RECOVERY FUND: THE ENGINE BEHIND THE EUROPEAN TRANSFORMATION

SPECIAL REPORT | MAY - JUNE 2021 https://eurac.tv/9ThZ

With the support of RECOVERY FUND: THE ENGINE BEHIND THE EUROPEAN TRANSFORMATION

SPECIAL REPORT https://eurac.tv/9ThZ

The unprecedented Recovery and Resilience Facility, the main instrument of the EU’s €800 billion recovery fund, represents a unique opportunity to overcome the recession triggered by the COVID-19 pandemic and complete the twin green and digital transitions of the European economies.

But the European Commission, international institu- tions, and experts agree that for this to work, member states must put forward well-designed investment proposals, ambitious reforms and solid governance systems. Contents

EU recovery fund struggles to find its true nature 4 Pressure mounts on member states to ensure successful roll- out of recovery fund 6 National authorities take center stage in fight against fraud 8 with recovery funds

The new kid on the EU bond block 10 Portugal investors demand bank bond money back or will 12 boycott European fund

Thinking about investing in Portugal? Think again. 14 The truth behind BES and Novo Banco! 16 4 RECOVERY FUND SPECIAL REPORT | EURACTIV EU recovery fund struggles to find its true nature

By Jorge Valero | EURACTIV.com

French president Emmanuel Marcon and chancellor Angela Merkel and EU High Representative, Josep Borrell, during the special European Council summit of July 2020 when the recovery fund was agreed.

mid doubts around the concerns among investors and has been dwarfed by the never-ending implementation of the criticism in national capitals. impetus of the Biden Administration, A€800 billion recovery fund, who have already put forward the fifth European Commission and experts “We have lost too much time. spending package for the US economy. stress that the EU instrument is not China has resumed its growth, the US a US-like emergency stimulus but an is booming, the EU must remain in the In recent weeks, EU institutions investment tool for the medium-term race,” French finance minister, Bruno and finance ministers have rushed to to transform the European economy. Le Maire said recently. point out that the comparison with the US efforts is unfair because EU Last July, every EU leader agreed By Friday (6 May), only half of EU governments had already approved on describing the recovery fund governments have submitted their national measures and European as a “historic deal”, built on the investment and reform proposals to welfare programmes are more robust unprecedented joint issuance of €800 access their part of the funds, although than on the other side of the Atlantic. billion of EU bonds. they were expected by 30 April. Meanwhile, seven member states must “Critically, a focus on But the slow process of finalising still ratify the Own Resources Decision scale understates the size and all the details of the fund, preparing to make it possible to borrow the €800 transformational nature of the national recovery plans and green- billion in the markets. support being provided, particularly lighting the massive borrowing for the EU economy,” Eurogroup in national parliaments sparked In addition, the European stimulus president Paschal Donohoe wrote in

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Continued from Page 4 the Financial Times in March. It will take many years to see what economic shocks, as the European results it will bring”, for example in Central Bank already requested in The Commissioner for Economy, the digital transformation. September at least for the euro area. Paolo Gentiloni, emphasised that the recovery fund, in particular its main In the medium term, the Facility This step would require a pillar, the Recovery and Resilience could represent the ‘carrot’ to potentially tricky change of EU Facility, is not “emergency money”, implement long-delayed reforms treaties, and member states allergic given that the first response given by in member states, for example, to to new fiscal transfers, including member states was very strong and transform the labour market in Germany and the Netherlands, have other EU instruments were approved Spain or the justice system in Italy. insisted on the temporary nature of before, including the SURE scheme to The European Semester, the EU the recovery fund. This will be one support workers. mechanism to coordinate national of the political battles to come, but economies, did not provide enough only once the pandemic is over and Gentiloni explained that “this incentives in past years because it member states prove they are making common money is for quality growth, lacked teeth, experts said. good use of the recovery funds. it should be connected to green and digital transitions and reforms”. In a recent paper, the Centre for the European Policy Studies Maria Demertzis, deputy director highlighted that the RRF “has the of Bruegel think tank, agreed that potential to steer the implementation the recovery fund is not a stimulus of structural reforms”. comparable to the checks sent to citizens and authorities by the Biden “The disbursement of the RRF Administration. funds is linked to the completion of targets and milestones set in the She argued that the European National Recovery and Resilience fund “is a medium-term investment Plans, which are defined in line with instrument, not a fiscal stabilisation the structural reforms identified by the tool, and it is important to remember country-specific recommendations that because people talk about it as if (CSRs),” the paper said. it was an ordinary stimulus”. But Demertzis was sceptical OPPORTUNITIES about the implementation of major reforms with high political costs and The unprecedented Recovery and recommended “not to expect too Resilience Facility offers primarily much” from governments. She said three opportunities in the short, that “emphasis” would be given to medium and long term. reforms linked to the green and digital agendas, although some “first steps” In the near future, it could provide would be taken in labour, pensions resources to impulse Europe’s and other difficult areas. leadership in the green transition and help the bloc catch up in the digital “This would be already a good race. thing because it is important to remain realistic,” she added. Ángel Talavera, head of European Economics at Oxford Economics, In the long run, the RRF, which will however, warned that “there is a lot be operative until 2026, could turn of uncertainty about the economic into the permanent fiscal instrument impact of a recovery plan of this kind. the EU is missing to deal with 6 RECOVERY FUND SPECIAL REPORT | EURACTIV Pressure mounts on member states to ensure successful roll-out of recovery fund

