Explanatory Memorandum to COM(2020)139 - Establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) following the COVID-19 outbreak

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dossier COM(2020)139 - Establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) following ...
source COM(2020)139 EN
date 02-04-2020


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Since the first cases of COVID-19 contagion, the European Union has been working tirelessly to support Member States and their citizens in addressing the crisis. The Commission has activated its general rapid alert system “ARGUS” for crisis coordination and the Crisis Coordination Committee meets regularly to coordinate the actions of all the relevant departments and services of the Commission and of the EU agencies. The Commission has also established a coordinating response team at political level, composed of the five Commissioners responsible for the most affected policies. Following the EU leaders' videoconferences on the response to the COVID-19 outbreak on 10, 17, and 26 March 2020, the Commission is further stepping up its response to the COVID-19 outbreak, on all fronts. In this respect, the Commission has published a Communication to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup for a “coordinated economic response to the COVID-19 outbreak” on 13 March 2020. In the economic sphere, the Commission proposed the Coronavirus Response Investment Initiative (CRII) to flexibly use the EU Structural Funds to respond to the rapidly emerging needs in the most exposed sectors, such as healthcare, SMEs and labour markets, and help the most affected territories in Member States and their citizens. This proposal was meanwhile adopted and entered into force on 30 March. The Commission has also adopted a Temporary Framework for State aid to enable Member States to use the full flexibility foreseen under State aid rules to support their economies. Moreover, the Commission has also called on the Council to ensure that the Union institutions activate the general escape clause under the Stability and Growth Pact, and the Union institutions will apply that clause as part of the strategy of the Union to respond quickly, forcefully and in a coordinated fiscal manner to the COVID-19 pandemic.

The crisis we face because of the COVID-19 pandemic has a very significant human dimension, as well as a major negative socio-economic impact. It is therefore essential that the Union and its Member States act decisively and collectively, in a spirit of solidarity to contain the spread of the virus and to help patients, to counter the economic fallout and to mitigate the negative social impacts. As part of that joint coordinated response, the Commission proposal to extend the scope of the EU Solidarity Fund (EUSF) to include major public health emergencies and to define specific operations eligible for financing was also adopted enhancing Union solidarity to Member States in dealing with the emergency situation.

As announced in the Communication of 13 March 2020, the Union also stands ready to support Member States where possible in alleviating the employment impact for individuals and the hardest hit sectors. The new instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) proposed to the Council is an additional temporary instrument to allow for Union financial assistance up to EUR 100 billion in the form of loans from the Union to affected Member States. The contingent liability arising from those loans from the Union will be made compatible with the EU budget constraints with guarantees from Member States to the Union budget, representing 25% of the loans granted provided by each Member State in line with their respective share in total Gross National Income of the Union. SURE will be an additional financial assistance, coming on top of national measures and further to the regular grant support provided for similar purposes under the European Social Fund.

The SURE instrument should be available to Member States that need to mobilise significant financial means to fight the negative economic and social consequences of the COVID-19 outbreak on their territory. The establishment of SURE is a further tangible expression of Union solidarity, whereby the Member States agree to support each other through the Union by making additional financial resources available through loans. The SURE instrument will provide financial assistance to Member States to address sudden increases in public expenditure for the preservation of employment. Specifically, the SURE instrument will act as a second line of defence, supporting short-time work schemes and similar measures, to help Member States protect jobs and thus employees and self-employed against the risk of unemployment and loss of income. Short-time work schemes are public programmes that allow firms experiencing economic difficulties to temporarily reduce the hours worked while providing their employees with income support from the State for the hours not worked. Similar schemes exist for income replacement to the self-employed in emergency situations. Conditions to determine when a Member State can benefit from support under this instrument should be established by reference to the sudden severe increase in actual and possibly also planned public expenditure, for the preservation of employment, caused by the COVID-19 outbreak and be directly related to the creation or extension of short time work schemes and other similar measures taken in response to it.

Contents

1.

