Explanatory Memorandum to COM(2020)854 - Brexit Adjustment Reserve - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)854 - Brexit Adjustment Reserve. |
|---|---|
| source | COM(2020)854  |
| date | 25-12-2020 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The United Kingdom of Great Britain and Northern Ireland (‘United Kingdom’ or ‘UK’) left the European Union (‘EU’) and the European Atomic Energy Community (‘Euratom’) – hereafter referred together as the ‘Union’ – on 1 February 2020. The Withdrawal Agreement 1 concluded between the Union and the United Kingdom entered into force on that date, securing the United Kingdom’s orderly departure, and providing legal certainty in important areas, including citizens’ rights, the financial settlement and avoiding a hard border on the island of Ireland.
According to the Withdrawal Agreement, a transition period was agreed, which is to last until 31 December 2020 and guaranteeing “business as usual” conditions for citizens, consumers, businesses, investors, students and researchers, for instance, in both the EU and the United Kingdom. The EU and the United Kingdom negotiated a new framework of relations, based on the Political Declaration agreed between the EU and the United Kingdom 2 .
Regardless of the type of any future agreement, the fact that the United Kingdom will no longer participate in Union policies as of the end of the transition period will create barriers to trade in goods and services and to cross-border mobility and exchanges that have not existed before. This will happen in both directions, i.e. from the United Kingdom to the Union, as well as from the Union to the United Kingdom.
Based on the decades of close partnership inside the EU, there is an important economic, commercial and social interdependence between the United Kingdom, on the one side, and the EU Member States, on the other. Therefore, despite the preparedness measures put in place both by the Commission and the Member States, at the end of the transition period, many economic sectors and businesses, especially companies with a significant exposure to the United Kingdom, will face difficulties as a consequence of the loss of facilitated access to its market or be otherwise affected by more complex trade and economic relations. This could result in losses of jobs. Against such background, Member States may decide to counter the negative impact by introducing specific support schemes to assist affected regions and businesses in managing change or by introducing measures to help preserve employment levels. One of the sectors that would be most adversely affected is the fisheries sector due to resulting limitation of fishing activities.
Member States’ public administrations are also affected as they had to set up additional infrastructure and facilities and recruit additional personnel. For instance, in the field of customs and indirect taxation, some national administrations have made 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, Member States had to set up new Border Inspection Posts or extend existing ones at entry points of imports from the United Kingdom into the EU. Member States may have to step up control measures at sea and at ports for additional monitoring and inspection. Member States’ administrations had to adapt the rules for issuing certificates and authorisation of products, establishment requirements, labelling and marking, as well as envisage and update specific awareness raising measures on the consequences that the withdrawal will have for citizens and businesses.
Since the UK referendum in 2016, Member States and the EU have been actively preparing for the withdrawal in both political and economic terms. They have been putting in place preparedness measures to take into account the possible effects of the withdrawal of the United Kingdom from the Union on all stakeholders affected. The Commission has repeatedly called on all relevant actors to take the necessary steps to avoid or reduce the potential impact. Despite the measures already taken or planned, the withdrawal of the United Kingdom from the Union is an unprecedented situation for all Member States that requires specific, targeted and fast action. It is fair to assume that, due to the particularly close economic and trading relationship that has been developed with Member States during the 47 years of the United Kingdom’s EU membership, some Member States, regions and sectors will be more impacted by the withdrawal and are expected to experience economic and financial losses not yet possible to quantify. These additional actions are likely to have a significant impact on public spending, especially in the short term and in those Member States and regions particularly affected, thus resulting in an urgent need for additional public funding to offset these consequences, especially in the first years following the withdrawal.
Therefore, the European Council conclusions, agreed at its special meeting of 17-21 July 2020, provide for the establishment of a new special Brexit Adjustment Reserve (the ‘Reserve’) within the special instruments outside of the EU budget ceilings of the multiannual financial framework ‘to counter unforeseen and adverse consequences in Member States and sectors that are worst affected’ 3 . The European Council invited the Commission to present a proposal.
