EUROPEAN COMMISSION

Brussels, 14.9.2016

SWD(2016) 299 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

Communication from the Commission to the European Parliament and the Council

Mid-term review/revision of the multiannual financial framework 2014-2020
An EU budget focused on results

{COM(2016) 603 final}

Table of Contents

1.introduction

2.where we spend: focusing the budget further on jobs and sustainable growth and response to new challenges

2.1.Tackling the economic crisis and investment gap

2.1.1.Kick-starting spending for jobs and growth

2.1.2.Mobilising cohesion investment for jobs and growth

2.1.3.Sustainable Growth: Natural Resources

2.2.Addressing the refugee crisis

2.2.1.Protecting the EU external borders

2.2.2.Challenges inside the EU

2.2.3.External challenges

2.3.Addressing security and development concerns inside the EU and in its neighbourhood

2.3.1.Macro-Financial Assistance to avoid economic instability in the EU neighbourhood

2.3.2.EIB External Lending Mandate

2.3.3.Security and Defence

2.4.Addressing climate change

3.how we spend: improving the flexibility of the budget and maximising its impact

3.1.Improving the flexibility of the EU budget to respond to unforeseen events

3.2.Leveraging the EU budget

3.2.1.Financial instruments and EFSI

3.2.2.Trust Funds

3.3.Improving the conditions for an effective use of EU funds

3.3.1.Linking effectiveness of European Structural and Investment Funds to sound economic governance

3.3.2.Simplifying the delivery of the EU Budget

3.3.3.Improving the interoperability of funds, financial instruments and EFSI

4.How we are assessed: Performance, Accountability and Multiannual Error Rates

4.1.Towards a reinforced EU Performance Budgeting System

4.2.Accountability and reporting

4.3.Multiannual error rates

5.Budgetary availabilities in the 2014-2020 MFF

5.1.Financing needs for the initiatives proposed by the Mid-Term Review

5.2.Budgetary availabilities in the remainder of the 2014-2020 MFF

5.3.Sufficiency of payment ceilings

6.towards the next multiannual financial framework

6.1.Context of the next MFF

6.2.Duration of the next MFF

6.3.EDF budgetisation

6.4.Potential new spending areas: defence and security

6.5.Own resources

6.6.Completing Europe's Economic and Monetary Union

ANNEXES

annex 1: mff 2014-2020

annex 2: climate tracking of 20 % target

annex 3: european union trust funds

annex 4: schematic view of esi funds macro-conditionality

annex 5: simplification scoreboard

annex 6: medium-term payments forecast

1.introduction

The present Staff Working Document accompanies the Commission's Communication on the mid-term review/revision of the multiannual financial framework 2014-2020 – An EU budget focused on results 1 . 

The multiannual financial framework (MFF) for 2014-2020 provides for EUR 1087 billion in commitment appropriations and for EUR 1025 billion in payment appropriations (in current prices) 2 . In commitments, this represents about 2.1 % of EU Member States’ total government expenditure and 1.04 % of EU gross national income.

The MFF provides a stable funding framework for programmes which contribute to the achievement of the Europe 2020 strategic long term objectives 3 in the areas of competitiveness for jobs and growth, economic, social and territorial cohesion, sustainable growth and natural resources, security and citizenship and external action (Global Europe). The focus on political priorities is further reflected in the Commission's Agenda for Jobs, Growth, Fairness and Democratic Change, which highlights the ten policy areas where action will be pursued during the current mandate in order to prepare Europe for the global challenges ahead 4 .

The 2014-2020 MFF has brought about some significant improvements in terms of how EU money is spent, notably:

–Competitiveness, EU value-added and strengthened conditionality: the share of the budget spent in programmes considered to bring the highest added value in terms of jobs and growth and enhancing competitiveness has been significantly increased. This has been notably the case for Horizon 2020 programme for research and innovation and the new Connecting Europe Facility that supports the development of trans-European networks in the fields of transport, energy and digital services. It is also the case of Erasmus+, with a strong EU value-added in its transnational mobility activities, contributing to skills development, employability of students and less likelihood of unemployment. Moreover, new provisions have been introduced for the implementation of the European Structural and Investment Funds to improve their effectiveness and European added value, notably by concentrating resources on key Europe 2020 objectives, establishing a performance framework based on measurable indicators and targets linked to the release of a performance reserve, introducing ex-ante conditionalities as well as creating closer linkages with the EU economic governance and the European Semester process.

–Common Agricultural Policy (CAP): the support to farmers through the CAP includes more public policy objectives than in the past, notably on promoting sustainable management of natural resources and climate action.

–Climate mainstreaming: overall, at least 20% of the EU budget should contribute to the fight against the causes and consequences of climate change.

–Performance budgeting: a performance budgeting system, aligned on the Europe 2020 strategy, has been established. Performance benchmarks have been embedded in the legal bases of multiannual programmes, including a set of clearly defined objectives, indicators, milestones and long-term targets, which are reported on, both ex-ante and ex-post, at the time of the draft budget.

–Simplification: progress has been made in reducing the number of programmes and instruments and grouping some of them under a common framework with uniform rules, simplifying procedures for application and declaration of costs by final beneficiaries, facilitating the deployment of innovative financial instruments, and improving the cost-efficiency of controls.

–Flexibility: the introduction of new instruments allows for shifting available margins between headings and years, which represents a major step forward in terms of flexibility within the total MFF ceilings to accommodate evolving needs.

–Leveraging: the MFF 2014-2020 and the related spending programmes have also laid down the foundations for a more systematic use of financial instruments as a means to leverage the EU budget's impact, and authorised the setting-up of European Union Trust Funds in the external policy area.

Building on this, the Commission has, in 2015, launched the Budget focused on results initiative which aims at further improving the impact and performance of the EU budget 5 and which is framed around four key questions:

–"Where we spend": the EU budget should invest in programmes delivering European added value and contributing to implementing the Union's overall strategy and priorities. Moreover, it should be able to respond to new challenges and to address multiple objectives (e.g. climate mainstreaming, conditionality and alignment with country-specific recommendations).

–"How we spend": the EU budget must ensure swift and efficient delivery on the ground by building on the simplification of delivery mechanisms already achieved, in particular in the research area, ensuring more efficiency in the budget implementation at Commission, Member State and project level, achieving a higher financial leverage from the EU budget and providing better incentives to achieve results through performance reserve and conditionality.

–"How is performance assessed": beyond guarantees on sound financial management in line with the legal and regulatory requirements, public accountability requires transparency and adequate reporting on how the EU budget contributes to the Union's political priorities. Furthermore, the Commission, together with the Member States, will aim to bring down the error rate, taking into consideration multi-annual corrections, to below 2%.

–"How we communicate": improving information and communication on the results achieved by EU spending is crucial for strengthening the citizens' confidence in the ability of the EU to provide added value and contribute to economic and social welfare and tackling global challenges.

The work undertaken under this initiative has helped framing the assessment made of the functioning and implementation of the MFF at mid-term 6 with a view to taking stock of progress made in modernising the budget and to seeking further improvements, along three main lines: further improving the budget's focus on policy priorities and new challenges (Chapter 2) and its efficiency and flexibility in mobilising and delivering funding to respond to evolving needs (Chapter 3), and demonstrating results (Chapter 4). 

Chapter 5 summarises the financing needs for further aligning the EU budget's to the political priorities and assesses the sufficiency of the MFF ceilings. Chapter 6 addresses issues of particular relevance for the preparation of the next MFF, for which the Commission will have to present proposals before 1 January 2018.

