What the European Commission says about how the funds will be allocated

MIIR wrote to the European Commission to ask what were the criteria that led to the specific allocation of funds per Member State and whether it took into account factors other than economic figures, such as the state of the National Health Systems in each country or their budgetary situation. In response to our question, a Commission spokesman on 04 March gave us the following answer: 

“The allocation key for the grants under the RRF, as agreed by the co-legislators, is the following: For 70% of the total of €312.5 billion available in grants (in 2018 prices), the allocation key will take into account 1) the Member State’s population, 2) the inverse of its GDP per capita 3) its average unemployment rate over the past 5 years (2015-2019) compared to the EU average. For the remaining 30%, instead of the unemployment rate, the observed loss in real GDP over 2020 and the observed cumulative loss in real GDP over the period 2020-2021 will be considered.

The formula used to allocate the grants is aligned with the objective of the RRF facility: foster resilience, reduce the economic divergences between Member States and thereby facilitate the recovery. As a result, the allocation key channels a very large share of the funds to countries which have been very severely affected by the crisis.” 

However, after the European Council’s meeting on  21 July 2020 – when EU heads of state and government reached a negotiated political agreement on the Mechanism package – criticisms were raised about the introduction of the 70% and 30% rates, as it was not included in the Commission’s original proposal for the recovery mechanism on 27 May 2020. In an excellent article analysing the allocation published on bruegel.org, it is shown that while the initial proposal favoured countries with lower national income, however, after the political agreement and the implementation of the 30% by replacing the unemployment rate by the GDP loss rate, countries with higher national income were favoured. This is because the calculation of the GDP index is linked to the size of each country, whereas the unemployment index is independent of size and was a criterion that dealt with this obstacle, making the distribution fairer.

Continuous assessment of targets and milestones up to 2026

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The Commission will subject the member states to a continuous assessment of their effectiveness in implementing reforms/investments and whether the agreed targets and milestones are being met. The Facility will only finance mature projects (at an advanced stage of design approval, siting, etc.) so that they can be completed within the recovery plan’s provisional duration. If it is found that the objectives are not met, the Commission will cut off all or part of the recovery funding. 

In fact, the efficiency and the subsequent disbursement will not only be assessed by the Commission, as the possibility of a “veto” by one or more member countries has been introduced. They will be able to block the money if they consider that there are serious deviations from the satisfactory fulfilment of targets and milestones of a member country! 

Once the Commission receives the final Recovery Plans, it must then within two months approve them and agree on the targets/milestones. Once the assessment is completed, the Council’s approval follows within one month. The front-loaded disbursement of an amount equal to 13% of each country’s total financing will then be approved.

This means that first disbursements can start from mid-2021, and thereafter countries can submit requests for continued disbursements twice a year until 2026. These requests will again be assessed within two months by the Commission, and if it considers after an assessment that the objectives and milestones of the Plans are being satisfactorily implemented, only then will it authorise continued disbursements.  

The extension of remote work and reduced working hours

In order to receive both grants and loans, the member state’s national reform plan must meet the criteria linked to the six pillars of the recovery and resilience plan: 1. green transition; 2. digital transformation; 3. economic cohesion, productivity and competitiveness; 4. social and territorial cohesion; 5. health, economic, social and institutional resilience; 6. policies for the next generation. 

In particular, the recovery and resilience plans must cover at least 37% of funding to investments and reforms linked to climate objectives, and 20% to actions supporting digital improvement and transformation of public administration and businesses. 

However, an extremely critical and so far, a relatively obscure criterion is the implementation of reforms linked to the Council’s annual country-specific recommendations (CSRs) to each country, included in the European Semester, on the economic and structural changes they are required to implement in their National Reform Programmes. 

The European Semester is considered crucial especially for countries that are struggling financially like Italy and Spain, but most especially Greece which is already under enhanced post-monetary surveillance, as it includes recommendations for structural changes in the economy and finances. For example, in the specific recommendations for Greece for 2020-2021, the Commission urges 4 key actions to ensure debt sustainability, provide liquidity to the economy, complete its post-memorandum commitments and mitigate the impact of the crisis on employment, “including by implementing measures such as reduced working time schemes and ensuring effective support for participation in active working life”.