The Reserve established under this Regulation will provide support to Member States, regions and sectors, in particular those that are worst affected by the adverse consequences of the withdrawal of the United Kingdom from the Union, mitigating thus its impact on the economic, social and territorial cohesion. The Reserve will provide financial contributions to cover all or part of the additional public expenditure incurred by Member States, especially those relying most heavily on trade and economic relations with the United Kingdom, for measures directly linked to the withdrawal. The Reserve complements other existing tools available under Next Generation EU and the next long-term EU budget.
• Consistency with existing policy provisions in the policy area and with other EU policies
The Reserve will be complementary and ensure synergies with other Union programmes and funding instruments. The 2021-2027 multiannual financial framework, NextGenerationEU and accompanying programmes including the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) under the structural and cohesion funds, the post-2020 cohesion policy funds, the Just Transition Fund, the Recovery and Resilience Facility and the InvestEU will focus more on dealing with the effects of the crisis caused by COVID-19 and provide support to Member States’ economies to become more resilient, sustainable and better prepared for the future. The Reserve will concentrate its resources specifically and exclusively on the direct effect of the specific and unprecedented event of withdrawal of the United Kingdom from the Union, reducing its impact in terms of territorial cohesion.
The proposed instrument also draws inspiration from the long-standing experience of the European Union Solidarity Fund 4 .
There is currently no instrument providing financial support to Member States, specifically and directly linked to the economic and social consequences of the withdrawal of the United Kingdom from the Union.
The proposal is part of the preparation for the end of the transition period between the United Kingdom and the Union. It builds on and complements the work done by the EU institutions and Member States in the context of the preparedness measures taken under the respective Union policies during the negotiations under Article 50 TEU and the Commission’s outreach work to help ensure that Member States’ national administrations are ready for the end of the transition period. Its architecture takes into account the unprecedented situation for Member States, its uniqueness and the need for them to react quickly and flexibly to the challenges as they arise in their economies.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal is based on Articles 175 and 322 of the Treaty on the Functioning of the European Union (TFEU).
Article 174 TFEU provides that in order to promote its overall harmonious development, the Union shall develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion.
The right to act in pursuing this goal is enshrined in the third paragraph of Article 175 TFEU setting out that, if specific actions prove necessary outside the Funds and without prejudice to the measures decided upon within the framework of the other Union policies, such actions may be adopted by the European Parliament and the Council acting in accordance with the ordinary legislative procedure and after consulting the European Economic and Social Committee and the Committee of Regions.
In line with the third paragraph of Article 175 TFEU, the proposal provides that the Reserve is aimed at enhancing economic, social and territorial cohesion by providing financial support to the most affected Member States, regions and sectors to deal with the adverse consequences of the withdrawal of the UK from the Union thus ensuring EU solidarity and strengthening resilience.
The proposal is based also on Article 322 TFEU because it contains specific carry-over rules derogating from the principle of annuality set out in Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council (the ‘Financial Regulation’) 5 .
• Subsidiarity and proportionality
In accordance with Article 4 i TFEU, the Union has shared competence with Member States in the area of economic, social and territorial cohesion as well as of certain aspects of social policy. The funding of the proposed activities through the proposed Regulation in line with the principles of shared management respects the principles of European added value and subsidiarity. Funding from the Union budget concentrates on activities whose objectives cannot be sufficiently achieved by the Member States alone, and where the Union intervention can bring additional value compared to action of Member States alone.
In view of the above, the Reserve established by the Regulation should provide support to Member States to counter the adverse consequences of the withdrawal of the United Kingdom from the Union. Its overall objective is thus to enhance cohesion, through measures that allow mitigating the economic, social and territorial impact of the withdrawal on the Member States’ economies and to protect employment levels.
Furthermore, the subsidiarity principle is also reflected by the fact that the Reserve will be implemented under shared management. Interventions are not managed directly by the European Commission, but instead implemented in partnership with the Member States. Thus the Union action is limited to what is necessary to achieve the Union objectives as laid down in the Treaties. In line with the principle of subsidiarity, it defines clear eligibility criteria for the Reserve to be mobilised and provides flexibility in its use commensurate to the unique situation.