SURE will take the form of a lending scheme underpinned by a system of guarantees from Member States. This system will allow the Union to:


(1)expand the volume of loans that can be provided by the SURE instrument to Member States requesting financial assistance under the instrument;

(2)ensure that the contingent liability for the Union arising from the instrument is compatible with the Union budget constraints.

For the approach to serve the intended purpose, Member States must provide credible, irrevocable and callable guarantees to the Union in line with the respective shares in the total Gross National Income of the Union. The system of guarantees will avoid the need for up-front cash contributions from Member States while providing the credit enhancement required to ensure a high credit rating and protect the resources of the Union budget.

2.

In addition to the provision of Member State guarantees, other safeguards are built into the framework in order to ensure the financial solidity of the scheme:


·A rigorous and conservative approach to financial management;

·A construction of the portfolio of loans that limits concentration risk, annual exposure and excessive exposure to individual Member States, whilst ensuring sufficient resources could be granted to Member States most in need; and

·Possibilities to roll over debt.

• Consistency with existing policy provisions in the policy area

The present proposal comes in addition to another Union law instrument to provide support to Member States in case of emergencies, namely Council Regulation (EC) No 2012/2002 of 11 November 2002 establishing the European Union Solidarity Fund (EUSF) (“Regulation (EC) No 2012/2002”). Regulation (EU) 2020/461 of the European Parliament and of the Council, which amends that instrument to extend its scope to cover major public health emergencies and to define specific operations eligible for financing, was adopted on 30 March.

Whereas, the EUSF is a permanent instrument, SURE would be of a temporary nature. The geographical scope is also different because SURE is limited to Member States and does not extend to countries negotiating their accession to the Union. The thematic scope of the two instruments, however, is consistent – addressing major crises resulting from public health threats, where the EUSF can be used on a permanent basis while the SURE instrument is confined to the particular case of the COVID-19 outbreak. Another difference is that the EUSF is grant-based and allows for advance payments. The SURE instrument is loan-based.

Mobilisation of Union financial assistance under the SURE instrument would be possible on a proposal by the Commission to the Council. The Member State concerned should request support. Before the Council grants financial assistance under the SURE instrument, the Commission should consult with the Member State concerned to assess the extent of the (realised or expected) sudden severe increase in public expenditure in the field of protection of employment. The Member State should provide evidence of this sudden severe increase in actual and possibly also planned expenditure when requesting support. The Council adopts an implementing decision approving the financial assistance, acting by qualified majority, if the conditions of this instrument are fulfilled. The Commission and the beneficiary Member State will conclude an implementation agreement. Relevant operations when examining the sudden increased expenditure remain limited to public emergency operations in the field of protection of employment caused by the COVID-19 outbreak. The resulting loans will help Member States to finance their increased public expenditure in the field of short-time work schemes and similar measures, to help them protect jobs and thus employees and self-employed against the risk of unemployment.

• Consistency with other Union policies

The proposal is part of a range of measures developed in response to the current COVID-19 pandemic such as the “Coronavirus Response Investment Initiative”, and it complements other instruments that support employment such as the European Social Fund and the European Fund for Strategic Investments (EFSI)/InvestEU. It builds on a technique used for the European Financial Stabilisation Mechanism (EFSM) in the past financial crisis by the Union to provide on short notice financial assistance from the Union to Member States confronted with difficulties, or threatened by difficulties caused by an exceptional event beyond the Member State’s control, and on the new framework to manage contingent liabilities foreseen in the Financial Regulation of 2018. By making use of borrowing and lending in this particular case of the COVID-19 outbreak for supporting Member States, this specific instrument could in particular be used by Member States as a second line of defence to finance short-time work schemes and similar measures, helping protect jobs and thus employees and self-employed against the risk of unemployment.

This temporary instrument should be seen as an emergency operationalisation of a European Unemployment Reinsurance Scheme in the specific context of the COVID-19 crisis, without prejudice to the possible subsequent establishment of a permanent instrument under a different legal basis in the TFEU.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The legal basis for this instrument is Article 122 of the Treaty on the Functioning of the European Union (TFEU). It is based on both paragraph i and paragraph (2) of Article 122 TFEU.

