Proposal on how to turn the Eurozone budget (RSP/BICC) into a central tool for a European sustainable recovery, while improving the resilience of our societies to future shocks

The massive economic and social disruption caused by the covid-19 outbreak is confronting governments today with a twofold challenge. They need to initiate a swift and sustainable economic recovery and they need to invest in the resilience of our economies, societies and administrations to future shocks. This pandemic has shown that crisis readiness of public health systems, of governments’ capacity to provide short-term relief and of business continuity frameworks has been insufficient in many places across Europe. Yet such resilience is vital not just to contain pandemics but also to react to natural disasters and food and water crises – especially in light of climate change.

Many EU-countries will find themselves unable to sufficiently respond to these challenges on their own. Massive initial fiscal responses to covid-19 are causing drastic increases in public debt levels. Shrinking tax revenues will further reduce the fiscal room to maneuver. It is foolish to believe that this dynamic only affects some EU countries – overcoming this crisis far exceeds the ability of any single country and thus requires a European response.

I therefore welcome the Council’s initial measures, agreed upon at yesterday’s meeting. I also appreciate that the Commission will address shock resilience in its recovery plan proposal even though I doubt that the overall size of the plan is sufficiently large to be effective.

The RSP (incl. BICC and CRI) has been mentioned as a potential instrument in the Commission’s recovery package. Indeed, it is able to provide an effective structure for funding governments’ reforms and investments in the sustainable recovery and increased resilience according to EU-wide funding priorities. However, it can only be effective in tackling the imminent challenges, if the following conditions are met (details below):

  1. Its scope needs to be expanded to sustainable recovery investments and resilience-enhancing reforms, next to its original emphasis on structural economic reforms

  2. The governance of spending priorities needs to move past permanent Council infighting and must be democratic via co-decision of European Parliament and Council

  3. Funds must be flexible to be employed where they are needed, instead of being subject to national quotas and ‘juste retour’ conditions

  4. Its size needs to be commensurate to its tasks: EUR200bn or more are needed to fund resilience-enhancing reforms and investments for recovery

To distribute the load on multiple shoulders, funds should be raised via recovery bonds, with guarantees and debt service funded by significant increases in the EU’s own resources. A European minister for Finance and Economy and an EU Treasury should play a pivotal role in ensuring its effectiveness, flexibility and democratic governance.

Quotes Damian Boeselager:

“Reviving the RSP / BICC instrument is an important tool to overcome this exceptional crisis, but only if its scope is broadened to encompass investments in building resilience and a sustainable recovery, if its size is sufficiently large for this purpose and if funds are allocated to where they are needed. Such a program must be democratically governed and controlled and hence must follow co-decision of Parliament and Council”.

“The ECB has done its monetary policy job, now it is up to the EU to collectively utilize fiscal tools to initiate a massive program for a sustainable recovery and building shock resilience. The RSP / BICC can be a central tool to make this happen, but it needs to be made fit for the new purpose.”

Details / background

1.       Scope

In its current form, the Reform Support Programme (RSP), and its two main components, the budgetary instrument for convergence and competitiveness (BICC) and the convergence and reform instrument (CRI) are narrowly confined to structural reforms defined under the European Semester. To enable the instrument to respond to the challenges faced by the EU over the next years, the scope should be significantly broadened:

(1) to fund investments in a green recovery and

(2) to enhance countries’ economic, administrative, institutional and societal resilience to withstand large-scale shocks (e.g. early detection and coordinated response capabilities in case of substantial risks to public health, business and service continuity solutions for essential public and private institutions, improving national, regional and local governments’ ability to support affected citizens in times of sudden impacts to their financial livelihoods).

2.       Governance

The periodical definition of the strategic orientations for reforms and investments needs to be a democratic and collaborative process, involving proposals of the Commission and co-decision by Parliament and Council. It could, for example, be linked to the (annual) budget procedure. Alternatively, multi-year setting of strategic orientations could take place (e.g. 2x per MFF).

3.       Flexibility

The funds should be employed where they are most needed and where the crisis hit the hardest. Pre-agreed per-country allocation should apply at most to 50% of the funds, and the per-country key should take into account the population per head income. The remainder should be distributed purely based on the merit of the submitted reform and investment proposals. Co-financing is welcomed in principle, however should be reduced during a severe downturn, including during 2021 and 2022.

4.       Size

We believe an overall size of no less than EUR200bn is necessary to fulfil its objectives in the EU. The size of the instrument should be seen in light of the current recovery needs. While investments in resilience require constant investments over the entire horizon of the program, the recovery necessitates swift investments over the following 2-3 years. A front-loading of the instrument should be contemplated