It is worthwhile to dwell a little on the announcement about reduced working time schemes, already implemented by the Greek government through the SYN-ERGASIA Programme, which is funded by a loan from the SURE programme. They outline a bleak future for the labour sector in Greece, against the backdrop of the labour bill that the Greek government is expected to submit on the increase of the daily working time (10 hours), unpaid overtime, remote work, changes in the trade union law, etc. 

As stated in the text of the recommendations, Greece has already introduced a temporary system that reduces labour costs for companies, “however, the implementation of a comprehensive system of reduced working hours would be a more sustainable and flexible solution and the authorities have taken steps in this direction”. At the same time, “the expansion of flexible working arrangements, such as remote working, which in Greece have so far been limited compared to other member states, will also contribute to maintaining economic activity and jobs during the period of lockdown and social distancing.”

MIIR sent a question to the Commission asking to what extent the extension of the reduced and flexible working hours scheme is linked as a criterion to the disbursement of the Facility’s money to Greece. A Commission spokesperson directly avoided linking this criterion – although central to the specific recommendations of the European Semester – to the Mechanism, replying that:

“the Commission will assess the recovery and resilience Plans based on eleven transparent criteria set out in the regulation itself. In particular, the Commission assessment will consider whether the investments and reforms set out in the plans:

– represent a balanced response to the economic and social situation of the Member State, contributing appropriately to all six RRF pillars

– contribute to effectively address the relevant country-specific recommendations

– contain measures that effectively contribute to the green and digital transitions

– contribute to strengthening the growth potential, job creation and economic, institutional and social resilience of the Member State

– do not significantly harm environmental objectives

As regards the financing of short-time work schemes, there are other instruments that Greece can use and is already using for that purpose. The SURE scheme, for instance, assists Greece in covering the costs related to its short-time work scheme and other similar measures that have been introduced in response to the coronavirus pandemic. Once all SURE disbursements have been completed Greece will receive €2.7 billion in loans.” 

It is worth noting that in the concise 67-page Resilience and Growth Plan, presented by Prime Minister Kyriakos Mitsotakis, interventions on labour are presented only in headings as axes of the “labour law reform”. In particular, it mentions “the modernisation of collective labour and trade union law” and “Adjustment to teleworking”, with no specific reference to the reduced hours regime.  

At the same time, however, in the more detailed text with the “Strategic Guidelines for the National Recovery and Resilience Plan”, the extension of the reduced and flexible working hours regime, teleworking and interventions in the pension system are analysed as a milestone target. 

Specifically, under the pillar ‘Employment, skills, social cohesion’ under axis 3.1 ‘Increasing jobs and promoting labour market participation’, it is described as an objective: ‘In addition, through the short-term Coworking work programme and reforms promoting flexible working arrangements such as teleworking, the axis mitigates the impact of the COVID-19 pandemic on the labour market and incomes’ (p. 37).

Special reference is also made to the specific recommendations for Greece on ‘the implementation of measures such as short-time work schemes (SYN-ERGASIA)’ (p. 27).

It should be recalled that under the SYN-ERGASIA scheme, which started in June 2020 and is still in force today, companies can unilaterally reduce the hours during which they employ their workers by up to 50%. The employer is required to pay only half of the employee’s salary, and the latter will receive from the state 60% of half of the net earnings lost. The total insurance contributions (employer and employee contributions), corresponding to the time during which the workers are not employed, are also paid by the State Budget.

Finally, the same axis (3.1) also includes “the reform of the current supplementary pension system, in particular the transition from a non-capitalised system of mixed pre-defined benefits and notionally defined contributions to a fully capitalised system of pay-as-you-earn withholding payments.

As our in-depth research on the Mechanism thus shows, the National Recovery Plans may seek “ownership” of reforms and investments on the part of European states, but the link to the European Semester and the setting of targets and milestones that will also determine the evolution of funding is a major challenge for European governments, especially within such a tight binding implementation timeframe defined by the temporary duration of the Mechanism.

At the same time, the reforms being promoted pose risks for labour rights, as is the case in Greece, while national borrowing, as well as grants, will affect national budget figures and budget deficits, which is of great concern, especially when the EU’s fiscal discipline rules, currently suspended due to the pandemic, are reintroduced. If the above risk is not taken care of in time, the recovery that the EU is seeking may not be possible…

Author

Text – Research: Nikos Morfonios

Data visualization: Ilias Stathatos

This investigation was published in the European Data Journalism Network – EDJNet.

Copyright: MIIR