The COVID-19 outbreak is a sudden and exceptional event entailing a massive and disruptive impact on the Member States’ economic systems calling for collective responses in a spirit of solidarity. The construction of the guarantee system based on voluntary contributions from Member States to the Union to underpin the financial assistance under the SURE instrument is based on Article 122 i TFEU. This intervention would reflect in a spirit of solidarity a response by Member States with measures appropriate to the unprecedented economic situation, which the COVID-19 outbreak causes. It is therefore justified to base the guarantee scheme supporting the SURE instrument on Article 122 i TFEU.

The organisation and management of the loan scheme is based on Article 122(2) TFEU, which allows the Council to provide on a temporary and ad hoc basis Union financial assistance, on a proposal from the Commission, to a Member State in difficulties or seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control subject to certain conditions. This legal base would underpin the lending component of the SURE instrument.

Article 122(2) TFEU has been used once before. During the financial crisis, it served as the legal basis for the establishment of a temporary European Financial Stabilisation Mechanism (EFSM) to help Member States that lost market access in full or in part due to severe deteriorating borrowing costs. The Union used that instrument to provide loans to Ireland, Portugal and a bridge-finance for Greece.

Article 122(2) TFEU can be used for any type of exceptional crisis event and is not confined to crises of a financial or financial stability nature only. The Council has a broad margin of discretion for assessing whether the conditions of this legal basis are fulfilled. This is manifestly the case for Member States that are most affected by the major public threat to health posed by the COVID-19 outbreak as well as by its economic and social consequences.

• Subsidiarity (for non-exclusive competence)

The proposal aims to support Member States confronted with a severe economic disturbance due to the exceptional event of the COVID-19 outbreak in order to show European solidarity with those Member States that are heavily affected, by providing Union financial assistance in the form of temporary loans. As a second line of defence, such financial assistance supports their governments’ increased public expenditure on a temporary basis in respect of short-time work schemes and similar measures to help them protect jobs and thus employees and self-employed against the risk of unemployment and loss of income.

Such support would help the population affected, contributes to a rapid return to normal living conditions in the affected regions and mitigates the direct societal and economic impact caused by the present COVID-19 crisis.

• Proportionality

The proposal respects the proportionality principle. It does not go beyond what is necessary to achieve the objectives sought by the instrument.

• Choice of the instrument

This act takes the form of a Regulation because the act creates a new specific and temporary instrument that could be used by any Member State and has to be binding in its entirety and directly applicable in all Member States. A Council Regulation for establishing financial assistance to Member States under Article 122(2) TFEU has been used in the past in the context of the financial crisis to establish procedures and practices to prepare and assess the requests of relevant Member States, and to implement such financial assistance in a rapid and effective manner. It ensures that subsequent implementing decisions by the Council to provide financial assistance to Member States take place under an appropriate and consistent framework. A Regulation applicable to all Member States is also the most appropriate legal instrument to organise the guarantee scheme underpinning the lending under the SURE instrument in view of the fact it is based on voluntary contributions by all Member States.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Stakeholder consultations

Due to the urgency to prepare the proposal so that it can be adopted in a timely manner by the Council, 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

The Commission should be able to contract borrowings on the financial markets with the purpose of on-lending them to the Member State requesting financial assistance under the SURE instrument.

3.

SURE will take the form of a lending scheme up to EUR 100 billion underpinned by a system of guarantees from Member States. This system will allow the Union to:


(1)expand the volume of loans that can be provided by the SURE instrument to Member States requesting financial assistance under the instrument;

(2)ensure that the contingent liability for the Union arising from the Instrument is compatible with the Union budget constraints.


For the approach to serve the intended purpose, Member States must provide credible, irrevocable and callable guarantees to the Union, in line with their respective share in the total Gross National Income of the Union. The system of guarantees will avoid the need for up-front cash contributions (paid-in capital) from Member States while providing the credit enhancement required to ensure a high credit rating and protect the resources of the Union.

4.