2.where we spend: focusing the budget further on jobs and sustainable growth and response to new challenges

In the first years of implementation, the MFF has contributed to address the challenges the EU is facing, notably the economic crisis and the resulting investment gap, the refugee crisis, the internal and external security concerns, as well as climate change.

In this context, to take account of the difficult situation of Member States who suffered most from the crisis, the Member States' cohesion allocations were reviewed in June 2016 and, where appropriate, adjusted for the years 2017-2020 on the basis of the most recent statistics available.

As announced in the technical adjustment of the MFF for 2017 7 , the Commission has engaged in discussions with Member States who benefit most of the adjustment of cohesion policy envelopes with a view to focusing the additional amounts on measures to help tackling the migration crisis and youth unemployment and on investments through financial instruments and a combination with the European Fund for Strategic Investments, taking into account the needs and relevance of those priorities for each Member State.

2.1.Tackling the economic crisis and investment gap

2.1.1.Kick-starting spending for jobs and growth

The ceiling for sub-heading 1A "Competitiveness for Growth and Jobs" is set at EUR 142 billion in current prices under the MFF 2014-2020.

Compared with the previous period, the MFF 2014-2020 has operated a significant recalibration of spending towards activities conducive to jobs and growth. This has been amplified by the setting-up of the European Fund for Strategic Investment (EFSI).

A number of programmes have shown high demand resulting in fast project selection and commitment of funds: for example, the programme for research and innovation (Horizon 2020) could finance less than one third of the proposals evaluated positively; in 2015, around 560 000 young people, staff members of educational institutions and youth organisations from EU and non-EU countries were given the chance to participate in actions supported by Erasmus+ such as to study abroad and youth-exchanges as well as trainings and volunteering experiences; the strong demand for COSME financial instruments – the Union's programme dedicated to support SMEs – resulted in the whole 2014-2015 budget being used up by mid-2015 8 ; similarly, demand for microcredit and microloans under the EU Programme for Employment and Social Innovation (EaSI) 9 exceeded expectations by far; finally, the 2014 and 2015 calls for proposals launched under the transport strand of the Connecting Europe Facility (CEF) 10  were very successful. As a consequence, no significant appropriations will be available for CEF transport for any new calls until the end of 2019. 

In terms of large-scale projects, the infrastructure for Galileo (the European Satellite navigation programmes) and Copernicus (the European Earth Observation Programme) is being successfully deployed, with first services becoming operational in 2016-2017. On the other hand, the completion of the International Thermonuclear Experimental Reactor project (ITER) is being delayed, mostly because of its highly complex nature 11 .

Complementing the existing MFF programmes, the European Fund for Strategic Investments (EFSI), adopted in June 2015, aims at contributing to bridge the investment gap of the EU since the start of the crisis. To establish EFSI, a guarantee of EUR 16 billion has been created, which is backed by a guarantee fund of EUR 8 billion from the EU budget, aiming at mobilising EUR 315 billion in investments in the real economy over three years (2015-2017) 12 .

The EFSI is delivering tangible results. Around 300 projects have been approved in 26 EU Member States by July 2016, which are expected to support some 200,000 SMEs and to mobilise EUR 115.7 billion in total investment, representing more than one third of the overall objective. It has been successful in crowding in significant additional finance (85% of the total investment mobilised) from private and public investors 13 . 

Complementarity between the EFSI and other EU funds is a key part of the Commission’s overall commitment to ensure a better use of EU funds across all policy areas. The Commission has published guidance on this matter 14 and will propose to simplify their combination (see also under 2.1.2).

EU financing has a strong leverage effect on Member States and private investments. This is also relevant in the digital area - one of the top 10 priorities of this Commission – where investment needs linked to high-performance computing, cybersecurity, digital skills and connectivity have been identified. The Commission will look into ways to address these investment needs by pooling EU, national and private funding.

2.1.2.Mobilising cohesion investment for jobs and growth

Planned spending for Economic, social and territorial cohesion under sub-heading 1b of the MFF 2014-2020 amounts to EUR 371 billion in current prices. This amount includes the European Structural and Investment Funds (ESI Funds), the Youth Employment Initiative specific allocation (EUR 3.2 billion), the Fund for European Aid for the most Deprived (FEAD) allocation (EUR 3.8 billion) and the Cohesion Fund contribution to the Connecting Europe Facility (EUR 11.3 billion).

So far the implementation of the new operational programmes has been limited. As part of the reform for the 2014-2020 programming period a series of innovative elements to deliver high quality investments (see section 3.3.1 for more detail) have been introduced. Putting this ambitious new approach into practice in Member States and regions requires time and resources in the start-up phase to ensure that the necessary conditions for effective spending are in place.

The setting-up of these innovative elements required time and resources in the start-up phase to ensure that the necessary conditions for effective spending are in place. This and the late adoption of the legal acts and the introduction of a general n+3 decommitment rule, which considerably relaxed the regulatory discipline on speed of implementation contributed to delaying the preparation of the operational programmes. Moreover, Member States focused their efforts on maximising the implementation of the 2007-2013 programmes in order to avoid potential loss of allocations. Finally, the process of designating the programme's managing, paying and certifying authorities by the Member States, which is a prerequisite for the submission of payment claims, was particularly lengthy 15 .

Hence, so far the implementation of the new programmes has mainly been limited to the payment of the initial and annual pre-financing. The low take-up so far of the 2014-2020 cohesion programmes is a source of concern and requires determined action by the Member States. The Commission will present a first report summarising ESI Funds implementation in December 2016.

A specific allocation of EUR 3.2 billion (with the same amount being added from the European Social Fund) has been made available to the new Youth Employment Initiative (YEI) and frontloaded to 2014 and 2015. The YEI provided for the first time ever direct targeted support to young unemployed living in regions with youth unemployment rates higher than 25%. Whilst the YEI also experienced delays in setting up the programmes, designating authorities and submitting payment applications 18 , all systems and structures necessary for the smooth implementation are now in place and showing encouraging results: 

To date, over 1.4 million young people have been covered by YEI-supported actions, a number which exceeds initial estimates. First evaluations point at significantly improved opportunities for young people who completed a YEI intervention in finding employment or continuing their studies afterwards 19 . In many Member States, the mobilisation of EU funds (YEI and ESF) to support the national Youth Guarantee schemes and related structural reforms has been crucial for the successful implementation of the Youth Guarantee 20 . Jointly, the YEI and the ESF invest directly more than EUR 12.7 billion for the integration of young people in the labour market over 2014-2020. In a number of Member States, the Youth Guarantee has provided a new impetus and has accelerated policy developments, especially in those facing important challenges and receiving significant EU financial support.

2.1.3.Sustainable Growth: Natural Resources

Heading 2 "Sustainable Growth: Natural Resources", with an overall ceiling of EUR 420 billion for the years 2014-2020, covers direct payments, market-related expenditure and rural development under the Common Agricultural Policy, the European Maritime and Fisheries Fund and environment and climate action (Life programme).

Since 2014, the Commission has proposed a number of exceptional market support measures for fruit and vegetable producers and the dairy and other livestock sectors in response to the Russian ban and market imbalances, which could be financed through the European Agriculture Guarantee Fund (EAGF) from redeployments and assigned revenue 21 . The total amount of these measures adds up to EUR 1 664 million. This financial support is to be considered exceptional.

2016 is the first year fully reflecting the implementation of the 2014-2020 CAP reform in the EU budget. Due to technical difficulties experienced in the implementation of the new direct payments scheme, EAGF execution reached 57% by mid-2016 compared to 90% a year earlier. The implementation gap is expected to substantially decrease until 15 October, which is the end of the 2016 agricultural financial year. To help Member States facing these difficulties, the Commission will waive reductions for expenditure made after 30 June but before 15 October.

