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Portolano Cavallo: COVID-19 Emergency, How to Rethink European Funds to Respond to the Crisis

April 22, 2020 |

One opportunity to address the socioeconomic consequences of the spread of COVID-19 is presented by the possibility of allocating part of the direct and indirect European funds allocated in the 2014–2020 programming cycle for this purpose. However, there is debate on the best way to implement the restructuring of existing programs, in particular the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund. Although the measures adopted (and in the process of being adopted) at the European level are mainly moving toward extending the types of expenditures attributable to the individual funds by introducing specific COVID-19–related forecasts, there is still debate, at both the European and national level, over the opportunity to completely untie European funds from the priority axes and territorial links so that they would be devoted to pandemic crisis management only.

The state of play at the European level

The European Commission is working on proposals to raise the necessary resources to face the economic consequences of the COVID-19 outbreak through realignment of the European funds allocated in the 2014–2020 programming cycle. A first initiative, the Coronavirus Response Investment Initiative (CRII), concerns the investment of €37 billion to be allocated to health systems, SMEs, labor markets, and other vulnerable parts of Member State economies through substantial restructuring of the cohesion policy.

As already stated in the letter written on March 18, 2020 by commissioners Elisa Ferreira and Nicolas Schmit to Member State ministers, the CRII is based on an immediate injection of liquidity into government coffers and the possibility of reallocating the current emergency-related expenditure under the structural funds already allocated. With regard to the latter, Member States will be allowed to (i) use the ERDF to cope with short-term financial shocks, in particular as regards SMEs and sectors particularly affected by the crisis, (ii) use the ESF to temporarily support national short-term working arrangements, (iii) use both the ERDF and the ESF for expenditures related to the health system (e.g., purchase of health and protection equipment, disease prevention, e-health, medical devices). In addition, Member States will be able to use the unused structural funds for the 2014–2020 period to fight the crisis (an extremely relevant factor for Italy, which at the moment has used only 31% of the available funds) and the Commission will apply the rules on cohesion spending with maximum flexibility, so as to accelerate the implementation of the measures.

This proposal from the European Commission received a favorable opinion from the European Parliament and the Council leading to the adoption on March 30, 2020 of Regulation (EU) 2020/460 and Regulation (EU) 2020/461. The former amends the common provisions of the European Structural and Investment Funds (in particular ERDF and EMFF) as regards specific measures to mobilize investment in Member States’ health systems and other sectors of their economies in response to the COVID-19 outbreak. The latter acts on the European Union Solidarity Fund (EUSF) to provide financial assistance to Member States and countries negotiating their accession to the Union affected by a major public health emergency. In order to ensure an immediate response to the consequences of the epidemic, expenditure incurred as of February 1, 2020 for operations in response to the crisis will be charged to the Structural Funds, as amended by the Regulations.

A second package of measures, known as the Coronavirus Response Investment Initiative Plus (CRII+), is still in the process of being adopted. Its main objectives are (i) to support the most deprived persons by amending the rules of the Fund for European Aid to the Most Deprived (FEAD), e.g., by offering 100% financing for accounting year 2020–2021 for measures such as the distribution of food aid and the provision of basic material assistance, and (ii) a more flexible reallocation of financial resources within operational programs in each Member State, together with a simplified amendment procedure.

This reprogramming process also involves direct European funds, i.e., those provided directly by the European Commission through specific programs, such as Horizon 2020, which is dedicated to research and innovation. On the one hand, the funds allocated to this program have been partially earmarked — through an emergency call for expressions of interest — to finance research projects that will advance studies on the epidemic and contribute to more efficient clinical management of patients; on the other hand, the calls opened under Horizon 2020 are constantly being amended and extended to include initiatives related to COVID-19.

The direct funds are also earmarked for new calls, such as the rapid call for research proposals to develop treatments and diagnoses in response to the COVID-19 epidemic published as part of the Innovative Medicines Initiative (IMI), which closed on March 31, 2020 with 144 proposals.

The debate on the reorganization of funds

In parallel with the measures taken by the European Commission, Member States are planning to identify the most appropriate strategies to tackle the crisis. At both the European and state level, there is no agreement on this. On the one hand, there are those who argue that funds should be totally untied in order to give Member States the freedom to dispose of funding according to the needs that arise from the impact of the epidemic on the national socioeconomic fabric; and on the other hand, there are those who believe that it would be more appropriate to preserve the current structure, which allocates funds to specific areas by providing, within these, the possibility of supporting initiatives related to COVID-19 when compatible.

Under the second approach, there is discussion, for example, of the possibility of allocating part of the ERDF to the conversion operations of SMEs for the production of healthcare facilities or the development of new activities linked to the production of goods needed for emergency management. Furthermore, in the context of the Cohesion Fund, initiatives could be encouraged to support the most disadvantaged segments of the population, whose conditions are aggravated by the crisis, or the ESF could be used to finance part of the redundancy fund for workers. This approach is in line with what the European Commission has done so far, but, again, there is no unanimous agreement.

A different view of the realignment of funds envisages the possibility of eliminating the priority programming axes by setting management of the coronavirus emergency as the only constraint. The main aim would be to allow immediate liquidity at the national and, more critically, regional level. In this way, the resources already earmarked for local communities could be used, without incurring further debt, to manage the COVID-19 emergency independently of what had been defined as priority axes. Furthermore, the possibility of making the use of the funds more flexible, freeing them from territorial or group constraints (less developed, transitional, or more developed areas), would make it possible to allocate them to the areas most affected by the crisis. However, such an initiative requires the green light from Brussels so that expenditure released in this way can be justified in the 2014–2020 programming period.

This reflection is also relevant for the identification of priorities for 2021–2027 programming. Indeed, it may be appropriate to provide greater autonomy for the Member States in the management of the funds in the coming years so that they can take action to rebuild the production and labor fabric and to promote economic recovery. However, the difficulties that emerged during the negotiations for the next programming period have led the Commission to reflect on the possibility of extending the current cohesion policy programs by one or two years, particularly in order to avoid the risk of funding being interrupted in the face of the need to introduce investment into the economy quickly. In both cases, the question of the approach to untying the funds remains, as well as, where appropriate, a possible change in the process for identifying 2021–2027 programs and priorities to ensure a smooth transition for Member States between the current and the next programming period.

Livia Petrucci
Irene Picciano

Compliments of Portolano Cavallo Studio Legale – a member of the EACCNY.