Summary
The EU has launched a huge €1.98 trillion EU Recovery Plan in response to the Covid-19 crisis. The focus of the long-term recovery dimension of this plan and the basis for its financing, raise a number of issues in an ACP context. The most important of these are: the need to identify ways in which ‘easier and quicker access to finance’ can be provided to ACP companies which would otherwise be viable in the absence of the crisis; the options for using the EC’s good credit rating to mobilise funds in support of economic recovery in ACP countries; the scope for adopting the ‘strategic autonomy’ approach in sectors whose critical importance and vulnerability has been highlighted by the crisis; opening a dialogue with the EU on how future development assistance financing can be used to reimburse the budgets of agreed programmes from which funds have been redirected to address current emergency needs.
The EU has launched a major Covid-19 EU Recovery Plan focussed on:
- Sustaining regions and citizens through the Covid-19 crisis period and supporting recovery.
- Sustaining companies through the Covid-19 crisis period and supporting recovery.
- Establishing new health sector and emergency support programmes and initiatives drawing on the lessons from the Covid-19 crisis.
In addition, a globally orientated pillar which focuses on the EU near neighbours and the wider developing world was also created.
According to the EC ‘European Recovery Plan will put € 1.85 trillion (expressed in constant 2018 prices) to help kick-start our economy and ensure Europe bounces forward’. This will supplement the normal EU budget of €1.1 trillion. Significantly within the EU Recovery Plan there is a strong focus on measures which support the implementation of the EC’s Green Deal and Digital Transformation agenda (1).
The EC is also proposing to reinforce the budget of the ‘European Agricultural Fund for Rural Development by €15 billion’. This could help free up funds from the current pillar two programmes for emergency level interventions.
The EU Recovery Plan needs to be seen in a context where the latest projections suggest ‘the EU economy is expected to shrink by more than 7% in 2020’, but where in the event of ‘a worst case scenario of a second wave and extended lockdown measures’ this contraction in EU GDP could be ‘anywhere up to a 16%’. According to the EC’s assessment ‘while the economy is expected to return to growth in 2021, the initial recovery will be partial’, with many people seeing ‘their income drop and their jobs put at risk’, with unemployment projected to ‘rise to 9% in the EU’, with this ‘hitting young people and those in low-skilled, temporary work and living in poorer households disproportionately hard’. In this context ‘poverty and inequalities are likely to rise’ across the EU (2).
Against this background the pillar Sustaining Regions and Citizens has a total financial allocation of €670 billion, with these funds being channelled through:
- A European Recovery and Resilience Facility (€560 billion).
- The Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) (€55.0 billion).
- Reinforced Cohesion and Rural Development Fund (€15 billion).
- The Reinforced Just Transition Programme (€40 billion).
The European Recovery and Resilience Facility aims to ‘support Member States to implement investments and reforms that are essential for a sustainable recovery’, with the emphasis on supporting member states in promoting a green and digital transformation of their economies, as an integral part of the post Covid-19 economic recovery. The €560 billion facility will consist of €310 billion in grants and €250 billion in loans. While it will be open to all member states it will be focussed on the most affected countries (2).
The Recovery Assistance for Cohesion and the Territories of Europe programme will be focussed on helping EU member government implement ‘crisis repair measures’ and to supporting the most deprived areas and groups. Its main target will be to ‘support workers and SMEs, health systems and the green and digital transitions’ (2).
The Sustaining Companies pillar has three main windows, with financial allocations totalling €46.3 billion:
- A Solvency Support Instrument (€31 billion).
- A Strengthened InvestEU Facility (combined financing with the SIF of €15.3 billion).
- A Strategic Investment Facility (SIF).
The EU is looking to kick-start the economy by incentivising private investment. Significantly the Solvency Support Instrument aims to provide ‘easier and quicker access to finance’ for companies which in the absence of the Covid-19 pandemic would otherwise be viable. Similarly, the new Strategic Investment Facility which will form part of the InvestEU facility will be aimed at strengthening the resilience of the EU economy and promoting ‘strategic autonomy across key technologies and value chains’ (2).