Implementation of the European Agricultural Fund for Rural Development (EAFRD) and of the European Maritime and Fisheries Fund (EMFF) was delayed due to the late adoption of the regulatory framework and programmes 22 . However, whilst the EMFF was confronted with the same process of designation of the programmes' managing and certifying authorities as for cohesion policy 23 , the continuation of existing accredited paying agencies allowed for Rural Development interim payments to take place as soon as the related programme was adopted.

2.2.Addressing the refugee crisis

Heading 3 "Security and citizenship" is the smallest of all MFF headings, standing at EUR 17.7 billion in current prices (less than 2% of the MFF). Heading 4 "Global Europe" stands at EUR 66.2 billion (6% of the MFF).

Europe has been experiencing unprecedented migratory flows in 2015, driven by geopolitical and economic factors expected to persist over the coming years. The European Agenda on Migration 24  has set out measures needed to prevent human tragedies and to strengthen emergency responses, as well as to address this issue comprehensively with a focus on four key areas: securing Europe's external borders; a strong Common Asylum System; a new European policy on legal migration and fighting irregular migration and human trafficking more robustly. 

On 18 March 2016, EU Heads of State or Government and Turkey agreed on a mechanism seeking to end irregular migration from Turkey to the EU and to facilitate legal channels of resettlement of refugees to the European Union. Under the EU-Turkey Agreement, for every Syrian national returned from the Greek islands to Turkey another will be resettled to the EU directly from Turkey. Resettlement of refugees is financed from the EU budget under the EU relocation and resettlement schemes.

More than EUR 10 billion have been mobilised from the EU budget and the European Development Fund in 2015 and 2016 on the internal and external dimension of the refugee crisis, doubling the amount initially foreseen under the MFF for the Asylum, Migration and Integration Fund (AMIF), the Internal Security Fund (ISF), including emergency assistance 25 . The Commission has proposed for 2017 to maintain this level of expenditure by resorting to further redeployments and activation of special instruments.

Moreover, in response to the growing pressure, the EU has expanded the funding base through the creation of external Trust Funds and the Refugee Facility for Turkey (see section 3.2.2), pooling and coordinating additional contributions from Member States with funds from the EU budget.

All these actions should allow for a total funding available for migration of EUR 15.7 billion in 2015-2017, demonstrating the budget’s ability to react but also the challenges and the limits of the current financial availabilities in addressing the refugee crisis.

2.2.1.Protecting the EU external borders

The Schengen area without internal borders is only sustainable if the external borders are effectively secured and protected. The Commission's proposal of 15 December 2015 for a European Border and Coast Guard, to be built from the existing Frontex agency and the national authorities and coastguards responsible for border management will be able to draw on at least 1,500 experts that can be deployed in under 3 days. For the first time the Agency will be able to acquire equipment itself and to draw on a pool of technical equipment provided by the Member States. The new Agency's human resources will more than double those of Frontex, to reach 1,000 permanent staff by 2020. The Agency’s budgets for 2015 and 2016 26 have been reinforced in order to enable it to address the migratory crisis, in particular by tripling the financial resources for the joint operations Poseidon and Triton, extending the Agency’s support to the Member States in the area of returns and giving necessary resources to set-up reception centres.

For the Agency to adequately fulfil its new tasks, an additional amount of EUR 840 million will be needed until 2020 compared to the initial financial programming. The total number of staff will increase gradually to reach 1000 persons in 2020, of which 550 temporary agents. The Commission is committed to provide financial assistance for urgent needs to Member States facing extreme pressure at the external borders of the Union.

2.2.2.Challenges inside the EU

Two implementation packages have been adopted under the European Agenda on Migration to provide for the relocation within the EU of 160,000 refugees from Italy and Greece and the resettlement programme to provide for legal and safe pathways for refugees outside the Union 27 . 

In order to ensure an adequate and comprehensive response to the challenges Member States may face with the migrant crisis, the Commission has called on Member States to examine the use of their Structural Funds programmes in terms of supporting migration-related measures, including integration and support to local host communities, with a view to a possible reprogramming of the funds. Accordingly, the proposal to simplify financial rules accompanying the Mid-Term Review introduces a dedicated investment priority to support the reception and integration of migrants and refugees. This will make programming simpler and provide legal certainty concerning action in this area.

Given the sudden and massive influx of third-country nationals into the territory of a number of Member States in 2015 and 2016, a new instrument has been established for providing emergency assistance in EU Member States. This support can include the provision of food, shelter, medicine and other basic necessities. The estimated needs for 2016 are EUR 300 million with a further EUR 200 million each for 2017 and 2018 respectively.

2.2.3.External challenges

Addressing root causes of migration and providing assistance to refugees hosted by third countries is of crucial importance for reducing migratory pressure. The EU and Member States are the world's largest development and humanitarian aid donor. But the scale of migratory movements puts the onus on being more targeted, more tailored and effective in terms of investments having a real impact boosting local growth and job creation and hence reducing the causes of irregular migration both in countries of origin and transit. The EU must use all means available and set itself clear priorities and measurable objectives. Development, pre-accession and neighbourhood policy tools should reinforce local capacity-building, including for border control, asylum, counter-smuggling and reintegration efforts.

Like heading 3, heading 4 has been under particular pressure due to the multiplication of crises in the European neighbourhood and beyond. The Instrument for Pre-Accession Assistance (IPA), the European Neighbourhood Instrument (ENI), the Development Cooperation Instrument (DCI), Humanitarian Aid, and the Instrument contributing to Stability and Peace (IcSP) were mobilised for responding to the new challenges and emergencies. Some important reinforcements had to be made through redeployments and the use of margins and flexibility instruments, whilst funding had also to be redirected and leveraged by means of new tools such as Trust Funds and facilities.

Since the beginning of the crisis, the EU has provided a significant contribution in terms of humanitarian aid to Syrian refugees both in Syria and neighbouring countries. The EU Regional Trust Fund in Response to the Syrian Crisis ("Madad") addresses non-humanitarian resilience needs of the almost 5 million Syrian refugees, internally displaced persons and hosting communities in Syria's neighbouring countries and the Western Balkans in terms of education, livelihoods and health. The Trust Fund also has a mandate to finance reconstruction in a future post-conflict Syria, and would be the best suited EU instrument for that purpose. It has already reached a volume of more than EUR 700 million, and is expected to meet its initial target of EUR 1 billion by the end of 2016. By mid-August 2016, EUR 629 million had already been allocated for projects in Lebanon, Jordan, Turkey, Iraq, and the Western Balkans 28 .

Since the beginning of the crisis, EU humanitarian aid to Syrian refugees has exceeded EUR 1 billion. The EU and its Member States total contribution pledged at the London Conference "Supporting Syria and the region" in February represented over 70% of all pledges 29 . The political imperative now is to deliver on this commitment. At the London conference, the EU pledged to continue its support over the coming years to help cover the annual cost of EUR 1.25 billion for ensuring education for all children in the region. The Facility for Refugees in Turkey combines both immediate and structural support to a total EUR 3 billion in 2016-2017 30 . By mid-August 2016, EUR 2 239 million had been allocated for humanitarian and non-humanitarian assistance 31 .

Beyond Syria, the EU Emergency Trust Fund for Africa ("Africa Trust Fund") has been launched at the Valetta summit on migration in November 2015. It will assist countries that are most affected by migration in the Sahel and Lake Chad region, the Horn of Africa and North Africa. With its initial allocation of EUR 1.88 billion, decisions have been taken on projects worth over EUR 750 million in areas such as job creation and resilience, with a focus on the most vulnerable.

