, it must be clarified whether the EIBG can operationally and financially cope with these expanded activities.

With regard to the Union Civil Protection Mechanism (UCPM)/RescEU, the government thinks a thorough evaluation and further analysis should be carried out before fundamental changes can be considered. The government supports the strengthening of the member states as part of its task to provide an appropriate crisis response.

Financing Next Generation EU

The Commission proposes to finance the €750 billion recovery package for 2020-2024 by borrowing funds, temporarily and only in these exceptional circumstances, on the capital market. According to the Commission, this is necessary in view of the member states’ uneven capacity to respond to the impact of the COVID-19 crisis. Financing by means of higher member state contributions would put even more pressure on national budgets and further increase the member states’ indebtedness.

The funds borrowed by the Commission will be distributed to the member states in the form of both grants and loans. In total, €500 million will be provided as grants, financial instruments or guarantees to strengthen existing budgeted programmes and to finance the grant component of the RRF. The remaining €250 billion will be provided as back-to-back loans from the RRF. The loans will be issued to member states on the same terms (interest, maturity and nominal value) as the Commission borrows on the capital market. The loans for the €500 billion grant component will be repaid through the EU budget by all member states jointly over a period of 30 years, between 2028 and 2058. The Commission estimates the total interest payable on the loans will amount to €17.4 billion during the forthcoming MFF period (2021-2027). The interest must be met from the EU budget.

To make this additional borrowing on the capital market possible, the Commission will temporarily increase the ceiling in the Own Resources Decision that sets the maximum amount of funds the Commission can request from member states. This will increase the headroom, i.e. the difference between the MFF expenditure ceiling and the own resources ceiling. The Commission will use this headroom to guarantee its borrowing on the capital market. To enable it to borrow the proposed €750 billion on the capital market, the Commission will temporarily raise the own resources ceiling for commitments and payments by 0.6% of EU gross national income (GNI). The Commission also proposes that it be authorised via the Own Resources Decision to borrow funds on the capital market. This increase is earmarked for action to address the COVID-19 crisis and will cease to apply when the obligations have been met and no later when the bonds mature in 2058.

The Commission proposes to repay part of the funds raised from new own resources. It is adhering in this regard to earlier proposals for contributions based on amounts of non-recycled plastic waste and member states’ emissions trading system (ETS) revenues. The Commission has not abandoned its proposal for an own resource based on the Common Consolidated Corporate Tax Base (CCCTB) in the revised Own Resources Decision proposal but it is no longer included in the latest version of the negotiating document. In addition, the Commission gives four examples of other new own resources that could be explored during the new MFF: extending the ETS to include the maritime and aviation sectors (based on an earlier ETS proposal), a Carbon Border Adjustment Mechanism (Commission proposal announced in 2021), a digital tax for large multinationals (based on OECD work) and a levy on large companies in respect of the benefits they draw from the single market. The Commission has not yet drawn up concrete proposals on these four options.

Assessment

The government thinks it is undesirable to finance current EU budget expenditure by means of borrowing. The European Commission can issue bonds on the EU’s behalf to lend money to countries (inter alia in the context of the European Financial Stabilisation Mechanism (EFSM), balance-of-payments programmes and the instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE)). The novel element of this proposal is the European Commission’s borrowing on the capital market to temporarily reduce member states’ contributions to the recovery package. The government is critical of this approach. Together with Austria, Denmark and Sweden, it has issued a joint non-paper with proposals for a temporary fund to support the economic recovery by means of loans to the member states. The Netherlands’ stance is unchanged. Given that the proposed approach is new and moreover involves a large sum of money, the government is still studying its compatibility with the basic principles for funding the EU budget laid down in the EU treaties and will ask questions about it. The Netherlands is also critical of the size of the increase in the own resources ceiling. The government considers it important that the funds for the recovery instrument be recognised in the budget distinctly and separately. It welcomes the fact that the Commission has disclosed all the funding for the Next Generation EU recovery instrument, including for interest payments, as clearly defined items in the budget in order to underline their temporary and exceptional nature and to be as transparent as possible.

