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The ‘Next Generation EU’ budget needs stronger rule of law checks and balances to achieve the Green Deal ambitions

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On 10 September the European Parliament’s Committee on the Environment, Public Health and Food Safety (ENVI) endorsed the proposal for a legally binding Climate Law with the ambitious goal to make the EU climate-neutral by 2050, with a 60% reduction of emissions from 1990 levels by the year 2030. The latest version of the Climate Law still has to be voted by the European Parliament at its October plenary session and also approved by the Council. However, the success of the EU Climate Law will ultimately be determined by the effective programming of the Multiannual Financial Framework (MFF) and the Green Recovery Fund, as well as by the fair allocation of funds to EU long-term decarbonisation targets.

The agreement sealed by EU leaders during the July Council meeting mirrors less and less the initial ambitions of the Green Deal and threatens to paralyze the green transformation process in the EU. Europe is currently facing enormous healthcare, socio-economic, environmental, and democratic governance challenges. Its peoples, east and west, north and south are demanding to see how the budget deal will deliver climate and social justice, rule of law and the protection of European democratic values. The agreed total EU expenditure of €1 824 billion for the period 2021-2027, consisting of €1 074 billion for the Multiannual financial framework (MFF) and €750 billion for the Next Generation EU (NGEU) is the last train Europe could catch to catalyse the transition to a carbon neutral economy, innovation and green growth. Yet, last minute budget cuts introduced by the Council would primarily hit climate-related funding streams and undermine the capacity of the energy-intensive regions to carry out the socio-economic transition.

EU budget negotiations have been shaped for a long time by an intergovernmental logic that has reinforced the already dominant thinking in national net balance categories. This form of fiscal profit and loss accounting corresponds less and less to the challenges that the European Union is facing. Apart from the old cleavages between net contributors and net receivers, the summit featured another conspicuous division – between the more European proposal of France and Germany and the more national approach of the so called “Frugal Four” countries (Austria, Denmark, the Netherlands and Sweden). Altogether, the main “victims” of the bargaining have been the reduced budgets for Horizon Europe programme, InvestEU, the Just Transition Fund and the EU4Health Programme, which are key for bringing the European Green Deal forward. In addition, the rule of law mechanism, which is supposed to ensure accountable and efficient spending of the increased funds throughout the EU has also suffered. Adopting and implementing a more stringent rule of law mechanism will define what kind of budget the EU leaders will choose to support – a citizen-oriented budget reaching small producers, farmers, ecopreneuers, start-ups and energy citizens through more microgrants and targeted-oriented support for these local pioneers on the ground, or primarily large corporations, government-close businesses and clientelistic structures. It is a choice that will define Europe for the next 30 years.

How conditional is the climate conditionality?

According to the agreement achieved during the July summit, 30% of the overall EU budget, including the EU Recovery Plan and the MFF, has to be consistent with the EU net-zero emissions target for 2050. This strengthens climate conditionality and makes the agreed financing the largest “green stimulus package” in EU’s history. It means that the absorption of the Recovery Fund and the MFF programmes will be more tightly linked to the EU climate policies and targets. Climate conditionality has also been introduced for the Just Transition Fund. Access to the fund will be limited to 50% of national allocation for those Member States that have not yet committed to the implementation of the EU climate-neutrality goal by 2050. The other 50% will be made available upon acceptance of such a commitment. Member States will also have to submit national recovery and resilience plans that address the strengthening of their green and digital transition. In addition, climate-spending and performance will be monitored by targeted measures.

The objectives of ecological transformation are also reflected to some extent in the EU agricultural policy, the largest spending pot of the EU. The CAP policy now contains a headline target of 40% climate mainstreaming. Its spending and distribution modality have been known to be among the most inefficient and inequitable that has also reflected past dependencies between net receivers and net contributors and the lack of qualitative criteria in the delivery of its targets. This has been illustrated by the fact that 70% of all CAP subsidies have been granted without the fulfilment of environmental and societal goals. The uneven distribution is especially visible in the trend that more than 30% of the funds eventually make it to less than 2% of beneficiaries and that 3% of the EU’s biggest farms use more than half of the land for agriculture in the European Union. At the same time, the number of farms has declined by 25% between 2003 and 2013. In the past, the EU Court of Auditors has often criticized the generous scoring of both the income support regime, and of rural development funding.