Supplementing action under the existing programmes, the Commission has proposed a Partnership Framework with third countries 32 under the European Agenda on Migration in order to ensure a coherent approach vis a vis partner countries and a more efficient and coordinated deployment of the different programmes and funding sources at the Union's disposal, i.e. MFF programmes, the European Development Fund (EDF), European Union Trust Funds and the Facility for Refugees in Turkey. The partnership framework aims at a coherent and tailored engagement where the Union and its Member States act in a coordinated manner putting together instruments, tools and leverage, to reach comprehensive Partnership frameworks (compacts) with third countries to better manage migration in full respect of the Union's humanitarian and human rights obligations.

The following main financial sources from the EU and its Member States should be available to vitalise the partnerships:

–Money for financing the immediate actions of the compacts: EUR 1 billion to be added to the EU Emergency Trust Fund for Africa, consisting of EUR 0.5 billion from the EDF reserve and EUR 0.5 billion from the Member States.

–Money from the existing trust funds: EUR 3.6 billion from the EU Emergency Trust Fund for Africa and EUR 1 billion from the EU Regional Trust Fund in Response to the Syrian Crisis.

–Nearly EUR 2.4 billion in total pledged contributions from the EU and its Member States as additional funds for Lebanon, Jordan (and Syria) at the London conference.

–Macro-financial assistance to avoid economic instability of up to EUR 1 billion in loans to Tunisia (EUR 0.3 billion being implemented and EUR 0.5 billion proposed by the Commission in February 2016) and Jordan (EUR 0.2 billion million under consideration).

–Total aid flows from the EU and its Member States to the key priority countries which recently averaged EUR 4.4 billion per year.

This would mean, provided that all Member States participate, that nearly EUR 8 billion are made available over 2016-2020 for the delivery of the compacts to be complemented by the annual Official Development Aid flows from the EU and Member States.

In the long term, the EU should continue to increase its efforts to address the root causes of irregular migration and forced displacement and to provide capacity building to the host communities and relevant institutions. This will require fundamentally reconsidering the scale and nature of traditional development co-operation models. A much greater role must be given to private investors looking for new investment opportunities in emerging markets. This is the purpose of the proposed External Investment Plan that aims at supporting investments in regions outside the EU as a means to contribute to the achievement of sustainable development goals, thus addressing the root causes of migration and support partners to manage its consequences 33 .

In parallel with the Mid-Term Review, the Commission is submitting a proposal for a new European Fund for Sustainable Development (EFSD) which should constitute the investment pillar of the External Investment Plan 34 . The EFSD will combine existing blending facilities (EUR 2.6 billion) and a new innovative scheme whereby EUR 1.5 billion of guarantee (the EFSD Guarantee for Sustainable Development) borne by the EU budget would be backed by a guarantee fund endowed with EUR 750 million 35 .. It will operate as a "one-stop shop" to receive financing proposals from Financial Institutions and public or private investors and provide an integrated financial package to finance investments in regions outside the EU, thereby creating growth and employment opportunities, maximising additionality, delivering innovative products and crowding-in private sector funds.

The EFSD Guarantee aims to constitute guarantee capacity for credit enhancement that will ultimately benefit the final investments and allow risk sharing with other investors, notably private actors. It will leverage additional financing, in particular from the private sector, by addressing the key factors that enable crowding-in private investment. The EFSD Guarantee Fund will provide the liquidity in case the EFSD Guarantee is called upon to cover for losses occurred under the guarantee agreements.

Overall EUR 3.35 billion of EU resources will go to the EFSD. The impact of the new EFSD guarantee would be greatly enhanced if Member States also contributed either through the blending facilities and/or the guarantee.

The Commission estimates that if Member States were to match the EUR 1.5 billion EU guarantee, the total investment mobilised by the EFSD could reach up to EUR 62 billion.

2.3.Addressing security and development concerns inside the EU and in its neighbourhood

2.3.1.Macro-Financial Assistance to avoid economic instability in the EU neighbourhood

The macroeconomic and financial instability in the Union's neighbourhood, fuelled by recent regional crises and conflicts, has led to increasing demands for EU macro-financial assistance (MFA) over recent years 36 . MFA commitments have increased from EUR 1.5 billion in the period 2000-2008 to EUR 4.6 billion since 2009; MFA amounts made available in the context of the recent crisis in Ukraine account alone for EUR 3.4 billion.

As the geopolitical and economic instability of the region persists, the needs for EU macro-financial support are likely to remain at a exceptionally high levels for the years to come. This is evidenced by the two follow-up operations currently under preparation for Tunisia and Jordan, and the possibility of an additional large-scale operation in Ukraine. However, currently, the size of potential MFA operations in 2014-2020 is limited to about EUR 500 million per year due to the provisioning mechanism of the Guarantee Fund for External Actions under the current MFF.

2.3.2.EIB External Lending Mandate

The European Investment Bank (EIB) is the Union’s financing institution which contributes to European integration, development and cohesion by financing projects in support of EU policies. Although the majority of projects financed by the EIB are located within the EU, the EIB also carries out operations outside the Union, guaranteed by the Guarantee Fund for External Actions (the ‘external lending mandate’ (ELM)). The latter currently amounts to EUR 27 billion over the period 2014–2020.

An external mid-term review of the ELM has been carried out which estimates the financial needs of the ELM at EUR 30 billion to support the ELM objectives.

In parallel, the EIB has proposed a new "Resilience" initiative aimed at rapidly mobilising additional financing in support of sustainable growth, vital infrastructure and social cohesion in Southern neighbourhood and Western Balkans countries in response to the March 2016 European Council.

2.3.3.Security and Defence

The Commission has responded to the evolution of the security situation in Europe, especially in the aftermath of the terrorist attacks in Paris in November 2015 and in Brussels in March 2016, by proposing legislation and increasing the financial resources dedicated to address the security needs.. The security situation remains unstable and unpredictable. In order to guarantee the security of our citizens additional measures might be needed to address future crises including stepping up if necessary additional financial resources.

The key instrument of the budget inside the EU is the Internal Security Fund (ISF), which promotes the implementation of the Internal Security Strategy, law enforcement cooperation and the management of the Union's external borders. The ISF is composed of two instruments, ISF Borders and Visa and ISF Police with a total allocation of EUR 3.8 billion for 2014-2020. Additional reinforcements were factored in for ISF in the course of the 2016 for a total amount of EUR 119.4 million. The current level of emergency assistance for ISF has reached EUR 140.5 million.

In April 2015 the Commission has set out a European Agenda on Security for the period 2015-2020 to support Member States' cooperation in tackling security threats and step up the efforts in the fight against terrorism, organised crime and cybercrime 38 . This has been followed by several proposals and actions to pave the way towards a genuine and effective Security Union.

On the external front, the Global Strategy for the European Union's Foreign and Security Policy presented to the European Council in June 2016 stresses the need for the Union to mobilise all its networks, its economic weight and all the tools at its disposal in a coherent way in order to address the hybrid security threats it is facing. Actions strengthening internal security through preventing and fighting terrorism have to be complemented by a multifaceted approach to resilience in the regions surrounding the EU. This requires joining up the Union's security and development policies.

In that context, the revised European Neighbourhood policy calls to step up cooperation with the partner countries on law enforcement issues and on the prevention and response to crises and conflicts.

The Union already finances a number of actions in third countries in the field of capacity building in support of security and development. The Commission has proposed to extend the assistance provided under the Union's instrument contributing to stability and peace (IcSP) under exceptional circumstances to be used to build the capacity of military actors in partner countries in order to contribute to sustainable development and in particular the achievement of peaceful and inclusive societies 39 .