The Netherlands still has reservations about introducing new own resources. For the Netherlands, the basic principle is that EU contributions are underpinned by the GNI resource. The proposals for contributions based on non-recycled plastic waste and ETS revenue will be comprehensively assessed in the forthcoming MFF negotiations. As explained in the assessment of the original proposed Own Resources Decision, the proposed contributions based on the ETS and non-recycled plastic waste are aligned with the government’s climate policy objectives. It is difficult to estimate the scale of the environmental impact of an own resource based on non-recycled plastic waste, but the government welcomes this approach. However, the government has reservations about these proposals with regard to factors such as the envisaged transparency, simplification and predictability of the system of own resources. The Netherlands’ position on a CCCTB own resource remains unchanged. The Netherlands will assess any future proposals for other new own resources in due course. These options are not elaborated upon further and are therefore difficult to assess.

In the government’s opinion, the Commission has not provided adequate reasons to justify the proposed size of Next Generation EU, as noted above in the response to the needs assessment.

Changes in the MFF and Own Resources Decision and the Interinstitutional Agreement

Content

The Commission proposes to amend the proposal for the regular MFF for 2021-2027. To this end, it has made several proposals to target various funds and instruments more at recovering from the crisis and increasing the EU’s resilience. The expenditure ceiling proposed for the MFF for 2021-2027 has been raised from €1,095 billion in commitments (ceiling proposed in the European Council President’s negotiating box of 14 February 2020) to €1,100 billion.

In concrete terms, the Commission proposes to allocate additional funds to the following programmes in comparison with the most recent version of the negotiating box: Digital Europe, the Connecting Europe Facility (CEF) for Transport, the Single Market Programme, Erasmus Plus, Creative Europe, the Common Agricultural Policy, the Fisheries Fund, the Asylum and Migration Fund, the Integrated Border Management Fund (IBMF), the Internal Security Fund (ISF), the European Defence Fund, and pre-accession assistance. The contributions to the BICC and CRI will be scrapped; the Reform Support Programme will be replaced by the RRF, as described above.

The Commission also states that the changes in the proposal for the MFF for 2021-2027 are only cosmetic in comparison with the most recent version of the negotiating box. The architecture, the balance between the priorities, and such elements as the ambition of making 25% of MFF expenditure climate-related, the rule of law conditionality and measures to combat fraud remain necessary for a balanced recovery and appear to have been retained. In addition, the Commission proposes that a mid-term review of the cohesion policy country envelopes be carried out in 2024 on the basis of the statistics then available, in order to support the member states and regions most in need of the funds. This could lead to an upward revision of the MFF ceiling of up to €10 billion. The table below compares the current proposal, the most recent negotiating box (European Council meeting of 20-21 February 2020) and the original Commission proposal of May 2018 (level of ceiling for commitments per expenditure category).

Comparison of Commission MFF proposals (€bn; 2018 prices)
	May 2018 proposal	Negotiating box, 14 Feb. 2020	May 2020 proposal	Diff. between NB 14 Feb. 2020 and May 2020 proposal
1. Research & innovation	166	150	141	-9
2. Cohesion & values	392	380	374	-6
of which Cohesion (ERDF, ESF, CF)	331	316	323	7
3. Agriculture	337	354	357	3
of which CAP	324	329	333	4
4. Migration & border management	31	22	31	9
5. Security & defence	24	14	19	5
6. External action	109	102	103	1
7. Administrative expenditure	76	73	75	2

The Commission further proposes to increase flexibility for contingencies by strengthening the applicable special instruments. To respond more quickly to future crises both inside and outside the EU, the Commission proposes to increase the budgets of special instruments (the EU Solidarity Fund, the Emergency Aid Reserve, the Flexibility Instrument and the European Globalisation Adjustment Fund) to €37.7 billion in the forthcoming MFF (Commission proposal of May 2018: approximately €16.8 billion). In the Commission’s proposal, the special instruments are financed over and above the MFF ceilings.

