Explanatory Memorandum to COM(2019)399 - Amending Regulation (EC) No 2012/2002 in order to provide financial assistance to Member States to cover serious financial burden inflicted on them following a no-deal Brexit - Main contents
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| dossier | COM(2019)399 - Amending Regulation (EC) No 2012/2002 in order to provide financial assistance to Member States to cover serious financial ... |
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| source | COM(2019)399  |
| date | 04-09-2019 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The United Kingdom has decided to leave the European Union, invoking the procedure set out in Article 50 of the Treaty on European Union (TEU). Following a request by the United Kingdom, the European Council (Article 50) agreed on 11 April 2019 1 to extend further 2 the period provided for in Article 50 i TEU until 31 October 2019. Unless the United Kingdom ratifies the Withdrawal Agreement by 31 October 2019 or requests a third extension, to which the European Council (Article 50) agrees by unanimity, the period under Article 50 i TEU will end then. The United Kingdom will then be a third country as of 1 November 2019 without an agreement to ensure an orderly withdrawal. The Commission continues to consider that an orderly withdrawal of the United Kingdom from the Union on the basis of the Withdrawal Agreement is the best outcome.
All EU primary and secondary law will cease to apply to the UK from that moment onwards. There will be no transition period, as provided for in the Withdrawal Agreement. This will obviously cause significant disruption for citizens, businesses and public institutions and would have a serious negative economic and financial impact.
Thus far, the European Union and the EU-27 Member States have put in place a significant set of measures. In particular, since November 2018, the European Commission has been preparing for a withdrawal without an agreement. To date, the Commission has tabled and the co-legislators adopted 19 legislative proposals. The Commission has also adopted 63 non-legislative acts and published 100 preparedness notices.
The principles governing the contingency measures at all levels were set out in the second Brexit Preparedness Communication of 13 November 2018 3 . These include in particular that measures should not remedy damage that could have been avoided by preparedness measures and timely action by the relevant stakeholders.
As stated in the fourth Brexit Preparedness Communications of 10 April 2019 4 , in the context of the preparations of contingency measures, the Commission is ready to propose financial support measures to mitigate the impact in the most affected areas and sectors, taking into account the funds that are available and any adjustments on the expenditure and revenue side of the EU budget that might result from a withdrawal without an agreement. For more immediate support to affected stakeholders, EU State aid rules offer flexible solutions for national measures.
Businesses, especially small and medium-sized companies with a significant exposure to the United Kingdom may also run into difficulties as a consequence of the loss of easy access to its market or be otherwise affected by more complex trade relations. Loss of jobs could be a consequence. Member States may want to act against a negative impact on the labour market by introducing aid schemes to assist affected businesses in managing change or by introducing measures to help preserve employment levels.
Member States’ public administrations will also be affected as they will need to set up additional infrastructure facilities and recruit additional personnel in some affected sectors, within a very short time span.
For instance, in the field of customs and indirect taxation, national administrations will need to put significant investments in infrastructure and human resources, primarily in Member States that are the main entry and exit points for the European Union’s trade with the United Kingdom. In the field of sanitary and phytosanitary controls, the 27 Member States are setting up new Border Inspection Posts or extending existing ones at entry points of imports from the United Kingdom into the EU.
The above types of actions are likely to have a significant impact on public spending, especially in the short term and in those Member States particularly affected. For the public finances of those Member States, it could constitute a major disaster resulting in an urgent need for additional public funding. Therefore, the mobilisation of the European Union Solidarity Fund (EUSF) could provide vital relief to those Member States and their finances, should its scope of action be extended as to cover the negative impact of this scenario.
The EUSF was created in 2002 to support EU Member States and accession countries in situations of major disasters caused by natural events such as floods, storms, earthquakes, volcanic eruptions, forest fires or drought. The Fund can be mobilised upon an application from the concerned country if the disaster event has a dimension justifying intervention at European level.
Its functioning is a tangible expression of a genuine EU solidarity, whereby Member States agree to support each other by making additional financial resources available through the EU budget.
Despite the measures already taken or planned, it is fair to assume that due to the particularly close economic and trading relationship with the United Kingdom, some Member States will be more impacted by the event of withdrawal without an agreement than others. Even if it is extremely difficult to assess it exactly, it will have a significant impact on the economy, the labour market and the public finances, especially in the short term. While it will be a singular event, its disruptive effects and the burden thereof on public finances, directly imputable to the event of a withdrawal without an agreement, could constitute a major disaster and therefore the activation of the “solidarity principle”, which is the core of the EUSF, would be justified in order to mitigate those effects.
• Consistency with existing policy provisions in the policy area
The present proposal aims at modifying Council Regulation (EC) No 2012/2002 of 11 November 2002 establishing the European Union Solidarity Fund (hereafter: “Regulation (EC) No 2012/2002”) in order to extend its scope to cover certain types of additional public expenditure caused by the withdrawal of the United Kingdom from the European Union without the Withdrawal Agreement.
• Consistency with other Union policies
The proposal is part of the preparations of contingency measures for the withdrawal of the United Kingdom from the European Union.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
As this is the modification of the existing regulation, it follows the provisions that are the legal basis for Regulation (EC) No 2012/2002, i.e. Article 175 of the Treaty on the Functioning of the European Union (TFEU). As this modification relates to Member States only, Article 212 TFEU does not apply.