The proposal complies with the proportionality principle because it does not go beyond the minimum required in order to achieve the stated objective at the European level and which is necessary for that purpose.
• Choice of the instrument
It is proposed to create a new instrument as the goals described in the preceding sections cannot be reached to a sufficient degree by individual actions of the Member States. Under cohesion policy, the selected instrument is a Regulation of the European Parliament and of the Council in accordance with the ordinary legislative procedure as set out in Article 175(3) TFEU, ensuring equal treatment of Member States. The proposed instrument draws inspiration from the long-standing experience of the European Union Solidarity Fund and cohesion policy, while adapting to the completely new circumstances and objective of countering the effects of the withdrawal of the United Kingdom from the European Union.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
It is impossible to evaluate ex post the impact or check the fitness of existing legislation because there is neither such legislation nor such precedent.
• 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. However, in preparation of this proposal, a series of meetings have been held with representatives of a wide range of Member States.
• Impact assessment
Due to the urgent nature of the proposal, no impact assessment was carried out. The proposal takes into account recent economic analyses, including the Commission’s autumn 2020 economic forecast and the European Central Bank’s research.
4. BUDGETARY IMPLICATIONS
Article 10 of Council Regulation (EU, Euratom) 2020/2093 6 provides that the overall amount of the Reserve shall be EUR 5 000 000 000 in 2018 prices.
The maximum resources for the implementation of the Reserve shall be EUR 5 370 994 000 in current prices, to be financed as a special instrument outside of the EU budget ceilings of the Multiannual Financial Framework. EUR 4 244 832 000 will be allocated and disbursed in 2021 in the form of a pre-financing. The remaining EUR 1 126 162 000 will be allocated and disbursed in 2024 for additional contributions in line with the provisions of the present proposal.
By derogation from the provisions of Article 12 i of the Financial Regulation, specific provisions on the automatic carry-over of appropriations are proposed due to the specific characteristics of the Reserve. While it is likely that most of the adverse consequences of the withdrawal of the United Kingdom from the Union will occur in the first year(s) after the effective withdrawal, effects on certain regions, sectors or Member States may occur in subsequent years. In order to maximise its impact and to fully operationalise the conclusions of the European Council 7 , which provide for an overall amount available of EUR 5 billion in 2018 prices without time limitation, it is thus necessary to provide for entering the Reserve as a provision in the budget, with an automatic carry-over of unused commitment and payment appropriations until 2025.
In addition, specific provisions on a tailor-made reference period are proposed due to the specific nature of the Reserve and the relatively short implementation period. Given that at the same time, the risks for the Union budget are mitigated by the requirement for a solid management and control system to be set up by Member States, it is justified to derogate from the obligation to submit the documents referred to in paragraphs 5, 6 and 7 of Article 63 of the Financial Regulation in February or March of each year.
5. OTHER ELEMENTS
• Visibility and reporting arrangements
Specific reporting arrangements will be applied to the contribution from the Reserve. All Member States will have to submit an implementation report by 30 September 2023 detailing the actions supported and the expenditure incurred and paid during the eligibility period as well as the values for a set of output indicators. The Member States will also have to ensure visibility and transparency of the interventions and beneficiaries. The Commission shall carry out an evaluation to examine the effectiveness, efficiency, relevance, coherence and EU added value of the Reserve. Following its assessment and decisions on the final allocation, the Commission will present to the European Parliament and the Council a comprehensive report about the activity of the Reserve by 30 June 2027.
• Detailed explanation of the specific provisions of the proposal
Contents
- Scope
- Eligibility
- Financial management
- Allocation method for the pre-financing
- Submission of applications for financial contribution from the Reserve
- Assessment by the Commission of the applications for financial contribution, clearance of the pre-financing and calculation of the additional amounts
- Management and control
This Regulation establishes the Brexit Adjustment Reserve. It will provide financial contributions to Member States to counter adverse consequences in Member States, regions and sectors, in particular those that are worst affected by the withdrawal of the United Kingdom from the Union, with the objective of mitigating its impact on the economic, social and territorial cohesion.
