EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

The European economy suffered a profound and unprecedented exogenous shock with the COVID-19 pandemic. The economy is contracting and unemployment is rising; the uncertainty of the situation to follow may lead to slower recovery. The initial responses to the crisis largely depended on national and regional capacities, which differ to a large extent across Member States and regions, due to the diverse economic structures and fiscal space. Such differences may result in asymmetric recovery and contribute to increasing regional disparities, which can in turn undermine the single market, the financial stability of the Eurozone and the solidarity of our Union.

The spread of the coronavirus across countries has prompted many governments to introduce unprecedented measures to contain the pandemic such as businesses being shut down temporarily or widespread restrictions on travel and mobility, and led to increased uncertainty on the financial markets. This in turn may lead to sharp declines in the level of output in many economies with severe social consequences. It may pose significant challenges for public finances in the years to come, which in turn may limit public investment necessary for the economic recovery.

The Commission is proposing to harness the full power of the EU budget to mobilise investment and frontload financial support in the crucial first years of recovery. These proposals are based on two pillars. On the one hand, an emergency European Recovery Instrument which will temporarily boost the financial firepower of the EU budget by using the headroom in the EU budget to raise additional financing on the financial markets. On the other hand, a reinforced multiannual financial framework for 2021-2027. The Commission is proposing to strengthen key programmes through the European Recovery Instrument to channel investment quickly to where it is needed most, reinforce the single market, step up cooperation in areas such as health and crisis management, and equip the Union with a budget tailor-made to drive the long-term transition to a more resilient, greener, and digital Europe.

The present proposal belongs to the second pillar mentioned above. It is crucial to ensure a swift recovery of the EU economy in the aftermath of the COVID-19 pandemic, while fulfilling the Treaty objective of promoting convergence and reducing disparities. This requires tailor-made actions in the context of national and regional economies. Cohesion policy investments need to play a leading role in ensuring a recovery for all paving the path for economic development over longer term. When providing support, particular emphasis needs to be put on the regions most affected by the crisis and which are less equipped to bounce back.

Therefore, it is necessary to propose amendments to the scope and specific objectives of the European Regional Development Fund (‘ERDF’) as well as a flexible mechanism that can be quickly applied should other exceptional occurrences leading to a crisis situation affecting the Union arise. Cohesion policy already permits a broad spectrum of funding possibilities, so that it is adaptable to the individual circumstances of Member States and regions. However, in order to improve the overall economic resilience and recovery of the EU, it is proposed to improve flexibility of investment under programmes to address weaknesses in the health sector, improve preparedness related to unexpected emergencies, promote job creation in small and medium enterprises and fully exploit economic potential of tourism and culture sectors. In order to improve capabilities to prevent, protect against, quickly respond to, and recover from health emergencies, it is proposed that investments to improve the resilience of health systems may be programmed and implemented in a comprehensive manner. This requires that investments could go beyond implementing infrastructure and may comprise investments in equipment and supplies that are necessary to ensure that health systems are resilient. Furthermore, given that effectively dealing with any arising crisis necessitates the provision of corresponding supplies, the ERDF should also be able to finance supplies to enhance disaster resilience in addition to improving the resilience of health systems. In this context, it is necessary that Member States ensure a coordinated approach and complementarity between investments financed from the [Health Programme] and from the ERDF. The lockdown due to the COVID-19 pandemic will severely impact regions where culture and tourism sectors contribute significantly to regional economies. Available data indicates that economic and social impact resulting from imposed travel restrictions as well as drop in confidence of customers is likely to be the greatest in territories more reliant on tourism and hospitality. It is therefore proposed, in addition to the possibilities for supporting the tourism and culture under other policy objectives, to create a separate specific objective under policy objective 4 to enable exploiting the potential of culture and tourism in enhancing economic development, social inclusion and social innovation. In order to stimulate employment-friendly growth and competitiveness of SMEs, the ERDF specific objectives should reflect job creation in small and medium-sized enterprises. It is also proposed that the ERDF supports undertakings in difficulty where temporary State aid measures in response to specific circumstances are established. This is consistent with the approach taken under the Temporary Framework for State Aid Measures to support the economy in the current COVID-19 pandemic and with rules for the granting of de minimis aid. Finally, it is necessary to adjust indicators, to allow for using output and result indicators related to tourism and culture outside policy objective 5, in line with the proposed amendments to the specific objective on culture and tourism. To learn the lessons from the current crisis, it is imperative that the legal framework for cohesion policy provides for mechanisms that can be quickly invoked should exceptional circumstances arise in the next decade. Therefore, temporary measures for the use of the ERDF in response to exceptional and unusual circumstances are proposed to ensure that under limited and specific circumstances derogations to certain rules may be provided to facilitate response to such circumstances. These include the possibility to extend the scope of support for the ERDF, such as support for working capital in SMEs in the form of grants as well as to allow for easing thematic concentration requirements where necessary as a temporary measure to provide an effective response to such exceptional and unusual circumstances.

•Consistency with existing policy provisions in the policy area

The proposal is limited to a targeted amendment of the proposal for a Regulation COM(2018) 372 of 29 May 2018 and consistent with the overall legal framework established for the Funds, in particular with the proposal for a Regulation COM(2018) 375 of 29 May 2018 and the proposal for its amendment. Together with the amended proposal for a Regulation COM(2018) 375 of 29 May 2018, it constitutes a means to support economic recovery and a crisis-response mechanism under the shared management rules in case of exceptional occurrences leading to a crisis situation at Union level.

•Consistency with other Union policies