Finally, the Commission has proposed within the Draft Budget 2017 to launch a new Preparatory action on Defence research in order to contribute to the technological autonomy of the EU in this field. The main objective of this flagship action of the EU defence industrial policy launched by the Commission's 2013 Defence Communication 40 is to prepare and test a mechanism to organise and deliver a variety of defence research, technology and development activities to improve competitiveness and innovation in the European defence industry, in view of the financing of EU defence research within the next MFF 41 .

2.4.Addressing climate change

In December 2015, the UNFCCC Conference of the Parties (COP21) concluded the historic Paris Agreement to keep global temperature increase well below 2 °C. The EU has been a leading actor in achieving an agreement that is global, ambitious, and binding, showing the way with its ambitious climate policies and the innovative approach of mainstreaming climate action throughout the EU budget with the set objective that it should represent at least 20% of EU spending in the period 2014-2020 42 .

The political commitment of devoting at least 20% of EU budget to climate action has helped to bring the climate dimension into the discussions with stakeholders on programme design and implementation and has as such delivered on its prime objective. It has also delivered a benchmark for analysing progress within and across instruments on the basis of a transparent methodology in the framework of the budgetary procedure. In addition, the EU financial instruments are leveraging significant investments towards the transition to a low carbon and climate resilient economy.

With all operational programmes now in place, the current estimates show that the EU budget annual allocation to climate action has exceeded the 20% target in 2016 and will remain close to it over 2017-2020. It is set to deliver slightly above EUR 200 billion 43 .

3.how we spend: improving the flexibility of the budget and maximising its impact

The MFF Regulation 2014-2020 introduced three new instruments that allow shifting available margins between Headings ('vertical' flexibility) and years ('horizontal' flexibility) to a much larger extent than in the past. This represents a major step forward in terms of the financial framework's overall flexibility 44 , within a framework where almost 80% of the EU budget is pre-allocated to Member States mainly under the Union's Common Agricultural Policy and cohesion policies:

the Global margin for commitments for growth and employment, in particular youth employment and the Global margin for payments allow safeguarding margins left unused in previous financial years;

the Contingency Margin which allows exceeding annual ceilings for commitments and payments by an amount equal to 0.03 % of the EU GNI (about EUR 4.5 billion per year), though respecting the overall ceilings; this means that any amount mobilised in a given year must be offset in the same or later financial years.

3.1.Improving the flexibility of the EU budget to respond to unforeseen events

The new instruments and other special instruments have been extensively used since the beginning of the MFF.

–The Contingency Margin was mobilised in 2014 for an amount of about EUR 3 billion in payment appropriations to reduce the backlog on payments from the previous MFF period 45 . The Commission has proposed in the Draft budget 2017 to mobilise the Contingency Margin for an amount of EUR 1 164 million to be offset by using margins available under Heading 2 (EUR 650 million) and Heading 5 (EUR 514 million) in the same year to top-up availabilities under heading 3 for migration-refugees-security related measures.

–EUR 2 448 million from the Global margin for commitments were anticipated in order to finance the part of the Guarantee Fund for the EFSI not financed through redeployment 46 . 

–The flexibility instrument and the Emergency Aid Reserve (EAR) have been intensively used to finance the successive migration packages since 2015.

–The European Union Solidarity Fund (EUSF) and the European Globalisation Adjustment Fund (EGF), whose size was scaled down for the current period, have been used to a more limited extent, with room for simplification in terms of the procedures for mobilising them 47 . 

–No use has been made of the agricultural crisis reserve.

The below table shows the use of the four special instruments so far 48 :

The use made of the flexibility tools, in particular for the refugee crisis, shows the importance of these instruments for reacting to unforeseen circumstances. In order to ensure a sufficient degree of flexibility without changing the overall ceilings of the MFF to respond to growing challenges and uncertainties for the remainder of this MFF, the Commission proposes to increase flexibilities in the following way:

3.2.Leveraging the EU budget

3.2.1.Financial instruments and EFSI

One of the major innovations of the MFF 2014-2020 was to lay down the foundations for a more systematic use of financial instruments by the EU budget as a means to leverage its impact.

The review of the current state of implementation of EU financial instruments leads to the following conclusions:

–Demand for instruments supporting SMEs (including microfinance and social enterprise finance), in particular the guarantees to loan portfolios, is well above their initial budgetary allocation. This demand has been satisfied largely thanks to supplementary resources provided by EFSI: EUR 1.25 billion for the COSME Loan Guarantee Facility and the Horizon 2020 InnovFin SME Guarantee. Demand for the Private Finance for Energy Efficiency (PF4EE) instrument, supported by the LIFE programme, is also significantly higher than initially expected 49 .

–In the infrastructure area supported by the Connecting Europe Facility (CEF), the launch of financial instruments in the broadband domain is under way in line with the initial financial programming. In the transport sector (CEF-T), the 2014-2016 work programme is being fully implemented. In addition, to increase the possibilities for combining Union Funds with EFSI support, the Commission proposes to shift EUR 1146 million from the CEF financial instruments to CEF grants to be blended with EFSI financing or to other instruments dedicated to energy efficiency. This should ensure a maximum impact of EU funds, eliminate overlaps and maximise the synergies between different grants and financial instruments as well as with private investors.

–A number of newly established financial instruments are lagging behind: this concerns the Students Loans Guarantee Facility supported under Erasmus+ and the Creative and Cultural Sectors Loan Guarantee Facility (CCS LGF) supported under the Creative Europe Programme. While the slow implementation path of the Students Loans Guarantee Facility is the result of an initial low response by the market, the pipeline of projects is progressively growing. The CCS LGF (EUR 121 million) is a novelty not yet tested with the market in a sector with a poor record in bank lending; its implementation just started and will be closely monitored.

–New financial instruments are being launched to keep pace with the priority on jobs and growth, such as a pan-European venture capital fund of funds. The fund will benefit from at least EUR 300 million support provided within Horizon 2020 (InnovFin), COSME and EFSI.

–As regards financial instruments in shared management, the European Structural and Investment Funds are due to provide an important contribution to the success of the Investment Plan for Europe, with the objective of at least doubling the use of financial instruments. Currently, EUR 11.5 billion ERDF and ESF are delivering support to SMEs, urban development and energy efficiency projects under the programmes due to be closed in early 2017. Planned allocations for financial instruments under ESI Funds during 2014-2020 will amount to EUR 21 billion. The SME Initiative 50 , deployed in Bulgaria, Spain and Malta, totals some EUR 1.1 billion in ERDF commitments. Three more Member States are about to join this initiative (Italy, Romania and Finland).

–Financial instruments have by nature a longer lead-in and set up time, but more needs to be done to further increase the uptake. In order to support and promote further use of financial instruments in combination with ESI Funds, the Commission established an advisory tool (fi-compass 51 ) to provide relevant information and guidance to stakeholders and developed five off-the-shelf instruments 52 for the use of Member States. The Commission also released guidance to managing authorities and other stakeholders on how to maximise ESI Funds/EFSI complementarities 53 . In addition, the proposal to simplify financial rules, which accompanies the review, amends the Common Provisions Regulation in order to facilitate the combination of ESI Funds and EFSI 54 . 

It is crucial now to warrant the full implementation of current plans by Member States and to further develop the potential of financial instruments, where appropriate in conjunction with ESI Funds and EFSI 55 , in order to fill the investment gap inherited from the financial and economic crisis. 