The period of eligibility for direct public expenditure will run from 1 July 2020 to 31 December 2022. The Regulation contains a comprehensive yet non-exclusive list of types of eligible expenditure for specifically set up measures, including for regions, areas, businesses, sectors and local communities adversely affected by the withdrawal. The Regulation also defines certain types of expenditure that are not eligible.
The Reserve will cover all Member States and will be activated in two rounds of allocations – the first one in 2021 in the form of a substantial pre-financing, and the second in 2024 as a payment of additional contribution from the Reserve. For this purpose, the Commission will take into account the use of the pre-financing and the overall eligible expenditure accepted by the Commission that exceeds both the amount of the pre-financing and 0.06% of the nominal GNI of 2021. The Commission will set out the relevant amounts for the allocation of pre-financing by means of an implementing act which, given the exceptionality, the uncertainty of the level of impact and the need for swift reaction from the Member States, will not include a description of the actions to be financed as stipulated by Article 110 i of the Financial Regulation.
The allocation method for the pre-financing will be based on official statistics that are reliable and comparable. These will take into account the importance of trade with the UK and the importance of fisheries in the UK exclusive economic zone. The allocation method for the pre-financing is set up in Annex I to the Regulation in order to ensure full transparency.
Member States will have to submit applications (a form is provided in Annex II of the Regulation) for a contribution from the Reserve by 30 September 2023, detailing the information on the total public expenditure incurred and paid by the Member State from 1 July 2020 to 31 December 2022. This application will also describe how the pre-financing was used. The specific nature of the instrument and the relatively short implementation period justify the establishment of a tailor-made reference period and the requirement of a single application in 2023. Given that at the same time, the risks for the Union budget are mitigated by the requirement for a solid management and control system to be set up by Member States, it is justified to derogate from the obligation to submit the documents referred to in paragraphs 5, 6 and 7 of Article 63 of the Financial Regulation in February or March of each year.
The application will be accompanied by an implementation report, detailing, among others, the measures taken to counter the adverse consequences of the withdrawal of the United Kingdom from the Union, and how they were implemented, a management declaration and an independent audit opinion covering the reference period for the Reserve.
Assessment by the Commission of the applications for financial contribution, clearance of the pre-financing and calculation of the additional amounts
Once Member States submit the applications for a financial contribution by the single deadline of 30 September 2023, the Commission will assess the applications in a package, guaranteeing equitable treatment of all Member States and ensuring consistency in the evaluation. The Commission will in particular look into the eligibility and accuracy of the expenditure declared, its link to the end of the transition period and its economic effects, and the measures put in place to avoid double financing as well as the supporting documents (the implementation report, the management declaration and the independent audit report). In assessing the applications for a financial contribution from the Reserve, the Commission will clear the pre-financing paid, and recover the unused amounts. Where the expenditure accepted as eligible exceeds the amount paid in pre-financing and 0.06% of the nominal GNI of 2021, additional amounts from the Reserve may be paid to contribute to the exceeding amounts, within the limits of the financial resources available. The amounts recovered or carried over from the pre-financing may be used for reimbursement of additional expenditure by Member States, provided there is a demand.
The budget allocated to the Reserve will be implemented under shared management with Member States, guaranteeing full respect of the principles of sound financial management, transparency and non-discrimination and the absence of conflict of interest. In particular, Member States will have to set up a management and control system and designate bodies responsible for the management of the Reserve and an independent audit body. The Regulation sets out clearly the responsibilities for the Member States and a minimum set of requirements for the bodies responsible for the management, control and audit of the financial contribution under the Reserve. Member States will need to put in place systems that aim to prevent, detect and deal effectively with any irregularities, including fraud.
Member States should notify the Commission of the identity of the bodies designated and of the body to which the pre-financing shall be paid, and confirm that the systems’ descriptions have been drawn up, within three months of the entry into force of this Regulation.
For simplification reasons, Member States could make use of existing designated bodies and systems set up for the purpose of the management and control of cohesion policy funding or the European Union Solidarity Fund.
The Commission will take appropriate actions to ensure that the financial interests of the Union are protected, including financial corrections.