By Jorge Valero | EURACTIV.com

European Commission executive vice-president, Valdis Dombrovskis, after the Ecofin Council on 16 April. [Consilium]

s the EU recovery fund slowly The EU stimulus programme by the end of May or early June, more nears its implementation represents a “unique opportunity” for than a month later than the initial Aphase, member states’ Europeans to build back better after end-of-April deadline. absorption capacity and control the COVID-19 pandemic, European mechanisms are considered among of Commission executive vice-president Dombrovskis said that the main challenges for its successful Valdis Dombrovskis, said recently. But governments who already submitted roll-out. its implementation is a “challenging their plans met the green and digital task”, he added. targets of the recovery facility and Only six member states are still included a “good balance” of reforms to give their blessing to the EU’s The first priority for the EU and investments. The Commission €800 billion recovery fund. National executive is to ensure the quality now has two months to assess the governments could receive the first of the national recovery plans. To national plans in detail, some of them funds by the end of July, once the date, 18 national governments have more than 50.000 pages long. “We European Commission approves their submitted their investment and are under a lot of pressure to deliver national recovery plans. reform proposals. Most member states swiftly”, admitted Economic Affairs are expected to send their proposals Commissioner, Paolo Gentiloni.

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Council, and the role of the European institution added. But the results of the six-year Parliament. strategy to modernise Europe’s But according to the European economies using EU cash will depend Demertzis did not expect that Court of Auditors, the control on the capacity of member states to approving funds would turn into a mechanisms of the fund “need to be handle the unprecedented amount of lengthy process such as the troika strengthened”, in particular against new funds coming from Brussels. programmes. But “there will be fraud and irregularities. discussions among member states, EU officials and diplomats agreed and there needs to be”, she added. “We would like to stress the that the absorption of the recovery importance of effective measures fund will be “challenging” in Italy and The European Court of Auditors against fraud and irregularities Spain, the two largest beneficiaries of issued a note of concern with the to counter the risks arising from the instrument. governance and recommended significant additional resources to simplifying the procedures to be spent in a short time,” the court To ensure a timely and efficient the extent possible, to reduce the explained. absorption of the funds, the European administrative burden and facilitate Central Bank recommended absorption. For that reason, it proposed bolstering administrative capacity bolstering the European oversight in member states and reducing The court also proposed by “clearly” defining the role of the bottlenecks. last October reconsidering the European Parliament and the Court of frequency and timing of reporting Auditors in the instrument. “The quality and capacity of and evaluation, and defining public administration are likely to suitable indicators for the overall Having an adequate auditing and be decisive factors in the successful achievements of the fund. control framework is particularly use of Next Generation EU funds and important as the Commission has could be a promising area for reform,” CONTROL encouraged member states to crowd the ECB said in a note published in in private investment to multiply the March. The auditing and control impact of the fund. mechanisms of the instrument, mostly GOVERNANCE left to national authorities, have been Against this backdrop, experts a major issue in the negotiations said that providing legal certainty Another issue of concern is the between the Commission and the and guarantees to private investors governance of the mechanism. capitals over the recovery plans. would help to increase the impact of Member states will unlock the the European stimulus. recovery funds twice per year, once As CEPS, a think-tank, explained in the Commission and national officials a study published in March, the cash- “An efficient process for checks, validated the completion of agreed for-results “requires a strengthening controls and an audit trail should be milestones. of the ex post mechanisms for established” stressed Jorge Núñez, evaluation, control, and sanctions.” associate senior researcher at Some have warned that the CEPS, “providing public and private complexity of the process could The ECB also pointed out that operators with the necessary legal hamper successful implementation “adequate national control and audit certainty while providing an efficient of the fund. systems could also play a crucial role in (one-stop shop) mechanism for the ensuring an effective implementation verification of investments and Maria Demertzis, deputy director of the recovery package”. reforms”. at Bruegel, said that there are still issues to be clarified, including how “Control systems could include the governance and the conditionality precautionary measures to prevent will work in practice, the interaction corruption, fraud and conflicts between the Commission and the of interest,” the Frankfurt-based 8 RECOVERY FUND SPECIAL REPORT | EURACTIV National authorities take center stage in fight against fraud with recovery funds