3.2.2.Trust Funds

In order to achieve the political leverage needed to address comprehensively major crises, the EU and Member States identified the need to set up EU Trust Funds. As mentioned in section 2.2.3, the Commission has created three funds 56  since 2014: the European Trust Fund for the Central African Republic (‘Békou’); the European Union regional Trust Fund in response to the Syrian crisis (‘Madad’), and the European Union Emergency Trust Fund for Stability and Addressing Root Causes of Irregular Migration and Displaced Persons in Africa (Africa Trust Fund) 57 . 

This new tool has allowed more flexible, coordinated and quicker identification and awarding of targeted projects. In this way, immediate measures have been financed, supporting refugees and host communities, as well as migration management and return and readmission through reintegration and capacity building.

3.3.Improving the conditions for an effective use of EU funds

3.3.1.Linking effectiveness of European Structural and Investment Funds to sound economic governance

The legislative framework for implementing the European Structural and Investment Funds agreed for the 2014-2020 period has introduced a number of provisions aimed at improving the effectiveness and European added value of the funds. This is notably done by concentrating resources on the national objectives, which following the country-specific recommendations translate the key Europe 2020 objectives, establishing a performance framework based on measurable indicators and targets linked to the release of a performance reserve, and introducing ex-ante conditionalities as well as creating closer linkages with the EU economic governance 58 . As a result, the ESI Funds will be supporting structural reforms in line with the priorities set at EU level.

Thematic concentration requirements ensure that ESI Funds investments are focused on priorities contributing to jobs and growth. For cohesion policy, planned investments are thus focused on research and innovation, SME support; ICT and the low carbon economy as well as on employment, social inclusion, education and administrative capacity building. These requirements have been complied with in the programming exercise and in many cases exceeded.

Ex-ante conditionalities require that regulatory and policy frameworks are in place and that there is sufficient administrative capacity before investments supported by the ESI Funds are made. 59 About 75 % of these ex-ante conditionalities were found to be fulfilled at the time of the programmes' adoption 60 . Where this was not the case, action plans for their fulfilment by the end of 2016 at the latest were agreed. A failure to fulfil such an action plan by the end of 2016 could trigger the suspension of payments by the Commission to the programme(s) and priorities concerned. 

As to the link to the European semester and macro-economic conditionality, more than two thirds of the Country Specific Recommendations in 2014 were relevant for ESI Funds investment (in particular the European Regional Development Fund and the European Social Fund) and have thus been integrated into the Member States' programme priorities 61 . They cover reforms in six areas: research and innovation, energy and transport, health care, labour market participation, education, social inclusion and reform of the public administration.

In 2017, the Commission will produce the first Strategic Report on ESI Funds implementation. If the in-depth assessment of the link between effectiveness of the ESI Funds and sound economic governance leads to the conclusion that there is insufficient progress in implementing an existing Country Specific Recommendation with ESI Funds relevance, it can require a Member State to adjust its ESI Funds programmes so that funds can contribute to responding to the challenge addressed in the Recommendation 62 .

The new conditionality tool box is starting to show results for significantly improved economic governance at EU level.

3.3.2.Simplifying the delivery of the EU Budget

Simplification has been at the core of the Commission's proposals for the programmes covered by the MFF 2014-2020 65 . Considerable progress has been made (the state of play of the take-up of simplification measures is shown in the simplification scoreboard in annex 5) 66 .

However, there is room for further simplification. This is confirmed by the experience gained since 2014 and by the work of the High Level Group of Independent Experts on Monitoring Simplification for Beneficiaries of the European Structural and Investment Funds 67 and the public consultation on the revision of the Financial Regulation 68 .

Efforts must therefore continue. Simpler and more flexible financial rules will contribute to optimising spending and impact of the MFF 2014-2020 and constitute as such one of the key elements of the Commission's initiative for a Budget Focused on Results. In addition, this will reduce the costs related to implementation of EU rules as well as the number of errors. Simpler and more flexible EU financial rules are key in enhancing the EU budget’s ability to adapt to changing circumstances and to respond to unexpected developments.

In simplifying and making EU financial rules more flexible, the above proposals pave the way for the preparation of the next generation of spending programmes in the next MFF.

3.3.3.Improving the interoperability of funds, financial instruments and EFSI

The principle of complementarity of the European Structural and Investment Funds with the centrally managed financial instruments was enshrined in their respective legal acts. Provisions exist in the legislative framework for ESI Funds concerning the possibilities for combination of financial instruments with grants and with other financial instruments. Nevertheless the facilitation of their combination with EU level instruments as regards state aid is key.

4.How we are assessed: Performance, Accountability and Multiannual Error Rates

4.1.Towards a reinforced EU Performance Budgeting System

A performance budgeting system, aligned on the Europe 2020 strategy, has been established for the EU budget with the adoption of the MFF 2014-2020. The EU programmes' performance framework is designed to provide the Budgetary Authority with ex-ante and ex-post performance information relevant for decision-making during the budgetary procedure. Legal bases and implementing acts of multiannual programmes include a set of clearly defined objectives, indicators, milestones and long-term targets, which are collected and reported on a regular basis through programme statements 70 . 

In the framework of the Budget Focused on Results initiative launched in 2015, the Commission works closely with international organisations with particular expertise in budget performance, especially the OECD, to ensure that the performance framework is aligned with international best practices as well as to identify possible areas for improvements.

Expert meetings on performance budgeting are organised with a view to pooling the expertise of the Commission, the European Parliament, Member States, the Court of Auditors and international organisations and to agree on the best use of performance information integrated in the annual and multiannual EU budget framework to inform political decisions.

One of the risks associated with performance-based budgeting is the multiplication of quantitative indicators as definite tools for evaluating a public policy. This imposes high implementation costs and may not be proportionate to the results in terms of relevant and timely evidence for decision-making. Consequently, the Commission engaged in a process to streamline indicators and selecting the most meaningful and reliable ones, while diminishing measurement costs.

4.2.Accountability and reporting

As from 2015 the Commission has reinforced budget planning and reporting. One illustration of this process is the publication of an Integrated Financial Reporting Package in July 2016, including the annual accounts, the Communication on the performance of the EU budget, the Financial Report and the Annual Management and Performance Report 71 for the EU Budget. This annual reporting package fulfils existing requirements for EU-budget programmes evaluation established in the EU Treaty and the accountability requirements for the budget management by the Commission as established in the Financial Regulation on the EU budget. 

Beyond reporting obligations, there is a need to enhance public communication and accountability of all bodies implementing the EU budget: the Commission, Member states, International organizations and agencies. In September 2015, at the first annual conference on Budget focused on results, the EU Results database was launched in order to improve the visibility of EU funding, with EU-financed projects in Europe and across the world presented in a single web application 72 .

4.3.Multiannual error rates

The Commission implements multiannual control strategies to ensure the legality and regularity of the financial operations. Controls are both implemented before payment (preventive, ex-ante) and after payment (corrective, ex-post).

In order to provide an overall view, the Commission reports on the best estimates of the amount at risk (i.e. expenditure in breach of applicable regulatory and contractual provisions) for the budget and of corrections expected in the future. The comparison of these two figures provides an estimation of the amount at risk at closure, i.e. the level of error after all corrective measures have been implemented at the closure of the programmes.

The amount at risk at closure represents the Commission management's view on the performance of the multiannual control strategies. It appropriately reflects the fact that the control cycle is multiannual and that further corrective measures can be implemented until closure.

The amount at risk at closure was produced for the first time for the various policy areas in the 2015 Annual Management and Performance Report for the EU Budget. The amount at risk estimated at the end of 2015 represented between 2.3% and 3.1% of the relevant 2015 expenditure. This is expected to be brought down to between 0.8% and 1.6% at closure, once all corrective measures have been implemented. Thus, the multiannual corrective mechanisms adequately protect the EU budget from expenditure in breach of law.