The Commission proposes a permanent increase in the own resources ceiling to 1.46% of EU GNI (commitments) and 1.40% of EU GNI (payments). The Commission wishes hereby to retain sufficient headroom between the MFF ceilings and the own resources ceilings to cover all financial obligations and guarantees in any years and in any circumstances. The weaker economic prospects and lower GNI brought about by the COVID-19 outbreak will reduce the own resources ceiling by billions of euros. To retain sufficient headroom, the ceilings must be increased as a percentage of GNI. In addition, the own resources ceiling will be temporarily raised by 0.6% of GNI to 2% of EU GNI in order to finance the exceptional resources in the temporary recovery package. This temporary increase may be applied only to finance the €750 billion that will be borrowed to mitigate the impact of COVID-19.

The Commission expects that the new Own Resources Decision can come into force on 1 January 2021 following the requisite national ratifications. The Commission will not be authorised to borrow funds on the capital market to finance the recovery instrument until the Own Resources Decision comes into force. The Commission therefore proposes, as a bridging measure, to increase the current MFF commitment ceiling for the period 2014-2020 by €11.5 billion by frontloading from the MFF for 2021-2027 for the benefit of cohesion policy (from REACT-EU), the Solvency Support Instrument and the European Fund for Sustainable Development. The Commission proposes to introduce the bridging measure in September 2020. To this end, it published a proposal for a supplementary budget (DAB6) for 2020 on 3 June 2020.

The revised MFF proposal and the Own Resources Decision proposal are accompanied by a revised proposal for the Interinstitutional Agreement on budgetary matters between the Commission, European Parliament and the Council. In it, the institutions will make working agreements on budgetary discipline, cooperation in budgetary matters and sound financial management. The proposed changes are practical in nature.

Assessment

The government remains committed to a modern and financially sustainable MFF with the costs being shared fairly. The simplest and most transparent solution is to adjust the contributions. The government will continue to work for the modernisation of the EU budget. One aspect of that modernisation is the introduction of an effective link between the receipt of EU funds and compliance with the principles of the rule of law, also known as rule of law conditionality, given the concerns about the rule of law and with a view to protecting the Union’s financial interests. For the government, strict conditionalities are an inseparable part of a modern EU budget. In the government’s opinion, substantive modernisation also means a sharper policy focus on research, innovation, the climate, migration and security. The government supports the goal of spending at least 25% of the EU budget on climate-related measures. It will seek to retain excellence and impact as the leading criteria for funding from the Horizon Europe research programme. The government shares the ambition of preventing and combating fraud and organised crime in the member states. As part of its pursuit of a modern and financially sustainable MFF, the government will advocate for Europol, Eurojust and the EU Public Prosecutor’s Office to be adequately equipped. In keeping with its earlier position, the government is critical of the proposed increase in programmes that are not directly related to recovery from the crisis caused by the COVID-19 outbreak. The government is also critical of the potential upward adjustment of the MFF ceilings as a result of the Commission’s proposal to carry out a mid-term review of the cohesion policy country envelopes in 2024. The government agrees with the Commission that the EU budget should be flexible enough to respond to unforeseen circumstances but it thinks the special instruments should be financed under the MFF ceilings in order to increase the predictability of member states’ EU contributions. This is not included in the Commission’s proposal. The government is critical of the proposal to increase the current MFF for 2020. It will lead to an increase in the Netherlands’ contributions; by how much is still uncertain. The House will be informed further when the Commission presents concrete proposals to amend the 2020 annual budget.

The government is critical of the proposal to raise the own resources ceiling and the amount of the increase, and will ask for further justification of it. The government welcomes the fact that the increase for COVID-19 is presented as temporary and exceptional. Furthermore, the government would prefer the own resources ceiling to be presented in billions of euros rather than as a percentage of GNI. This would prevent the own resources ceiling contracting when economic shocks occur.