EURACTIV.com

European Commissioner for Values and Transparency Vera Jourova and European Commissioner for Justice Didier Reynders (R) give a press conference on the 2020 Annual Rule of Law Report in Brussels, Belgium, 30 September 2020. [EPA-EFE/OLIVIER HOSLET / POOL]

ational control mechanisms As the funds start to finance A Commission spokesperson will be responsible for member states’ investment and told EURACTIV that the Recovery Nensuring that the EU recovery reform projects, a key element in and Resilience Facility requires “a funds are not affected by corruption the implementation of the recovery control framework that is tailored and or fraud, although the European facility will be the auditing and control proportionate to its unique nature.” Commission is also getting ready to mechanisms in each member state. use the new rule of law mechanism as For that reason, member states’ soon as possible. Having sound mechanisms national control systems “will serve as in place to protect the Union’s the main instrument for safeguarding The first payments of the recovery financial interests against any the financial interests of the Union,” funds are expected to reach member maladministration has been one the spokesperson added. states in July. The long-awaited of the elements prioritised by the resources of the €672.5 billion Commission in the negotiations with National governments will have Recovery and Resilience Facility will national governments to finalise the to ensure compliance with EU and help to boost the European recovery. recovery plans. national laws, including the effective prevention, detection and correction

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Continued from Page 8 of conflict of interests, corruption and Commission in April warning about of bonds they held. fraud. the “clear risk” of violating the rule of law in Spain. The reason was the EU PROTECTION The national governments had to reform of the governing body of judges provide sufficient assurances in their put forward by the government, and As part of the recovery fund recovery plans about how they are seen as a threat to their independence deal and the EU’s new seven-year going to protect the Union’s budget. by the judges. budget, the bloc up a new rule of law mechanism to ensure countries Against this backdrop, national Italy has been blamed for years receiving EU funds, including the auditing authorities and national for having a notoriously slow recovery funds, respect these values, courts will play an important role judiciary system. For that reason, including the independence of the in monitoring that the funds end one of the main reforms included judiciary system. up financing the green and digital in its recovery plan was a series of transitions and structural reforms measures to improve the Justice, by This new tool is under review by across the bloc. including temporary hires to deal the European Court of Justice, after with the immense backlog of cases being challenged by Hungary and The 2020 EU Justice Scoreboard and increasing the role of mediation Poland. showed “a continued improvement schemes to resolve disputes outside in the effectiveness of justice systems the courts. But Vera Jourova, Commission in a large majority of Member vice-president in charge of values, States,” Justice Commissioner Didier A similar problem affects said she may not wait for the ECJ Reynders said last August. Portugal, which currently holds the ruling before taking action. EU’s rotating presidency. But he noted that “challenges Asked if the Commission was remain to ensure the full trust of Despite improvements, “the planning to trigger the sanctions citizens in the legal systems of efficiency of the justice system procedure before the court delivers its member states where guarantees of continues to face challenges,” said the decision, she told Bloomberg that “we status and position of judges might Commission in its first Rule of Law will have to if the ECJ ruling comes too be at risk and subsequently their report about the country in 2020. late.” independence”. The EU executive addressed The new European Public Hungary and Poland are in this issue in the country-specific Prosecutor’s Office, which started everybody’s mind, as both are under recommendations, calling on Lisbon work on 1 June, will add an additional an Article 7 procedure for putting to improve the efficiency in tax and layer of protection at the EU level, at risk the rule of law and the administrative courts as an EU authority will for the first independence of the judges in their time have powers to investigate and territory. The Commission said some prosecute crimes committed against “considerable gains” were made the EU budget. But other member states also after Portugal took some measures, have outstanding issues with their including the creation of rapid judiciary systems. reaction teams to deal with case backlogs, although proceedings Spain and Italy, the largest remained comparatively lengthy. beneficiaries of recovery funds, face long-standing challenges with their Some of the cases affected by the courts. backlog are those put forward by a group of international investors, In the case of Madrid, three following the resolution of Banco associations representing the Espirito Santo in 2015, who challenged majority of judges sent a letter to the the losses imposed on the €2.2 billion 10 RECOVERY FUND SPECIAL REPORT | EURACTIV The new kid on the EU bond block

