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Questions and answers: the EU budget for external action in the next Multiannual Financial Framework

What did the Commission propose?

Together with the new European Recovery Instrument (‘Next Generation EU'), the European Commission is proposing a targeted amendment to its initial proposal for the Neighbourhood, Development and International Cooperation Instrument (NDICI) adopted in 2018. The new proposal reinforces the EU's capacity to support partners – in particular in the Western Balkans, the EU's wider Neighbourhood and Sub-Saharan Africa – in their efforts to fight and recover from the impact of the COVID-19 pandemic, in cooperation with partners such as international financial institutions, the United Nations and the World Health Organization. The External Action Guarantee and the European Fund for Sustainable Development Plus will be the key instruments in this regard.

The Commission proposes a budget of €118.2 billion for external action in 2018 prices (€132.6 billion in current prices) in the next Multiannual Financial Framework (MFF) for 2021 to 2027, including €15.5 billion under Next Generation EU. This represents an additional €16.5 billion in comparison to the proposal of the President of the European Council of February 2020.

The instruments for EU external action proposed in the 2018 MFF proposal  are maintained, namely a Neighbourhood, Development and International Cooperation Instrument, complemented by a European Instrument for Nuclear Safety; an Instrument for Pre-Accession Assistance; a humanitarian aid instrument; a Common Foreign and Security Policy budget; and an instrument for cooperation with Overseas Countries and Territories and Greenland. In addition, and outside the EU budget, the High Representative, with support of the Commission, proposed to establish a European Peace Facility.

The Neighbourhood, Development and International Cooperation Instrument (NDICI), the main instrument for EU cooperation and development with partner countries, will be increased  to €86 billion in 2018 prices (€96.4 billion in current prices), of which €10.5 billion come from the Next Generation EU. €12.9 billion will be maintained for Pre-accession assistance (€14.5 billion in current prices) and humanitarian aid will be increased to €14.8 billion (€16.5 billion in current prices), of which €5 billion from Next Generation EU. €2.4 billion will be provided for Common Foreign and Security Policy (€2.7 billion in current prices)

The new proposal for NDICI increases the overall amount to €96.4 billion in current prices (€86 billion in 2018 prices), of which €85 billion in current prices (€75.5 billion in 2018 prices) will be financed within the  MFF ceilings and €11.4 billion in current prices (€10.5 billion in 2018 prices) by Next Generation EU. The latter amount will be exclusively used to top up the provisioning of the External Action Guarantee to fight the negative consequences of COVID-19, which will allow increasing the maximum volume of this Guarantee from the initially proposed €60 billion to €130 billion. All other key elements, such as objectives, principles, areas of cooperation, implementation, remain unchanged.

Overall, the new MFF proposal increases the NDICI funds by over 8% compared to the proposal of 2018, more than doubling the firepower of the External Action Guarantee, a powerful implementing tool aiming at leveraging funds from the private and public sector and promote investment in partner countries and thus multiplying the effect of the EU assistance.

In the same package, the Commission proposes to amend Regulation (EU) 2017/1601 establishing the European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund. The amendment would increase by slightly more than €1 billion the provisioning of the EFSD Guarantee (currently it was provisioned by €750 million coming from the EU budget and the European Development Fund (EDF)). Since this guarantee is provisioned at 50%, the volume of the EFSD Guarantee would increase from €1.5 billion to €3.6billion. In addition, it proposes to expand the geographic scope of the EFSD Guarantee, currently only applicable to the Neighbourhood and Sub-Saharan Africa, to the Western Balkans as well. To allow a smooth implementation, the amending Regulation also extends the implementing period by one year, from 31 December 2020 to 31 December 2021. The EFSD will be replaced by the EFSD+ with the NDICI.

How will the extra €16.5 billion for external action be used?

The additional amount is composed of the €10.5 billion for NDICI and €5 billion for humanitarian aid, in both cases from the Next Generation EU, in the next budget and €1 billion for the European Fund for Sustainable Development from the current EU budget, all in 2018 prices

How much is the top up for the External guarantee, underpinned by the Next Generation EU, what will it finance and will it cover the Western Balkans too?

The additional amount of €10.5 billion would raise the ceiling of the External Action Guarantee from €60 billion to €130 billion in current prices, It will cover guarantees to partly reduce the risk of loans provided by European and international financial institutions to governments, administrations and businesses, so that they can recover swiftly and survive the current crisis and its aftermath. It will also cover Macro-Financial Assistance loans to support partner countries' balance of payments and thereby provide policy space to counter the economic fallout from the Covid-19 crisis. The EU guaranteewill cover all partner countries where the EU provides development and other assistance measures, with a particular attention to our neighbours and, within those, to the Western Balkans region, as well as to Africa.

What is the External Action Guarantee and why is it an appropriate tool to fight the consequences of the COVID-19 pandemic?

As part of the NDICI presented in 2018, the Commission proposed the establishment of the European Fund for Sustainable Development Plus (‘EFSD+'), the financing arm of a reinforced External Investment Plan, which is supported by an External Action Guarantee, as a powerful implementing tool for promoting investments and economic stability.

The External Action Guarantee will allow the EU to reduce the risk forpublic and private investment operations in partner countries covered by the NDICI and by the Instrument for Pre-Accession Assistance III (under the EFSD+), and to support those countries experiencing a balance of payments crisis (with macro-financial assistance).