The government supports making good working agreements between the institutions in the Interinstitutional Agreement.

Competence, subsidiarity and proportionality

The government’s assessment of the proposed package in terms of competence is positive. Under article 311 TFEU, the Union can adopt a decision relating to the system of own resources of the Union and, under article 312 TFEU, adopt a regulation laying down the multiannual financial framework. The Union’s system of own resources may in principle also include the option of giving the Commission exceptional, temporary and limited authorisation to borrow money on the capital market on behalf of the Union in order to cover the Union’s current expenditure. The proposed package also touches upon several of the Union’s policy fields, such as economic policy and economic, social and territorial cohesion. In the latter fields, the EU and the member states share competence (see articles 4 (1) and 4 (2) (c) TFEU respectively). Under the legal basis proposed by the Commission for the EU recovery instrument, article 122 TFEU, the Council may decide, in a spirit of solidarity between member states, upon the measures appropriate to the economic situation.

The government’s assessment of the proposed package in terms of subsidiarity is positive. The cross-border character of the consequences of the COVID-19 outbreak justifies measures at EU level. If the recovery is left to the member states, the symmetrical shock of the COVID-19 outbreak will be followed by asymmetrical recovery in the member states. This would entail the risk of increased divergence and place pressure on the single market.

In this initial assessment, the government has serious doubts about the proportionality of important elements of the proposed package. As an exceptional and temporary measure, the Commission proposes to borrow €750 billion on the capital market for the period 2020-2024 and use €500 billion of it to finance the grant component of the RRF and to meet ongoing expenditure from the EU budget. The government is critical of the proportionality of this approach for the following reasons. Firstly, it thinks it is neither appropriate nor necessary to finance ongoing expenditure from the EU budget by means of borrowing. A less radical approach would be possible if the strengthening of the programmes under the new MFF were financed in the first instance by means of cutbacks and reprioritisation in the MFF. The government also advocates supporting economic recovery by means of loans to member states. This is less radical than supporting economic recovery by means of grants.

The government will assess competence, subsidiarity and proportionality with regard to these proposals in the forthcoming assessment of the sectoral legislative proposals.

Initial indication of the consequences for EU contributions

The current proposals still contain insufficient information to form a detailed understanding of the forthcoming MFF’s consequences for the size of the Netherlands’ contributions and net position. An initial indication can be given, but it will change as more information and details become available. The multiannual estimates of the contributions in the Ministry of Foreign Affairs’ budget cannot be amended until agreement is reached on the MFF.

The package proposed by the Commission would substantially increase the Netherlands’ contributions in comparison with the current multiannual estimate in the central government budget, as presented in the 2020 Budget Memorandum. Regarding the regular component of the new MFF (2021-2027: €1,100 billion), this will lead to a setback amounting to some €1½ billion in 2021, rising to some €2¼ billion in 2027. This setback will increase on account of the Commission’s proposal to phase out gross reductions, as in the original MFF proposal of May 2018. The Commission has also returned to the May 2018 proposal with regard to refunding the cost of collecting import duties, 10% (current MFF: 20%). Finally, the increase in the special instruments, which are financed outside the ceilings in the Commission’s proposal, will also add to the setback.

Next Generation EU (totalling €750 billion, of which €500 billion in grants and €250 billion in loans) will not lead to additional contributions during the new MFF (2021-2027). The €500 billion grant component, however, will have to be repaid between 2028 and 2058 through higher contributions to the EU unless savings are made. If the member states’ repayments are in proportion to their GNI, the Netherlands will make an additional average annual contribution of approximately €1 billion over the period as a whole (to the end of 2058). The Commission intends to propose new own resources to finance the MFF and the recovery fund. However, insufficient information is available to estimate how these potential new own resources will be allocated across the member states. With regard to the €250 billion loan component, member states that receive the loans will have to repay them themselves; as the Netherlands would not be a recipient under the proposal, this does not therefore represent an additional burden for the Netherlands.