By Benjamin Fox | EURACTIV.com

The EU is set to become Europe’s largest supranational bond issuer within the next five years as a result of its SURE and NextGeneration programmes aimed at helping the bloc’s economies to recover from the damage caused by the Covid–19 pandemic. [Shutterstock/LALS STOCK]

he European Union is set to Between mid-2021 and 2026, size of the EU bond issuance could become the continent’s largest the total ‘NextGenerationEU’ bond impact on the bond programmes of Tsupranational bond issuer issuance will amount to €800 billion, EU treasuries and improve sovereign within the next five years as a result including 30%, equivalent to around credit ratings. of its SURE and NextGeneration €250bn, as green bonds. In 2021 alone, programmes, aimed at helping the up to €65bn will be brought to the That, says EU Budget Commissioner bloc’s economies recover from the market from July onwards, after the Johannes Hahn, will also help bolster damage caused by the COVID–19 EU has finalised its European green the international position of the euro. pandemic. bond standards. Hahn recently said that the With a total value of up to 5.5% of EU Deutsche Bank’s Natacha Hilger widespread investor interest in the EU GDP, the €800 billion NextGeneration has estimated that over the remainder bonds was because investors “consider and €100 billion SURE programmes of 2021, under the NGEU programme, the euro and the European Union as are likely to shake up the bond the EU is likely to issue €10 billion in a safe asset, as a safe haven”, adding market. Last year, European social, new bonds every two weeks, putting it that this will result in “a very strong sustainable, and green bond issuance in the same rank as Spain and France, economic but also political impact.” already hit their highest ever volumes, the eurozone’s second and fourth- a trend which is set to be accelerated largest economies, respectively. Nordic banking group Nordea by the new bond issuance. has argued that a genuine EU-level Analysts have also noted that the safe asset has been needed for a long

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Continued from Page 10 time, with investors hitherto seeing bonds of the former Portuguese bank German Bunds as the main safe asset Banco Espírito Santo (BES), say they in the bloc. Nordea has also argued will boycott the EU funds unless the that “a true safe asset would also help Commission takes action to ensure in improving the functioning of the that their case, and others similar to European financial markets”. it, is resolved.

Last October, the European Commission issued a two-tranche €17 billion inaugural social bond under the SURE instrument to help protect jobs and keep people in work – a €10 billion bond and €7 billion bond, due for repayment in October 2030 and 2040 respectively.

The EU executive reported that the bonds, which form part of a programme worth up to €100 billion in social bonds, were more than 13 times oversubscribed.

Commentators have also pointed out that since the bonds are jointly issued, and will be financed either by member states or via new EU taxes, they represent a major step in EU integration and towards a genuine transfer union between rich and poor states.

However, despite the political and economic benefits of the programme, and the indications that there will be major interest from the market as a whole, there are several storm clouds on the horizon.

The questions of how exactly the EU borrowing programme will be financed remains unclear, although member states would have to make increased direct contributions to the EU budget in the event that new EU levies cannot be agreed upon.