There is a major innovation in how the EU Recovery Plan is to be financed. This will be achieved by increasing the capacity of the EC to borrow money at low rates of interest based on the repayment of these loans from ‘Own Resources’ generated from contributions by EU member states, which in future will be larger than those required to cover impending budgetary expenditures (3).
The EC thus intends to ‘use its very strong credit rating to borrow €750 billion on the financial markets’ over the 2020-2024 period, via a bond issue on behalf of the EU, with varying maturity levels. This money will then be on-lent to member states under very good conditions, namely the same interest rates and repayment period under which the EC has been able to raise the money. This will allow weaker EU economies to benefit from the EU’s overall better credit rating and lower borrowing rates. The money raised by this bond issue will be repaid after 2027, with this being completed by 2058 at the latest (3).
This innovative financing mechanisms will be supplemented by proposals for new taxes and revenue generating measures which will go directly to the EU budget and help finance repayment of EC raised bonds. This includes a Carbon Border Adjustment Mechanism, which aims to raise between €5 billion and €14 billion per annum.
In terms of the globally orientated pillar of the EU Recovery Plan the EC acknowledges ‘if left to individual countries alone, the recovery would likely be incomplete, uneven and unfair’, with this reality posing ‘a very real risk in other parts of the world’. The EC argues that in response to the Covid-19 crisis ‘the EU and its Member States will need to leverage their collective strength on the global stage’. It is acknowledged ‘in the longer-term, the EU will only successfully recover if our partners around the world also recover’. Against this background the EC states in its staff working paper on the recovery programmes ‘we will support our partners around the world (4). However, it should be noted the wants to use its response to the Covid-19 crisis to ‘diversify and solidify global supply chains to protect us from future crises’ and ‘strengthen the international role of the euro’ (4).
| Comment and Analysis The tough economic circumstances which will be faced in the coming years are likely to carry implications for the evolution of EU demand for products across a range of areas where ACP countries have export interests. The market consequences of the deep recession in areas where ACP countries have export interests will need to be reviewed and assessed if a profitable export trade into the EU is to be restored in the coming 18 months.Of the 3 pillars of the EU Recovery Plan, the most interesting from the perspective of ACP agri-food sector businesses and producers are those related to sustaining companies through the crisis and moving ahead with post-pandemic economic recovery. In this context it should be noted how the EU Recovery Plan focuses on providing ‘easier and quicker access to finance’ for companies which in the absence of the Covid-19 pandemic would otherwise be viable. Against this background the question arises: could available EIB funding be deployed in support of similar such initiatives across the ACP where existing export orientated businesses serving the EU market are facing major disruptions? EU enterprises have a major stake in this trade, with it being a rich source of income and employment in the EU. A case in point in this regard is the East Africa horticulture and floriculture sector which has reliably provided a range of short shelf life products to the EU market on a growing and consistent basis for the past 25 years. In the floriculture sector this trade provides the basis for a multi-million Euro onward trade for Dutch enterprises across the whole of Europe and beyond. Similarly, fisheries products caught by ACP based enterprises is a major source of for the global operations of French and Spanish fisheries enterprises. An important question raised by the EU’s approach to financing the EU Recovery Plan is whether the EC’s good credit rating could be used to mobilise funds to be deployed through the EIB in support of economic recovery in ACP countries? Vera Songwe of the UN Economic Commission for Africa has already raised the prospect of this kind of initiative, by calling for the creation of a ‘new body which would borrow cheaply and then lead money to governments’ (5). A more limited facility building on existing EU loan financing instruments could usefully be a focus for an ACP/EU or AU/EU dialogue in the coming months. Given the focus in the EU Recovery Plan on strengthening the resilience of the EU economy and promoting ‘strategic autonomy across key technologies and value chains’ the