The next generation EU could benefit European citizens by introducing stronger target support measures and a requirement for national governments to set up a certain ratio for micro grants and decentralised citizens’ projects. National governments should be required to enable and facilitate such citizen-led projects in line with Article 25 of the proposal for a Regulation laying down common provisions on the ERDF, ESF + and EMFF. According to the proposed provisions, these funds could be used to support community-led local development, such as the creation of energy communities and the promotion of prosumership.

New wine in old bottles

Achieving fair environmental transition and digital transformation of the economy are at the heart of the new recovery instrument launched by the Commission in May 2020 in the aftermath of the COVID-19 crisis. The investment needs for this transformation are estimated at least EUR 595 billion per year (EUR 1.190 trillion over the next two years). The recovery instrument also aims to stimulate investment in sectors that have been defined as priority areas in the new Industrial Strategy and are at the same time excessively dependent on the imports of materials and services, for which supply was interrupted during the crisis. Such sectors that can play an important role in the economic and industrial restructuring of coal regions are digital infrastructures, key technologies such as microelectronics, industrial biotechnology, robotics, blockchain technologies, as well as the supply of raw materials for mobility, batteries and renewable energy technologies.

The significant downsizing of the Just Transition Fund from 40 billion (€10 billion in MFF + €30 billion in NGEU) to €17.5 billion (€7.5 billion + €10 billion), geared toward supporting coal-dependent regions in their industrial and economic restructuring, and the drastically reduced InvestEU fund from 15.3 billion to 5.6 billion Euro under NGEU may threaten the delivery of the EU 2050 climate and targets in some Member States, which need it the most. The budget cut might thus undermine the decarbonisation push in some of these energy intensive regions that are at the threshold of this industrial, economic and social transformation. Despite the enhanced climate conditionality of the JTF, the Court of Auditors still deems the link between performance and financing as relatively weak. The significant reduction of the InvestEU fund is also contrary to the EU objectives for stimulating sustainable growth, competitiveness and achieving deep decarbonisation in the countries of Central and Eastern Europe that will be most affected by the coal phase out and where the capital costs for green investments are much higher compared to Western European countries.

In order to benefit from all these financial instruments (the size of which will be set up in the final interinstitutional agreement), coal dependent countries like Bulgaria, Poland and Czechia have to develop ambitious territorial plans for a fair transition, outlining a long-term strategy for closing down coal production and the economic transformation of the coal-dependent regions. A gradual post-coal transition can be achieved by building on the industrial heritage of the coal regions in tandem with establishing new, competitive and innovative industries and services.

Checks and balances, climate monitoring and the rule of law conditionality

The Green Deal is not only about the quantity of the money spent and how those will be allocated among different Member States and different sectors. It is also (and some, including CSD would argue first and foremost) about the quality of the projects and how the different funds will be spent to ensure the transparency, accountability and efficient use of the available financial tools towards the achieving of the agreed milestones. Institutional safeguards and monitoring procedures and their implementation are therefore essential for the performance and the ultimate impact of the Green Deal.

The climate monitoring of EU spending, as well as the increasing demands to also introduce the rule of law conditionality and more stringent transparency requirements by some Member States has raised the issue about robust climate tracking.

The Council conclusions do not highlight enough the importance of the rule of law conditionality, which is still vaguely mentioned in the text. Social pressure against corruption and the misuse of EU funds in Member States in general, as well as against the slipping of rule of law in countries like Bulgaria, Hungary, Poland, and beyond is exacerbating. The citizens from both net contributors and net receivers of EU budget funding are demanding more stringent control and better monitoring of EU funds. Ensuring the effective functioning of the conditionality rules for green recovery and rule of law would be essential for the successful implementation of the Green Deal but also for the future of Europe. On the one hand, the citizens in net donor countries are understandably unhappy with the inability of Brussels to reign in oligarchic circles in the net beneficiaries from using EU funds to cling to power. On the other hand, the citizens of net beneficiaries feel left behind by Brussels in their demands for more accountability and rule of law with elites that benefit disproportionately from the EU largesse. The EU needs to deal with these tensions resolutely and coherently now and every day.

The democratic control over EU spending could be enhanced with veto rights for the European Parliament and the Court of Auditors over the approval of the national investment plans. In addition, the Court of Auditors should be able to carry out formal checks of the suitability of funding targets, as well as the cost effectiveness of the selected projects. With stronger institutional safeguards, the EU budget could be a successful complementary instrument for delivering the objectives of the European Green Deal, while at the same time fulfilling EU’s broad societal and environmental goals.

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