Meanwhile, a group of eight investors known as ‘Recover Portugal’, which has an unresolved €2 billion case related to its investment in 12 RECOVERY FUND SPECIAL REPORT | EURACTIV Portugal investors demand bank bond money back or will boycott European fund

By Patrícia Diniz | Lusa.pt

A group of international institutional investors coordinated by the Attestor Capital fund, on the hook for €2bn in the Banco Espírito Santo case, wants the European Commission to settle the case, waning that otherwise they will not fund the post-pandemic economic recovery. [European Central Bank / Flickr]

group of international statement, demanding “guarantees bonds of the former Banco Espírito institutional investors of redress and equitable treatment Santo (BES) claims to have “good and Acoordinated by the Attestor before considering partial funding of bad news” to give to Europe. Capital fund, on the hook for €2 billion the EU recovery fund. in the Banco Espírito Santo case, want “The good news is that the EU will the European Commission to settle the According to a source from the distribute €750 billion to member case, warning that otherwise, they will group of eight investors – called states, through the European Recovery not fund the post-pandemic economic ‘Recover Portugal’ – “for now, the legal Fund, to help them recover from the recovery. action is focused on the BdP [Bank crisis generated by COVID-19,” they of Portugal], but, “if the matter is not said. “It is essential that the law is resolved, they will undoubtedly be respected in member states and that forced to take legal action against the “The bad news is that before there is no political influence. We want European Commission”. distributing this money, the European information about what is happening Union has to borrow it, and that could and to be compensated for what we In a video posted online, this group be a problem because international have lost,” the investors said in a of institutionalists who invested in investors are quite unhappy with the

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EU and Portugal,” they pointed out. However, the institutional “It is good that they want to invest The group warns that if the EU investors holding these bonds money in digitising the judicial wants to get this €750 billion from accuse the BdP of discrimination system to speed up the resolution of international investors, “it first has by nationality, claiming that the cases and improve technology, but to show them that it will treat them five lines chosen by the regulator we need to solve the cases that have fairly and equitably, by first resolving were “held by foreign investors, been blocked for political reasons. the issue” of BES. not Portuguese” and “the only ones Unfortunately, this does not suit managed by Portuguese law and not the European Union,” said ‘Recover At a time when the Portuguese by international law”. Portugal’. are “under the gaze of the world” for occupying the presidency of “We want to recover the more Stressing that it is “important the Council of the European Union, than €2 billion that was taken from for the European Commission and ‘Recover Portugal’ calls into question us. The interests of investors must all members to put pressure on both the country’s ability to manage be protected, and we must ask the these unresolved cases”, the group the EU funds that are coming and the Portuguese government to solve considers it “unacceptable that capacity of its legal system for “not the Novo Banco problem as soon as investors have been expropriated, working in cases like this”, which has possible. This is what many investors without any solution so far”. been dragging on for six years. are waiting for,” ‘Recover Portugal’ said. “Recover Portugal demands At issue is the decision taken at the respect for the rule of law in the end of 2015 by the Bank of Portugal, Reiterating their “continued member states”, it concluded. faced with the capital needs of Novo concern about the situation in Banco (the “good bank” that resulted Portugal” and the “eventual suitability from the BES resolution process), and capacity [of the country] to to retransfer responsibility for five manage such large funding” as that lines of senior bonds of BES – which, coming from the European Recovery at the time of the resolution measure Fund, the group of aggrieved in August 2014, had passed to Novo investors believes that “the BES case Banco – back to the “bad bank”, which has put Portugal at the centre of a kept the toxic assets. controversy”.

In a statement released at the time, “Being a candidate for grants the BdP explained that this measure worth more than 4% of its Gross was “necessary to ensure that the Domestic Product, €45 billion in losses of BES are absorbed first by the the coming years from the Next shareholders and creditors of that Generation EU fund, it nevertheless institution and not by the banking raises dire questions about the system or taxpayers”. seriousness of the country’s judicial system,” they said. The supervisor then added that “the selection of these issues was They pointed out that the European based on reasons of public interest Commission had “identified lengthy and was aimed at safeguarding cases and long delays in Portugal’s financial stability and ensuring administrative and tax courts and compliance with the aims of the called on the country to implement resolution measure applied to BES”, its recommendations to increase the protecting “all depositors, creditors efficiency of administrative and tax for services rendered and other courts, namely by reducing the length categories of ordinary creditors”. of proceedings.” 14 RECOVERY FUND SPECIAL REPORT | EURACTIV

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DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network. Thinking about investing in Portugal? Think again.