• Subsidiarity (for non-exclusive competence)
The proposal aims to extend the scope of the EUSF in order to show European solidarity with the most seriously affected Member States by providing assistance from the Fund to help them bear the financial burden inflicted on them as a consequence of the withdrawal of the United Kingdom from the Union without an agreement. In line with the principle of subsidiarity, it defines clear eligibility criteria for the EUSF to be mobilised. Assistance under this instrument will therefore be confined to costs with serious repercussions on the economic and financial conditions in a given Member State.
The EUSF is based on the subsidiarity principle. This means that the EU should intervene only in cases where a Member State is deemed no longer to be able to cope with a crisis alone and requires assistance. The legislator considered that, for natural disasters, such a situation is present when the total direct damage exceeds a certain threshold. Economic follow-on damage is not included as it is considered too complex to determine in a quick, reliable and comparable way. The threshold for natural disasters was therefore set at direct damage exceeding 0.6% of gross national income (GNI) or EUR 3 billion (in 2011 prices), whereby the lower amount applies. This double criterion was chosen because a single fixed amount would not reflect the big differences in economic strength (and therefore budgetary response capacities) of the Member States and lead to great injustices and unequal treatment of Member States. A single percentage rate would lead to either extremely low amounts for the smaller Member States or unattainably high thresholds for the biggest economies.
In the case of a disorderly withdrawal of the United Kingdom from the EU, severe consequences for the economies of the Member States are expected. However, it is hardly possible to estimate the direct damage. The same approach as for natural disasters is therefore not possible. Instead, the Commission proposes to take the financial burden on Member States’ budgets in order to face the additional needs stemming from and directly linked to a withdrawal without an agreement as the reference to determine eligibility. This corresponds largely to the public share of direct damage eligible for funding (such as the cost of recovery of public infrastructure, assistance to the population, rescue services etc.) in the case of natural disasters. This eligible public share of total damage varies greatly depending on the disaster and the country affected. On average, it is around 50% of total damage.
The Commission is therefore proposing to maintain the principles on which access to the EUSF is based. Accordingly, the lower of 0.3% of GNI or EUR 1.5 billion in 2011 prices, i.e. half of that applicable to natural disasters, are defined as the minimum level of public expenditure related to the withdrawal without agreement in order to access the EUSF. It is for the Member State to provide evidence for that expenditure and to demonstrate that it is directly imputable to the withdrawal without agreement.
• Proportionality
The proposal respects the proportionality principle. It does not go beyond what is necessary to achieve the objectives already laid down in the current instrument.
• Choice of the instrument
It is proposed to modify the existing Regulation (EC) No 2012/2002 to use the established procedures and practices to prepare and assess the applications for assistance and to implement and report the aid. This exercise is targeted and limited to mitigate economic consequences of a unique event which is the United Kingdom leaving the Union without an agreement.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The Ex Post Evaluation 2002-2017 5 concluded that the Fund is a valuable instrument in the EU toolkit for interventions in disaster situations, bringing EU added value to the post-disaster response in Member States and accession countries. The evaluation also called for further consideration to be given to policy actions that increase the potential for the Fund to intervene.
• Stakeholder consultations
Due to the urgency to prepare the proposal so that it can be adopted on time by the co-legislators, a stakeholder consultation could not be carried out.
• Impact assessment
Due to the urgent nature of the proposal, no impact assessment was carried out.
4. BUDGETARY IMPLICATIONS
To maintain the availability of the EUSF for major natural disasters, which is its original purpose, the use of the EUSF for the purpose of the present proposal should be limited to a maximum of 50% of its annual available amount in 2019 and 2020.
The maximum annual allocation of the EUSF is EUR 500 million in 2011 prices. In current prices this means EUR 585.8 million for 2019 plus EUR 597.5 million for 2020, i.e. a total of EUR 1 183.3 million. Up to EUR 591.65 million would therefore be available for the purpose of the current proposal.
Based on the EUSF assistance already mobilised in 2019 and currently in the process of being mobilised, it is reasonable to expect that the major part, and in any event more than half, of the 2019 allocation will not be spent during that year and will be carried forward to 2020.
Advance payments were introduced with the revision of the EUSF Regulation in 2014 and became effective from 2015. The main justification for their introduction was that the procedure necessary to mobilise the EUSF and pay out the full assistance is too lengthy (typically up to one year) and that the serious crisis situation demanded a quicker response. It was also considered that the long delays in providing assistance were bad for the image of the EU.
The level of advances was set at 10% of the expected EUSF contribution, limited to a maximum of EUR 30 million. It turned out that this level was not satisfactory. In case of smaller disasters where the EUSF contribution amounts to a few million Euros the advance is not much more than some hundred thousand euros which hardly make a difference. In the event of very big disasters such as the Abruzzo earthquake with EUR 22 billion in damage and an EUSF contribution of EUR 1.2 billion an advance of no more than EUR 30 million is totally inadequate. In both scenarios the advance payment is disproportionate to its effects on the ground. The recent ex-post evaluation of the EUSF (2002-2017) confirms this analysis.
The Commission therefore proposes to raise the level of advance payments for individual disasters of all categories to 25% of the expected EUSF contribution, limited to a maximum of EUR 100 million.
The Commission also proposes to increase the total level of appropriations for EUSF advances in the annual budget from EUR 50 million to EUR 100 million. The Draft Budget for 2020 does not incorporate this proposal. In order to ensure the timely availability of resources where necessary, the Commission will propose to enter additional appropriations for a maximum of EUR 50 million in the budget for 2020.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
Maximum transparency and proper monitoring of the use of the EU financial resources are required. Reporting obligations for the Member States and the Commission, will apply as set out in Regulation (EC) No 2012/2002.