Q&A: Next Generation EU - Legal Construction

10 Jun 2020 04:17 PM

The proposed architecture of the exceptional financing is based on three pillars:

• The Own Resources Decision authorises the full amount of the borrowing, to be used for exceptional expenditure and for loans to Member States. Those amounts are not entered into the Union budget. It also organises the repayment of the amounts used for expenditure under the future MFF. The repayment will be entered into the Union budget in the year it takes place (as of 2028, until 2058).
• The Recovery Instrument based on Article 122 TFEU identifies recovery measures and allocates the borrowed funds to various Union programmes to that effect.
• The Union programmes receive the resources and lay down the rules for their implementation.

The major innovation, the borrowing for spending, is compliant with the Treaties.

1. Under the current circumstances, borrowing is a justified means to attain the Union's objectives

• The Union is allowed to provide itself with the means necessary to attain its objectives Article 311, first paragraph TFEU. A highly competitive social market economy, aiming at full employment, the promotion of economic, social and territorial cohesion and solidarity among Member States is an objective of the Union Article 3(3) TEU.
• The financial means of the Union come predominantly, but not exclusively, from own resources Article 311, second paragraph TFEU. Therefore, the Union enjoys some discretion as to the choice of the means necessary, as long as it respects the financial rules of the Treaty.
• Borrowing constitutes such a means. Under the current circumstances, it is necessary. Tackling the exceptional consequences of the crisis requires large resources in short period of time, without increasing national debt in the short to medium term.
• Borrowing creates a financial liability for the Union. However, financial operations involving liability of the Union are not extraordinary. The Treaties do not prohibit the Union from taking liabilities. The Union is already now taking liabilities e.g. from loans for financial assistance to Member States and third countries or budgetary guarantees, inclusive for market operations (e.g. European Fund for Sustainable Investments). Borrowing used for crisis spending would simply be a new type of a liability operation.

2. Borrowing must respect the principle of budgetary discipline. For that reason, provisions are needed in the Own Resources Decision

• According to the principle of budgetary discipline Article 310(4) TFEU, the Union's actions can be financed within the limits of the multiannual financial framework (MFF) and own resources. The Treaty also obliges the Union institutions to ensure that the Union can satisfy its financial obligations towards third parties Article 323 TFEU.
• Therefore, liability from borrowing is only permissible if the Union is able to repay the debt including interest. This requires that the own resources ceiling be sufficiently high to ensure each year sufficient financial space for the full coverage of the Union's liability. It also requires a mechanism ensuring availability of resources in all circumstances.
• The proposed amendment to the proposal for the new Own Resources Decision makes sure that these pre-requisites of budgetary discipline are fulfilled:
  • A dedicated and temporary increase of the Own resources ceilings will create sufficient budgetary space. That space is available (i) for the contingent liabilities from loans to Member States and (ii) for the repayment of the debt from borrowed funds used for spending programmes in the future (2028 to 2058);
  • An additional rule will allow the Union to call on resources from the Member States where, on a given year, the authorised appropriations entered in the budget are not sufficient for the Union to comply with its obligations resulting from borrowing.
• The Own Resources Decision will go one-step further. It will determine the maximum amount that may be borrowed and will set the parameters for its repayment, in particular the start date for repayment (2028) and the end date for repayment (2058). This can be done under the Own Resources decision for the following reasons:
  • Those provisions are a corollary of the dedicated increase of the own resources ceiling. The size and the modalities of the repayment delimit the maximum amounts of future own resources revenue, which will be needed for that purpose. They may, therefore, be considered as an integral part of the establishment of the system of own resources Article 311, third paragraph TFEU.
  • When defining the amounts of the needed revenue in the own resources decision, it is normal for the legislator to take into account related expenditure. E.g. the UK rebates were calculated in function of the total allocated expenditure in favour of the UK.
  • Moreover, the Own Resources Decision is of quasi-constitutional nature. It only enters into force after approval by all Member States in accordance with their national constitutional requirements. The authorisation of the borrowing will need the approval of all Member States, and, depending on national procedures, of their national parliaments. This provides for the necessary democratic legitimacy of that innovative proposal necessary to fulfil the Union's objectives.
  • At the same time, the approval by all Member States will constitute a clear commitment to bear the liability from the borrowing

3. Allocation of the funds to Union spending programmes, Article 122 TFEU

Article 122 TFEU allows for targeted derogations from standard rules in exceptional crisis situations. On that basis, the Recovery Instrument will provide for the financing, by reference to the authorisation to borrow provided by the own resources decision, and will assign those funds to the various spending programmes, as so-called “external assigned revenues”, for the purposes of recovery and resilience. Article 21(5), Financial Regulation

The borrowed funds will remain additional to the annual budget. They will not be part of the MFF and of the annual budgetary procedure.

Such way to proceed for large amounts diverges from the standard practice for the establishment of the budget and financing of the Union point 1, requirement of principal financing of Union policies from own resources. It is justified as a temporary and exceptional solution in the context of the current crisis.

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