The proposed €11.5 billion increase in the current MFF for 2014-2020 also has consequences for the Netherlands’ contributions to the EU in 2020. The Commission will account for this increase in the 2020 annual budget by means of an additional budget (DAB6). The House will be informed of the precise consequences for the Netherlands’ contributions in 2020 in a separate letter. They will be accounted for in the central government budget in the next memorandum on the budget. The government views this proposal as an integral part of the total package.

The contribution estimates are surrounded by more uncertainty than usual. It is uncertain how quickly and completely member states will recover from the current economic crisis; as a result, member states’ shares in the costs and receipts may change. Furthermore, more information is needed on the underlying assumptions. For this reason, a clear picture cannot be given of the Netherlands’ net payment position.

What is clear is that the new proposal is far removed from the Netherlands’ objective of avoiding a rise in contributions. To arrive at a result that is acceptable to the government, the size of the MFF must be adjusted downwards and the Netherlands’ contributions must be corrected substantially and permanently.

Negotiation process

The timeline for negotiating the Commission’s new proposals is not yet known. It is clear that the Commission’s new proposals are the starting point for negotiations on the recovery instrument and the revised proposals for the current and forthcoming MFF and Own Resources Decision, and that the negotiations will take time. The member states’ positions are still far removed from each other. The first discussion of the proposed package will take place at the European Council meeting of 19 June 2020. The meeting will be prepared by the General Affairs Council and by means of consultations between the President of the European Council and the member states.

On the basis of the discussions and consultations with the member states, the President of the European Council is expected to work on a new version of the negotiating document. This negotiating box will contain all political decision points and thus form the draft European Council conclusions on an agreement relating to the MFF and the Own Resources Decision. It is still uncertain when the member states can expect a new version of the negotiating box. The government will submit a separate assessment of it to the House.

Under article 312 TFEU, the decision laying down the MFF must be adopted unanimously by the Council and approved by the European Parliament. Under article 311 TFEU, a decision laying down the provisions on the system of own resources must be adopted unanimously by the Council after consulting the European Parliament and then approved by all member states in accordance with their respective constitutional requirements (this includes approval by the Dutch parliament). The Council must decide by qualified majority on most of the sub-regulations the Commission has proposed or proposed to amend, with the European Parliament as co-legislator. The Commission’s aim is to have the MFF, the Own Resources Decision and the sub-regulations come into force on 1 January 2021.

Europe’s moment – United in Recovery – COM(2020) 456; The EU budget powering the recovery plan for Europe – COM(2020)442; Proposal for a Council Regulation establishing a European Union Recovery Instrument– COM(2020) 441; Amended Proposal for the MFF Regulation 2021-2027 – COM(2020) 443; Amended Proposal for the Own Resources Decision – COM(2020) 445; Amended Proposal for an Interinstitutional Agreement – COM(2020) 444; Amended Proposal for the MFF Regulation 2014-2020 – COM(2020) 446.

2020Z09830/2020D21552

Commission Staff Working Document, Identifying Europe’s Recovery Needs, SWD(2020) 98.

https://www.rijksoverheid.nl/documenten/kamerstukken/2020/05/11/4-annex-ii-assessment-of-public-debt-sustainability-and-covid-related-financing-needs-of-euro-area-member-states.

The Technical Support Instrument (TSI) was also part of the proposal for a Reform Support Programme, for which the Commission has made a new proposal.

2018 prices.

Non Paper, annexe to written consultations on the General Affairs Council, 26 May 2020.

Parliamentary Paper 21501-20, no. 1379.

Unlike the MFF regulation, the Own Resources Decision does not have an end date.

The expected interest expense of €17.4 billion is included in the €1,100 billion of the regular MFF.