5.Budgetary availabilities in the 2014-2020 MFF

5.1.Financing needs for the initiatives proposed by the Mid-Term Review

The previous sections proposed a series of initiatives to reinforce the priority given to (i) jobs and growth and (ii) responding to the new challenges linked to migration, refugees and security. These initiatives would require about EUR 6.3 billion in commitments over the remaining years of the MFF to reinforce the budget availabilities in four areas:

1.Heading 1A: EUR 1.4 billion to reinforce Horizon 2020, CEF-Transport and Telecom, Erasmus+, COSME, and the EFSI;

2.Heading 1B: EUR 1 billion for the prolongation of the Youth Employment Initiative;

3.Heading 3: EUR 2.55 billion for the years 2018-2020 to finance the European Border and Coast Guard and the reinforcement of EUROPOL as well as the Commission proposals related to the EU Agency for Asylum, the review of the Dublin common asylum system, the Emergency support within the Union and the Entry/Exit system which aims at registering entry, exit and refusal of entry data of third country nationals crossing the external borders of the Member States of the EU.

4.Heading 4:

a.EUR 385 million for reinforcing the Macro-Financial Assistance instrument and the 'Extended External lending Mandate' of the EIB;

b.EUR 1 billion for the Partnership framework process and the European Fund for Sustainable Development;

Moreover, it is proposed to earmark the EUR 4.6 billion stemming from the adjustment of the national envelopes for cohesion policy for sustaining the effort to fight against youth unemployment, integration of refugees and supporting investment through financial instruments and in combination with the EFSI.

In conjunction with the use of margins and special instruments of EUR 1.8 billion mainly for migration proposed in the Draft Budget 2017, these three components would amount to an overall reinforcement of about EUR 13 billion which would allow addressing the persistently urgent needs and common political priorities for the remainder of the financial programming period.

5.2.Budgetary availabilities in the remainder of the 2014-2020 MFF

Taking into account the above proposals, the overall budgetary margins still remaining in 2017-2020 would amount to EUR 1.9 billion. Margins could materialise in Heading 2 over 2018-20 due to higher assigned revenue than foreseen when the MFF ceilings were established, although not to the same extent than experienced in the first years of the MFF given that some sources of assigned revenue do not exist any longer (e.g. the milk superlevy) and a backlog of conformity procedures has been cleared.

In order to maintain a sufficient capacity for the budget to react to unforeseen events until the end of the MFF period, the Commission therefore proposes to reinforce special instruments 73 and to create a new European Union Crisis Reserve, funded through the re-budgeting of de-committed appropriations, by means of an amendment of the MFF Regulation and the Financial Regulation. With the proposed doubling of the annual availabilities of the Flexibility instrument and the Emergency Aid Reserve, a total of EUR 4.1 billion and EUR 2.5 billion respectively would be available in 2017-2020 under these instruments. Based on the latest estimates (see annex 6), the additional availabilities that could stem from the proposed re-use of de-committed appropriations could range between EUR 3 and EUR 4 billion per year on average.

5.3.Sufficiency of payment ceilings

The constraints on the payment appropriations authorised in past budgets combined with the implementation cycle of the cohesion programmes from the previous MFF led to the progressive building up of very significant backlog of outstanding payment claims at year-end, reaching an unprecedented level of EUR 24.7 billion at the end of 2014. Difficult decisions made with regards to the 2014 and 2015 budgets, in line with the payment plan agreed by the European Parliament, the Council and the Commission 74 , have progressively reduced the abnormal backlog, which will be fully resorbed by end 2016.

By contrast, lower needs than originally foreseen in 2016 and a large "dip" in the payment profile in 2017 would be mainly due to the delayed start of the implementation of cohesion before bouncing back above the annual ceilings in the later years of the MFF once the programmes would reach their cruising speed. However, the risk of accumulating a significant amount of abnormal backlog again in the later years of the MFF should be mitigated by the Global Margin for Payments, which allows transferring unused payment appropriations to later years.

Bringing together the medium-term current payments forecast, which shows a margin until 2020 of EUR 5.3 billion, and the additional needs stemming from the Mid-Term Review, estimated at about EUR 3 billion 75 , the overall payment ceiling would be just sufficient under two necessary conditions:

• The payments for Special instruments are counted over and above the ceilings in the same way as commitments;

• The Global Margin for Payments is used to the full extent necessary to provide specific and maximum flexibility.

It should be noted that there are upside and downside risks to this medium-term payment forecasts given its large sensitivity to the pace of implementation of cohesion policy. A (+/-) 1% change in the pace of implementation leads to a (+/-) EUR 4 billion change in payment needs. While downside risks would translate into lower annual appropriations for payments, the materialisation of upside risks would require increasing the payment appropriations and to adjust the ceilings accordingly 76 as otherwise an abnormal backlog would build up again.

6.towards the next multiannual financial framework

6.1.Context of the next MFF

In line with the Budget focused on results initiative, European Value Added/subsidiarity principles as well as focus on impact and performance of the EU budget should be at the core of the next MFF proposals. Therefore, the next MFF should build on the upcoming mid-term evaluations of the current programmes.

Identifying the challenges for the next MFF will also require a thorough analysis of the medium-term challenges over a 10-year horizon, a major difficulty given the rapid changing circumstances of our globalised world. A financial framework which has to bridge the gap between stable investment horizon and catering for acute emergencies will require inbuilt resilience and flexibility from the very outset.

The EU budget has an important role to play as a leverage instrument in the policy, political and financial sense: even a small amount of money can have a significant impact by being attached to conditions that lead to changes in national policymaking (conditionality): the link of EU funds with economic governance will deserve particular attention in the next MFF context. Also, fostering cooperation between Member States in areas where economies of scale and/or externalities are significant is essential: this will be paramount to address new challenges such as in the areas of migration, security and defence.

The proposal to create for the next MFF contingent liabilities beyond the assets provisioned and to set-up a common provisioning fund which would centralise guarantees provided by the Union budget, which is included in the Commission's proposal to simplify financial rules , underpins this toolbox and allows increasing the leverage of the EU budget.

6.2.Duration of the next MFF

As part of their agreement on the 2014-2020 MFF, the three institutions concluded that, in the context of the Mid-Term Review/Revision, they would examine "the most suitable duration for the subsequent MFF before the Commission presents its proposals with a view to striking the right balance between the duration of the respective terms of office of the members of the European Parliament and the European Commission - and the need for stability for programming cycles and investment predictability” 77 .

Three main options for the duration of the MFF were discussed in the past: (a) alignment to the political mandates (five years), (b) sticking to the seven years, or (c) considering a period of ten years with a substantial/compulsory review after five years ("5+5") 78 .

In its Resolution on the preparation of the post-electoral revision of the MFF 2014-2020, adopted on 06 July 2016 79 , the European Parliament pointed out that, "given the rapidly changing political environment and with a view to ensuring greater flexibility, some elements of the MFF should be agreed for five years while others, notably those related to programmes requiring longer-term programming and/or policies foreseeing complex procedures for the establishment of implementation systems, should be agreed for a period of 5+5 years with compulsory mid-term revision."

6.3.EDF budgetisation

As regards the budgetisation of the European Development Fund (EDF), and recalling the 2013 Interinstitutional Agreement where the "European Parliament and the Council note that the Commission […] intends to propose the budgetisation of the EDF as of 2021", the Commission will carefully analyse the way forward, taking into account all relevant circumstances and considerations, including:

–The overall design and structure of the post-2020 external action instruments;

–The nature of the partnership between the European Union and the African, Caribbean and Pacific countries after the expiry of the Cotonou agreement in 2020;

–Lessons learned from evaluations of previous action, stakeholder consultations and impact assessments of various arrangements.