In addition to the provision of Member State guarantees, other safeguards are built into the framework in order to ensure the financial solidity of the scheme:


·A rigorous and conservative approach to financial management;

·A construction of the portfolio of loans that limits concentration risk, annual exposure and excessive exposure to individual Member States whilst ensuring sufficient resources could be granted to Member States most in need; and

·Possibilities to roll over debt.

5. OTHER ELEMENTS

• Detailed explanation of the specific provisions of the proposal

Article 1 of the proposed Council Regulation provides for the establishment of the European Instrument for temporary Support to mitigate Unemployment Risks in an Emergency following the COVID-19 outbreak (SURE). This instrument would be ad hoc and temporary in view of its legal basis. It would provide financial assistance under Article 220 of the Financial Regulation in support of Member States confronted with a severe economic disturbance caused by the exceptional occurrence of the COVID-19 outbreak.

Article 2 of the proposed Regulation stresses the complementary nature of the SURE instrument. It should complement efforts undertaken by Member States at national level and covers part of the severe and sudden increase in public expenditure they face as a result of their efforts to address the direct negative consequences of the COVID-19 crisis. The use of the SURE instrument does not prevent the application of other relevant EU-instruments dealing with specific aspects of major threats to public health and financial support instrument, like for instance the EUSF.

Article 3 of the proposed Regulation lays down the conditions for activating the instrument. Member States may request financial assistance where their actual and possibly planned public expenditure has suddenly and severely increased in the field of employment due to national responses to the COVID-19 outbreak. Support under the SURE instrument should in particular support the increased financial burden of Member States for short-time work schemes and similar measures that help protect jobs and thus employees and self-employed against the risks of unemployment and loss of income.

Article 4 of the proposed Regulation determines firstly that financial assistance under the proposed SURE instrument will take the form of a loan granted to the Member State concerned. Secondly, it provides for the empowerment of the Commission to be able to contract borrowings on the financial markets with the purpose of on-lending them to the Member State concerned.

Article 5 of the proposed Regulation establishes the maximum amount of Union financial assistance that can be provided under the SURE instrument. It concerns an amount of up to EUR 100 billion.

Article 6 of the proposed Regulation establishes the procedure for granting swiftly financial assistance to Member States. Following a request by a Member State, the Commission would consult the Member State concerned to verify the extent of the increase in public expenditure that is directly related to the creation or extension of short-time work schemes and similar measures notably for self-employed. Such a consultation also helps the Commission to properly evaluate the terms of the loan. Elements such as the amount, the maximum average maturity, pricing, availability period of support and the technical modalities for implementation should be determined.

Articles 7 to 10 of the proposed Regulation contain the procedural rules for the disbursement and implementation of the loan support under the SURE instrument. More specifically, they deal with rules on the disbursement, the borrowing and lending operations, the prudential rules applicable to the portfolio of loans under the instrument, and the administration of the loans.

Article 11 of the proposed Regulation deals with the funding mechanism of the instrument. The lending to Member States under the instrument will be underpinned by a system of guarantees from Member States committed to the Union on a voluntary basis. This system will allow the Union to expand the volume of financial assistance by means of loans that could be provided to Member States under the SURE instrument. The guarantees committed to the Union should be irrevocable, unconditional and on demand and laid down in an agreement concluded between the Commission and the Member States. Such contributions would constitute external assigned revenue.

Article 12 of the proposed Regulation sets a rule regarding the availability of the instrument. Union financial assistance under the SURE instrument will only be available as from the moment that all Member States have committed their guarantees to the Union.

Articles 13 and 14 of the proposed Regulation lay down rules on controls and audits and reporting.

Finally, Article 15 of the proposed Regulation makes clear that the instrument will not apply to the United Kingdom since under Article 143 i of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community 1 , the liability of the United Kingdom for its share of the contingent liabilities of the Union is limited to those contingent liabilities which arise from financial operations taken by the Union before the date of the withdrawal of the United Kingdom from the Union. Any contingent liability of the Union arising from financial assistance under this Regulation would be subsequent to the date of the withdrawal of the United Kingdom from the Union. Therefore, the United Kingdom should not participate in the financial assistance under this Regulation.