Recover Portugal

[Shutterstock/Andre Roque Almeida]

n 2017, a coalition of institutional Today, this still unresolved case “healthy” Novo Banco’s books and investors, including Pimco and gives reason for grave concerns among dumped them back into toxic BES, IBlackrock, boycotted an issuance some international institutional knowingly targeting international of Portuguese bonds to protest investors about the risks of lending institutional investors over domestic the risks associated with actively the EU €750b to finance its Recovery depositors. investing in Portuguese public or and Resilience Fund (RRF). private debt “as the Banco de Portugal The move came after the incoming still has not addressed the unlawful After the collapse of Banco Espirito Single Resolution Board (SRB) and discriminatory retransfer of Santo (BES), Portugal’s second largest Chairman and the European Central notes from Novo Banco to Banco bank in 2015, Banco de Portugal Bank (ECB) warned Banco de Portugal Espirito Santo in 2015.” retransferred 5 notes totaling €2.2b that if it failed to substantially of debt from the newly established reduce Novo Banco’s liabilities by

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January 2016, it would immediately hearing stage, and all proceedings and the operation of the national be placed into liquidation. All other regarding BES’ resolution were stayed. courts. recapitalization proposals were rejected, and the decision was made This second factor raises a second As Portugal’s Presidency of the to only dump notes held by foreign issue the EU is required to take up Council of the EU draws to a close, institutional investors. before approving Portugal’s RRF – Rule there is an opportunity for Portugal of Law. While Rule of Law concerns and the EU to reassure international This move in itself gives reason were initially focused primarily on institutional investors by expediting for grave concerns among some Poland and Hungary, the scope of the resolution of this case, as well as international institutional investors European Parliament’s Committee insisting Portugal implement the about the risks of lending the EU €750b on Civil Liberties, Justice and Home judicial reforms it has committed to in to finance its Recovery and Resilience Affairs (LIBE) has been expanded to its Recovery and Resilience plan. Fund (RRF). As the saying goes, fool cover all Member States, particularly me once – shame on you; fool me twice Malta, Slovakia, Slovenia and Bulgaria. – shame on me. For the EU to reassure In particular, a European Parliament international institutional investors, Resolution adopted 10 June 2021 Commissioner Mairead McGuinness, recalls that “the RRF and each of the along with DG FISMA and the SRB, national recovery and resilience plans must demonstrate to institutional should fully respect the Rule of Law investors that the EU will protect them Regulation.” from sovereign risk, and will treat them fairly and equitably. These are not the only rule of law scandals to rock Portugal during However, being held by foreign its Presidency. It kicked off with an investors was not the only criteria extremely contentious nomination Banco de Portugal employed when by Lisbon for the position of the selecting these five specific notes. European Public Prosecutor’s Office The second criteria was that only (EPPO), with the trial of former PM notes governed by Portuguese law Jose Socrates’ shadowing the duration may be dumped into toxic BES, while of its Presidency (very much linked to the remaining 47 notes, governed by Ricardo Salgado, the former president English law, were not to be touched. of BES) and is ending with a real threat This second criteria knowingly relied by investors to boycott the RRF. on the complicity of Portuguese Administrative Courts to reject or The European Commission defer repaying creditors – and indeed, has pinpointed the slow pace of the Portuguese Administrative Courts administrative and fiscal justice in have stalled and frustrated litigation Portugal, and has demanded reforms ever since. that the Portuguese Government needs to take, in order to be eligible Following the Banco de Portugal’s for financial assistance from the Retransfer Decision dated 29 December EU Recovery Funds. This has 2015, several institutional investors, been underlined by the European separately, filed administrative claims Parliament and the European Court of before the Portuguese Administrative Auditors. In Portugal’s case, there are Courts. Since filing, none of the cases serious rule of law issues related to the has yet to be moved to the preliminary independence of the judicial system 16 RECOVERY FUND SPECIAL REPORT | EURACTIV

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DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network. The truth behind BES and Novo Banco!

Recover Portugal

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If the EU wishes to borrow in the financial markets, it must first demonstrate to international institutional investors that it will treat them fairly and equitably. THE DUTCH BID FOR EMA

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