Explainer on the euro area budgetary instrument
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What is the budgetary instrument for convergence and competitiveness?
The BICC is a budgetary tool dedicated to the euro area (EA). It will finance packages of structural reforms and public investments in order to strengthen the potential growth of euro area economies and the resilience of the single currency against economic shocks.
Although it is rooted in the EU budget, the BICC differs from existing EU instruments in many respects. The Euro summit and the Eurogroup (EG) will provide strategic guidance for the BICC every year, while it will be up to the Commission to manage the instrument.
The case for a euro-area-focused tool became more acute after the crisis, which was amplified by the build-up of divergences among EA members. The euro area lacked tools to foster competitiveness and convergence among its members and to strengthen economic coordination. Properly calibrated, this instrument can become a driver for inclusive and sustainable growth.
Non-euro-area member states participating in the Exchange Rate Mechanism II will be able to participate, on a voluntary basis.
When will it start?
It is expected to become operational together with the 2021-2027 EU budget (also known as the Multiannual Financial Framework), which should come into force in 2021.
How much money will be available?
The BICC will draw on the EU budget. No decision has been taken yet on the amount of funds available to the BICC. Leaders will do this in the context of the EU budget negotiations.
To set the size of the BICC in the 2021-27 EU budget negotiations, the Finnish Council presidency – who is leading these negotiations and has been asked by the leaders to present a so-called "Negotiation Box"- intends to take into account the euro area share of a specific budget line included in the Commission’s proposal for the 2021-27 EU budgetary package. This budget line corresponds to the Reform Delivery Tool, initially designed to support reform initiatives in all EU countries. In its proposal, the Commission assigned €25 billion, of which around €17 billion would be allocated to the 19 euro area countries. These amounts are purely indicative at this stage.
Who will run the instrument? What is the role of the Eurogroup?
Euro area countries will provide strategic guidance for the instrument, while the Commission will oversee its implementation and provide support to member states.
Euro area governments will set the priorities for investments and reforms in the euro area as a whole, and those priorities will form the basis for the assessment of projects put forward by each country.
How does this link in with the European Semester?
The process for selecting projects for reforms and investments supported by the BICC will build on the European Semester timeline.
The euro area members will discuss the priorities for reform and investment as the first step in the process. This will be followed by strengthened euro area recommendations, which are a key part of the Semester.
Member states will then submit proposals, which should - as a rule - consist of packages of reforms and investments, linked to the National Reform Programmes. In its assessment of the projects, the Commission will take existing country-specific recommendations into account.
Member states' proposals will include not only the estimated costs of investments and, where appropriate, of structural reforms, and justifications for these estimated costs, but also the timeline for implementation, indicating the relevant milestones and targets.
What role will national parliaments play in the BICC?
The budgetary instrument will be part of the EU budget, which means the European Parliament and also the European Court of Auditors will play an important part.
The Commission will be responsible for budgetary implementation. The use of the funds will be subject to the scrutiny of the European Court of Auditors and the discharge of the European Parliament.
At the same time, national parliaments will have a chance to have their say in the country proposals for eligible projects.
What is the reasoning behind the idea of a budget for the eurozone?
The lack of a fiscal pillar - which could be used to flank a single monetary policy - in the set-up of the Economic and Monetary Union has long been a topic of discussion among policy-makers and economists.
In the current set-up, fiscal policy is not a shared competence, but is decided by national authorities, which must nevertheless respect commonly agreed fiscal rules.
The BICC establishes a new budgetary tool dedicated to the euro area. By promoting convergence and competitiveness, this instrument intends to help bring euro area economies closer into line. This should increase the effectiveness of monetary policy and, in so doing, to ease concerns about the need for permanent fiscal transfers.
How will countries finance this instrument?
The instrument will draw on the EU budget. This is funded by contributions from member states, which are by and large equivalent to the size of their respective economies.
A clause will be included in the regulation that makes it possible for participating members to fund the instrument with national contributions beyond the so-called own funds resources of the EU budget. This would require the conclusion of an intergovernmental agreement.
Technical work is continuing on this issue and a final decision will be taken in the context of the EU budget negotiations.
Will the BICC be disbursed via grants or loans, or both?
Support will take the form of grants – in other words, direct financial contributions. The cost estimate, within the envelope for each member state on the basis of the allocation key, will determine the amount of the support that a member state will receive for a given project.
What is the difference between the BICC and other structural funds?
The BICC stands out among other EU budget instruments, in particular the structural funds, for its dedicated governance and the flexibility it has in allocating and spending the funds.
The instrument is intended to address evolving challenges of euro area members. To that end, euro area members will decide together, on an annual basis, on how the money should be used, giving themselves room for effective economic steering.
To strengthen this process, the instrument will allow some degree of flexibility for allocating the funds between countries, in line with their priorities.
All this is in contrast with the multiannual EU budget, which pre-allocates a large share of its total.
Will countries have to co-finance?
Member states must have skin in the game. In normal times, national governments will cover 25% of the cost of eligible projects. In the event of severe economic circumstances as defined in the Stability and Growth Pact, this co-financing rate will be cut in half.
Is there a stabilisation function in the BICC?
BICC is geared towards convergence and competitiveness. In times of crisis, resources are scarce and investment often bears the brunt. To protect the levels of investment, national co-financing rates will be reduced in the event of severe economic circumstances. This will help supporting the economy.
Discussions on a stabilisation instrument, such as a common unemployment re-insurance system or a rainy day fund, have been ongoing at technical level. But there is no consensus on it yet.
How will the BICC's money be distributed?
All euro area countries will benefit from the BICC.
At least 80% of the funds will be split per country according to two criteria: inverted GDP per capita and population. No country will receive less than 70% of its share, meaning that all countries will get back at least seven out of ten euros of their contribution to this pot.
The rest of the funds - up to 20% of the BICC - will be used flexibly, to react to country-specific challenges by supporting particularly ambitious packages of reforms and investments.
Is there conditionality attached to these BICC funds?
There is no BICC-specific policy conditionality. The policy conditions that limit access to EU budget funds will also apply to the BICC.
This means that access to financing will hinge on the applicable macro-economic conditionality laid down in the Common Provisions Regulation and on compliance with the horizontal rules applying to the implementation of the EU budget (e.g. the Financial Regulation).
Furthermore, member states need to deliver on the commitments related to the implementation of the proposed packages of structural reforms and investments.
Who decided to set up a BICC? And when?
After the euro overcame the financial crisis, a consensus emerged on the need to take further steps to make it more resilient and further shield economies against economic shocks.
Against this backdrop, in December 2017 leaders asked ministers to develop the European Stability Mechanism and set up a backstop for bank resolution and to complete the banking union.
Under the chairmanship of Mário Centeno, in the first semester of 2018, the Eurogroup (in inclusive format) had an exploratory discussion on a euro area budget, on the basis of contributions from France and Germany.
On the back of that, Mário Centeno wrote to European Council President Donald Tusk with a comprehensive list of all the open items which had emerged in discussions and could form part of the list of euro area reforms. In June 2018, EU leaders asked the Eurogroup to work on all the items.
By December, the Eurogroup President had written to President Tusk stating ministers’ readiness to work on the “design, implementation and timing of a budgetary instrument for convergence and competitiveness”.
In response, leaders asked the Eurogroup to define the key features of the BICC, which were presented and confirmed again by EU leaders in June 2019.