question arises could this conceptual approach be utilised by ACP government in their efforts to promote national food sovereignty programmes for staple crops in the face of the Covid-19 disruptions of international supply chains. Or in the case of East Africa could it be used to promote a regionally based international air freight capacity recovery and expansion initiative aimed at achieving ‘strategic autonomy’ in a sector which is critical to the production and trade of an economically important component of the rural economy of East Africa? At the all ACP level an important aspect of the financial framework established under the global component of the EU’s recovery plan is the emphasis on ensuring flexibility in the financial allocations made, so as to allow funding to be shifted in line with evolving priorities. In terms of relations with the ACP, this reinforces the long standing trend in EU development assistance deployment away from earmarking funds for use in particularly countries and regions toward more global envelopes which allow the EU to juggle funding in response to the evolving demand. This will require ACP government to pay far greater attention to enhancing their capacities to absorb development assistance. The experience under the EU’s Sugar Protocol Accompanying Measures (SPAM) programme vividly highlights the importance of enhanced administrative capacity to absorbing funding, with Mauritius absorbing a disproportionately large share of available funding based on its highly effective model for the mobilisation and deployment of available EU assistance under this global allocation. Additionally, it should be noted this trend is likely to see a movement away from the financing of complex agricultural and rural development programmes given their long lead times and the pre-defined window for development assistance utilisation which increasingly governs EU development assistance expenditures. Focussing on such programmes under EU development cooperation arrangements could simply see funds withdrawn and reallocated as a result of a failure to meet pre-determined commitment deadlines. The financing instruments established to respond to the Covid-19 crisis thus serve to reinforce a move away from programmable allocations to the ACP Group, ACP regions and ACP countries. This will involve a further move away from the joint management of development assistance resources towards the negotiation of financial allocations for activities which are aligned with the EU’s evolving priorities. The reinforcement of the budget of the European Agricultural Fund for Rural Development by €15 billion, depending on how this funding is deployed, could serve to store up problems for ACP agri-food sector operators in the future (see companion epamonitoring.net article ‘EC Covid-19 Linked Agri food Sector Support Measures Extended’, 14 May 2020). This additional financial allocation to the EAFRD will allow the budgets of rural development programmes in the EU from which funds have been withdrawn to finance emergency measures in the EU agricultural sector to be reconstituted. This is necessary since these are multiannual programmes which have been under preparation for years, but which have temporarily been interrupted by the Covid-19 pandemic. This idea of reconstituting budgets from which funding for emergency programmes has been reallocated, is something which could usefully be raised by the ACP with the EU in the context of drawing up of plans for future development cooperation between the EU and ACP countries. This is potentially important given the scale of reallocation of funding to emergency measures which is occurring in response to the Covid-19 emergency (see companion epamonitoring.net article, ‘EU Moves Swiftly to Redeploy Existing Funds to Meet Immediate Crisis and Long-Term Structural Needs’, 30th June 2020). |
Sources:
(1) EC, ‘Key Instruments supporting the recovery Plan for Europe’, Factsheet, 27 May 2020
https://ec.europa.eu/info/sites/info/files/factsheet_2_en.pdf
(2) EC, ‘Europe’s moment: Repair and Prepare for the Next Generation’, COM (2020) 456 final, 27 May 2020
https://ec.europa.eu/info/sites/info/files/communication-europe-moment-repair-prepare-next-generation.pdf
(3) EC, ‘Financing the Recovery Plan’, Factsheet, 27 May 2020
https://ec.europa.eu/info/sites/info/files/factsheet_3_en.pdf
(4) EC, ‘Europe’s moment: Repair and Prepare for the Next Generation’, Staff Working Document SWD(2020) 98 final, 27 May 2020
https://ec.europa.eu/info/sites/info/files/economy-finance/assessment_of_economic_and_investment_needs.pdf
(5) The Economist, ‘African governments face a wall of debt repayments’, 6 June 2020
https://www.economist.com/middle-east-and-africa/2020/06/06/african-governments-face-a-wall-of-debt-repayments