Should the regular EU budget be more like the RRF?

EU Budget Commissioner Johannes Hahn told reporters on Monday (29 April) that he had “a lot of sympathy” for the idea of making the entire EU’s budget “performance-based”, along similar lines as the bloc’s post-pandemic recovery fund — the Recovery and Resilience Facility (RRF).

The term “performance-based”, however, could be something of a misnomer when linked to the RRF, according to the views recently expressed by the European Court of Auditors (ECA).

The ECA pointed out that many of the indicators used to determine the “performance” of payments from the €723 billion facility are too nebulous to be amenable to measurement.

“We don’t really see [the RRF] as a performance instrument at all,” ECA president Tony Murphy told Euractiv last month. “We see it as a sort of implementation instrument: You do something and you get paid for it. You implement the law, you get paid.”

Rather, the RRF’s distinctive feature is the way payments are typically linked to specific reforms in member states, for instance in the labour market or pensions system.

Zsolt Darvas, a senior fellow at EU policy think tank Bruegel, told Euractiv that the picture around the RFF’s “performance-based” nature is slightly more “mixed” than Murphy suggests.

In particular, he said that although some member states (e.g. Romania and Finland) have “really good and useful results indicators” for RRF disbursements, many others, like Germany and France, do not.

Instead, Darvas noted, assessments of RRF projects in these (typically larger) EU countries are mostly “input-based”: they focus on the financial and human resources put into projects.

“The fear about moving this [performance-based system] to the whole EU budget is that there could be some fudges in a sense that, we will call our new framework results-based, but actually it’s mostly still input-based,” he said.

“I would endorse more results-orientation — if indeed the focus is on results.”

There is a case to be made that restructuring the EU’s €1.2 trillion regular seven-year budget — the so-called Multiannual Financial Framework (MFF) —  to make it more like the RRF could prove an efficient tool.

Rebecca Christine, a columnist at Breakingviews, noted that over the next few years, the EU will almost certainly be compelled to restructure its cohesion policy, which supports growth in the bloc’s poorer regions and amounts to roughly a third of the MFF, to encourage new member states to continue pursuing reforms.

“We all know that the biggest opportunity the EU has to get countries to change is when they’re holding out membership in something as the carrot, whether that’s membership in the EU overall, membership in the euro, membership in Schengen, or even in the banking union,” she told Euractiv.

“But if you have a country like Hungary that is not trying to join something, you don’t have a lever. So the EU wants to learn from that. And before it lets more people in, it wants to have a way of managing what happens afterwards and keeping things from getting stuck,” she added.

In that sense, linking payments to reforms provides the EU with a “lever” over member states that is not dependent upon specific EU schemes or projects.

Some, however, are becoming increasingly concerned about the EU’s push to restructure its budget so as to make it more RRF-like.

In particular, they warn that the budget’s “centralisation” — the power given to national capitals to disburse the funds and the lack of regional participation over which projects are funded — would constitute a serious danger to the bloc’s territorial cohesion if extended to other EU budget schemes, and could lead to certain regions falling further behind.

“The RRF was the appropriate response in a multi-crises context and will probably have had a positive macroeconomic impact,” Christophe Rouillon, the rapporteur for the European Committee of the Regions (CoR) on the mid-term evaluation of the RRF, said last month.

“However, the centralisation it brought about, as well as the deficiencies of the performance-based mechanism, cannot be extrapolated to the future cohesion policy post-2027,” he said.

Promisingly, however, Bruegel’s Darvas noted that there do not appear to be any obstacles in principle to altering the RRF to make it more decentralised.

“I don’t see any issue of local municipalities meeting performance targets and then getting directly paid, irrespective of national capitals,” he said. “So I think this issue would be easily addressed.”

The problem, as ever in Brussels, seems ultimately not practical — but political.

Chart of the Day 

Discussions on extending the performance- and reforms-based – mechanism of the RRF to the wider EU budget would mostly concern the bloc’s disbursement of its cohesion funds, which represent about one-third of the total budget, and have been one of the backbones of the Union since they were set out in 1994.

The funds – aimed at strengthening economic, social and territorial cohesion across the 27-country bloc – are allocated based on a GDP-based geographical categorisation.

The map below illustrates the allocation for the 2021-2027 period for the two classes of regions: those with a GDP per capita below 75% of the EU average (the main target of the funds) and those with a GDP between 75% and 100% of the bloc’s average.