6.4.Potential new spending areas: defence and security

There is a growing expectation that the EU should take greater responsibility for the EU security and defence. Alongside external crisis management and capacity-building, the EU should be able to assist in protecting its Members upon their request, and its institutions. This means delivering on commitments to mutual assistance and solidarity and includes addressing challenges with both internal and external dimension, such as terrorism, hybrid threats, cyber and energy security, organised crime and external border management. For instance, the Common Security and Defence Policy (CSDP) missions and operations can work alongside the European Border and Coast Guard and EU specialised agencies to enhance border protection and maritime security in order to save more lives, fight cross-border crime and disrupt smuggling networks.

In this context, should the results of the Preparatory Action on Defence Research (see section 2.3) be positive, considerations could be given to include an EU Defence Research in next MFF. Future EU defence research financing should be designed to support a strong European industrial base able to deliver the strategic capability needs of Europe and identify where the EU could provide an added-value. It shall aim to ensure development and maintenance of defence capabilities requiring both investments and optimising the use of national resources through deeper cooperation. The Commission upcoming European Defence Action Plan will support the European industrial base and facilitate defence cooperation via the mobilisation of EU instruments, including EU financing tools, as appropriate.

6.5.Own resources

Whilst the 2011 Commission proposals on reforming the Own Resources system of the Union did not meet the required unanimous agreement in Council, the European Council of February 2013 invited Council to continue examining the Commission proposal of an own resource based on value added tax to make it as simple and transparent as possible and to ensure equal treatment of taxpayers in all Member States. It also invited Member States participating in the enhanced cooperation on the financial transaction tax to examine if it could become the base for a new own resource.

In order to provide a framework for a structured dialogue between institutions on the future of the Own Resources system, a high level Group (HLGOR), composed of members appointed by the three institutions and chaired by former Prime Minister of Italy and Commissioner Mario Monti, was established in that spirit. The Group issued a joint diagnosis on the current Own Resources system 80 .

The Commission will carefully assess the recommendations that the HLGOR is expected to submit at the end of 2016 in the preparatory phase of its next MFF package, and make legislative proposals as appropriate 81 . 

6.6.Completing Europe's Economic and Monetary Union

In June 2015, the President of the European Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup, the President of the European Central Bank and the President of the European Parliament presented a report on an ambitious yet pragmatic roadmap for completing the EMU 82 . This Five Presidents' Report makes the point that progress is necessary on four fronts in parallel: firstly, towards a genuine Economic Union that ensures each economy has the structural features to prosper within the Monetary Union; secondly, towards a Financial Union that guarantees the integrity of the currency across the Monetary Union by limiting risk to financial stability and increasing risk-sharing with the private sector; thirdly, towards a Fiscal Union that delivers both fiscal sustainability and fiscal stabilisation; and finally, towards a Political Union that provides the foundation for all of the above through genuine democratic accountability, legitimacy and institutional strengthening.

The Five Presidents also agreed on a roadmap for implementation that should consolidate the euro area by early 2017. In October 2015, a Commission "Communication on steps towards Completing Economic and Monetary Union" 83 set out specific actions for the first stage 84 . In Stage 2, more far-reaching measures should be agreed upon to complete the EMU's economic and institutional architecture.

To prepare the transition from Stage 1 to Stage 2 of completing the EMU, the Commission will present a White Paper in spring 2017, building on the progress made in Stage 1 and outlining the next steps needed to complete the EMU in Stage 2. The White Paper will be prepared in consultation with the Presidents of the other EU institutions.

ANNEXES

annex 1: mff 2014-2020

annex 2: climate tracking of 20 % target

The Commission's method for tracking climate related expenditure across the EU budget is based on using the so-called climate markers which distinguish ‘primary’ and ‘significant’ expenditure with respective assigned values of 100% and 40% that are counted as climate related spending. Given the range of implementing procedures (centrally managed, shared management, programmable/bottom-up), the approach to implementation varies across programmes and the general methodology is refined to reflect the specific circumstances.

The main purpose of setting a climate relevant spending target in the budget is to incentivise the integration of climate considerations at the programming stage, with the tracking providing a proxy indicator.

The methodology is more detailed for the European Structural and Investment Funds, Horizon 2020 and the European Agricultural Guarantee Fund, which make up more than 80% of the EU budget, and more than 90% of climate-related spending. With all operational programmes now in place and the method for tracking climate spending set for all programmes, the Commission can use the data as a baseline to track further evolution.

For 2014-2017, data is updated mostly on the basis of actual commitment allocations (for centrally managed funds) or on the basis of proportional distribution of the allocation of thematic objectives in final operational programmes over the whole 2014-2020 period (shared management funds, primarily ESI Funds).

Regarding the forecasts for 2018-2020, the indicative data depend on the programming process. For ESI Funds, these reflect the proportion of the relevant activities across the whole MFF period. For centrally managed funds where Mid-Term Reviews might reallocate funds between objectives and priorities, the forecasts can be a mathematical average.

As a denominator for calculating the share of climate related spending in the EU budget, the Commission uses the same baseline as in the annual monitoring as included in the annual budgetary documents, based on the latest available financial programming. In as far as the financial programming is a dynamic system, the exact percentage share may vary slightly from one year to the next.

annex 3: european union trust funds

The EU regional Trust Fund for the Central African Republic (Bêkou) was established in July 2014, the EU regional Trust Fund in response to the Syrian crisis (Madad) in December 2014, and the European Union Emergency Trust Fund for Stability and Addressing Root Causes of Irregular Migration and Displaced Persons in Africa in November 2015. The fourth planned EUTF will aim to support the peace process in Colombia. It received the unanimous approval of Member States within the DCI Committee and is expected to be established as soon as possible.

The EUTFs are set up as pool funds (i.e. bank accounts) established between the Commission and other donors for a specific purpose (for instance, providing support to a country or region in crisis, such as Syria or Northern Africa, or addressing a specific thematic issue, such as energy). Both the EU and other donors (usually EU Member States) contribute to EUTFs. Although these funds are managed by the Commission, they are separate from the EU Budget or the EDF. The use and implementation of funds therefore follow its own specific rules pursuant to its constitutive agreement, signed between the Commission and the other donors.

These agreements establish inter alia the governing structures of a EUTF (namely a Board and an Operational Committee where the Commission and other donors are represented), the role of the Commission as manager, and how the decisions on the global strategy and on the use of their funds for specific actions should be adopted by these governing bodies. Before the signature of a constitutive agreement establishing a EUTF, the College adopts the relevant establishment decision authorising its signature (the draft agreement is attached). Moreover, all the contributions of the EU budget (or EDF) to a EUTF are made on the basis of a financing decision. Once the EUTF is established, activities are proposed by the Manager to the governing bodies and agreed in principle by consensus. Implementation follows, as a rule, the normal procedures of the Commission.

Contributions from Member States and other donors vary depending on the trust fund. As they are open for further contributions during their existence, it is difficult to predict the total financing available. Furthermore, the different objectives of the trust funds have translated into a very diverse range of donors and contributions, depending mainly on donors’ own internal priorities and areas of interest. The contributions also depend on attraction capacity of the objective of the EUTF, needs, policy priorities and the international context. Disbursements may also be done in different years, and therefore pledges should be taken into account. See below tables reflecting pledges for each of the EUTFs in place.

The following pages show the State of Play of the three established EUTFs.

Bêkou Trust Fund

Madad Trust Fund

Africa Trust Fund

annex 4: schematic view of esi funds macro-conditionality