The Commission considers that this leveraging tool is appropriate to address the negative consequences of the COVID-19 crisis, in particular for the promotion of investments to reinforce the sanitary systems and the socio-economic recovery of partner countries, including by ensuring their macro-economic stability.

What is the difference between the EFSD+ and the External Action guarantee?

The External Action Guarantee covers not only the guarantees issued under the EFSD+ but also Macro-Financial Assistance  loans to Governments, which are not part of the EFSD+, because they are a very specific instrument targeted at providing financial support to a country's balance sheet.

The EFSD+ is a very comprehensive instrument that includes not only guarantees but also grants provided through blending –a mix of EU grants with bank loans–, technical assistance to help improve the quality of projects and the implementation of reforms, and several other types of support tools that can be used to support the development of partner countries. The EFSD+ goes beyond the guarantees which are covered by the External Action Guarantee.

How will the new investment framework work?

The new investment framework, the EFSD+, will function in a similar way to the one established under the current EFSD. Licensed (pillar-assessed) European and International Financial Institutions will submit programme requests to the Commission, asking for a guarantee support for their proposed loan and equity portfolios, so that they can finance projects that otherwise would be too risky for them to finance. The Commission will choose the ones that offer the best development impact and contribute most to the EU policy objectives. These loan and equity portfolios can be in support of the public sector and the private sector. The targeted priority areas of economic activity will be indicated by the Commission. In relation to the Next Generation EU, given the widespread impact of the crisis, the support to the recovery will have to cover a large number of economic sectors.

Why is the Commission proposing to amend the European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund?

Most of the support announced by the Commission on 27 May will be channelled through instruments that are foreseen to enter into force with the new MFF, in 2021. However, with the crisis at our doorstep today, a large number of businesses and public administrations already fighting to keep afloat and keep their activity running, cannot wait until 2021. In order to bridge that gap, the Commission proposed a reinforcement of existing instruments and tools, so that support can arrive immediately to those who need it today, while waiting for the larger instruments, with a reinforced firepower, to become  available in 2021. The EFSD, a guarantee fund whose financing capacity will more than double with this proposal, is one of the tools at our disposal to focus on the most pressing needs already in 2020. Given that it is the only budgetary guarantee instrument that exists today and covers only the Neighbourhood and Africa, the Commission decided to propose to extend its scope to the Western Balkan region, so that our closest neighbours can also benefit from this immediate and much needed support.

How much is the increase for IPA III?

The Commission did not adopt a revised proposal for the IPA III Regulation. The Recovery package maintains the IPA III proposal of June2018. The Commission continues to propose €12.9 billion (in 2018 prices) or €14.5 billion (in current prices), a significant increase compared to the current MFF amounts, which stand at €12.8 billion in current prices.

Why did IPA III not receive Next Generation funds?

The Commission proposes to reinforce the capacity of the External Action Guarantee, which is hosted in the Neighbourhood, Development and International Cooperation Instrument, but additional funds will also support IPA III beneficiaries. Moreover, as explained above, the Commission proposes to keep the ambitious budget for IPA III in line with its initial MFF proposal tabled in 2018.

Is Turkey still eligible for funding under the Instrument for Pre-Accession Assistance?

Yes, Turkey is a beneficiary of the Instrument for Pre-Accession Assistance. Under the Commission proposal for the IPA III Regulation, there would not be specific country envelopes for any of the beneficiaries. If this proposal is retained in the negotiations, the Commission will have to assess project proposals in light of a number of conditions, in particular their contribution to meeting accession criteria, in particular, in the areas of rule of law, fundamental rights, economic governance and public administration reforms.

What is the new Instrument for Pre-Accession (IPA III)?

The Instrument for Pre-Accession (IPA III) will be anchored in the EU policy towards the Western Balkans in particular in the context of the EU enlargement policy. It will contribute to the transformation process in the Western Balkans, including robust economic reform programmes and to enhance the focus on reforms necessary for future membership.

At the same time, IPA III will be flexible enough to adapt to the evolving situation in Turkey and reflect developments in EU-Turkey relations. The new instrument will benefit from more steer from the Union, as its programming is based on priorities rather than country envelopes. This allows to reward performance and progress towards key priorities and increased flexibility to respond to the evolving needs of the partners in their path towards accession.

Given the fact that the EU is one of the region most affected by the COVID-19, should we not concentrate all assistance in Member States?

The bulk of the Recovery Package will be used within the EU. However, at this stage of the COVID-19 pandemic and its rapid expansion worldwide, the EU is not isolated from the rest of the world. We are inter-connected with our key partners, in both sanitary and socioeconomic terms. We need to work together. Helping them also helps the EU to overcome this crisis.

The COVID-19 crisis is having a major impact on societies around the globe, starting with health systems, and moving to severe global social and economic consequences. The response strategy of the Union should be comprehensive, coherent and integrated, tackling both the public health and the socio-economic challenges globally. The least developed countries are the most vulnerable to COVID-19, given their weak, non-resilient health systems and complex socio-economic and governance challenges. Likewise, we need more than ever to show our solidarity to our close partners in the Neighbourhood and in the Western Balkans.

Given that COVID-19 will have a major impact on the economic and macroeconomic systems in our partner countries, governments will be challenged to sustain macro-economic stability and maintain fiscal space to protect the most vulnerable, their companies, their workers, and continue providing basic social services.

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