Economic Policy Roundup

Credit rating agency Moody’s is ready to look into the potential credit score implications of the European Investment Bank’s expected expansion into a broader range of defence and military assets. Kathrin Muehlbronner, senior vice president at Moody’s Ratings, told Euractiv that Moody’s currently holds “a very positive credit assessment” of the EIB, but considerable changes to its defence investment could warrant a re-evaluation. Moody’s is the first rating agency to confirm that the EIB’s overall credit rating – rather than just its ESG score – would be scrutinised in case of such changes. Muelhlbronner said that another reason to scrutinise larger defence and military investments from the EIB, besides their impact on social and ESG risk considerations, would be their potential effect on the overall visibility of the credit quality of the bank’s underlying portfolio.

The EU’s multibillion pandemic recovery fund is a “success story” that European policymakers “should not rush to roll back”, says International Monetary Fund (IMF) Managing Director Kristalina Georgieva. Speaking at the EU’s annual budget conference in Brussels on Monday (29 April), Georgieva praised member states’ decision in July 2020 to jointly borrow €806.9 billion under the Next Generation EU programme (NextGenEU), for showing “markets that the EU stands together” when faced with a “common and great problem”. “July 2020 will go down in history as a time of profound European cohesion,” said Georgieva, a Bulgarian who served as the EU budget commissioner from 2014-2016. “Next Generation EU is clearly a success story — one the EU should not rush to roll back,” she added.

On International Workers’ Day, German Chancellor Olaf Scholz (SPD/S&D) and trade union representatives voiced opposition to calls by business leaders and pro-business parties for longer working hours and increased retirement age. “Germany’s employees have never worked as many hours as they did last year,” he said, referring to numbers recently published by the German Institute for Economic Research (DIW). “That’s why it annoys me when some people speak disparagingly of ‘leisure park Germany’ or when there are calls to raise the retirement age,” he added. DIW data showed that the country’s workforce has produced a total of 54.7 billion hours last year, compared to 52.2 billion in 1990. However, the total number of employees has also increased from below 40 million to 45.9 million.

With France set to host on Monday (6 May) China’s President Xi Jinping on his first state visit to Europe in five years, Paris and Brussels are trying to find the right balance between taking an offensive stance against Beijing and attracting new investments. The visit will be “very political”, the Elysée said. France will seek to balance attracting more Chinese investment in cutting-edge sectors, notably the automotive industry, with advocating for a greater level playing field and more reciprocity in trade relations.

The EU should expand its budget and consider linking all member state payments to structural reforms, says EU Budget Commissioner Johannes Hahn. Hahn urged fellow policymakers at the aforementioned EU budget conference overcome the “informal taboo” that the bloc’s seven-year regular budget – the Multiannual Financial Framework (MFF) – should not exceed 1% of its total annual GDP. In a subsequent briefing with reporters, Hahn refused to say how much the current €1.2 trillion budget should be increased upon expiring in 2027 but emphasised that “the task of a reasonable […] politician is to explain what is needed and what it costs”. He also noted that he had “a lot of sympathy for [the] idea” of making all budget payouts “performance-based” like with the bloc’s €723 billion Recovery and Resilience Facility (RRF).

The eurozone beat analyst expectations to emerge comfortably from a recession in the first quarter of this year, new EU data shows. Eurostat, the EU’s official statistics office, reported on Tuesday (30 April) that the single currency area grew at a quarterly rate of 0.3% over the first three months of this year, after declining by 0.1% in the final two quarters of 2023. Analysts polled by Bloomberg and FactSet had predicted the eurozone would grow by just 0.1%. Sander Tordoir, a senior economist at the Centre for European Reform, told Euractiv that the data suggests that the supply shocks triggered by Russia’s full-scale invasion of Ukraine in February 2022 “are really well and truly behind us”. However, he warned that growth in the bloc’s two largest economies, Germany and France, which both expanded by just 0.2%, remains concerning.

Ursula von der Leyen’s performance as European Commission president was slammed by the lead candidate for the Alliance of Liberals and Democrats for Europe (ALDE), Marie-Agnes Strack-Zimmermann, on Saturday (27 April), citing prescriptive climate policy and bad approval ratings among businesses. Speaking to Euractiv on the sidelines of the two-day convention of German liberal coalition party FDP in Berlin, Strack-Zimmermann questioned voting for a second term of von der Leyen.

At the same event, pro-business FDP party accused Christian Democrat (CDU) opponents of “hiding” their lead candidate for the European elections – European Commission President Ursula von der Leyen – due to her faltering policy performance. Six weeks before the EU elections, the FDP (Renew) stepped up its offensive against centre-right CDU (EPP), its main rival for pro-business voters. “There is a reason why the CDU hides its lead candidate for Europe on its posters. Because the bureaucratic hassle in our country has a first name: Ursula,” said Finance Minister and FDP leader Christian Lindner.

[Edited by Anna Brunetti/Zoran Radosavljevic]

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