Letter IEDI n. 1039–Europe Post COVID-19: the European Union's recovery plan
As in many parts of the world, the COVID-19 pandemic has affected the European Union (EU) countries in an unprecedented way, with the rapid transformation of the health emergency into a major economic crisis. Estimates suggest that bloc's economy may shrink more than 7% in 2020, with partial recovery in 2021.
Europeans, however, took the lead by designing an ambitious and comprehensive plan to reactivate their economy, associating short-term goals, such as employment and GDP growth, with long-term targets, like building an environmentally sustainable economy and advancing digitalization. Today's Letter IEDI presents the main elements of the European Union's recovery plan.
Proposed by the European Commission—the EU executive body—on 26 May 2020 and sanctioned on 21 July 2020 by the European Council—a decision-making body composed of the 27 heads of state and/or government—the European Recovery Plan combines short-term measures with actions for long-term structural transformation, under the multiannual financial framework (MFF) 2021-2027 (the EU's long term budget), reinforced by the additional resources of the new recovery instrument, called Next Generation EU (NGEU).
To finance the effort to reactivate the bloc's economy, the European Commission was authorized to raise up to €750 billion at 2018 prices on capital markets by issuing bonds on behalf of the European Union until 2026.
These resources will make up the NGEU Fund and add to the €1,074 billion in budget allocations for the period 2021-2027 financed with Member States' resources and contributions. In other words, the total reaches €1.8 trillion for the reactivation of the European economy.
According to the European Commission's proposal, €500 billion of the NGEU resources would be allocated to Member States in the form of grants and €250 billion as loans.
However, in the agreement reached between the leaders of the European Council, after a long and hard negotiation with the group of so-called “frugal” countries (Austria, Denmark, Holland, Sweden and Finland), the volume of subsidies was reduced to €390 billion and the volume of loans rose to €360 billion, both at 2018 prices.
The funds raised in capital market will be transferred to the Member States through instruments and programs, in the amounts and forms agreed by the leaders of the European Union, linked to the strategic objectives of the twin ecological and digital transitions, the main structural transformation policies of the bloc.
The programs and instruments that make up the Recovery Plan are organized around three axes.
The first axis is Support for Member States, following the COVID-19 shock. As investment has a vital role to play in a balanced and sustainable recovery, the bulk of the NGEU resources (over 98%) will be used to support state investment and major structural reforms in the Member States.
The priority will be those countries and/or regions where the impact of the crisis and the need for resilience are the greatest. This axis includes the Recovery and Resilience Mechanism (RRF), Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU), European Agricultural Fund for Rural Development (EAFRD) and the Just Transition Fund (JTF).
The second axis focuses on bringing the economy back online by encouraging private investment, especially in key sectors and technologies, which is deemed strategic to guarantee the European Union's long-term competitiveness. The Commission has proposed strengthening InvestEU, Europe's main investment program.
In the proposal for the Recovery Plan sent to the European Council, this 2nd axis also included the Temporary Solvency Support Instrument, designed to help match the recapitalization needs of viable companies at risk of insolvency due to the crisis. However, this proposal was not approved by European leaders, who preferred to reinforce the Recovery and Resilience Mechanism that integrates Axis 1.
The third and final axis focuses on the lessons learned from the crisis. The pandemic underlined the value of cooperation and highlighted the need for the European Union to urgently develop its capacity to respond to crises and increase resistance to future shocks.
For this reason, the Recovery Plan provides for the allocation of additional resources to programs that drive growth and strengthen Europe's cooperation and capacity to withstand and overcome future crises, such as RescEU, the EU civil protection mechanism, and Horizon Europe, the main European program to promote research and innovation.
Italy will receive the largest volume of NGEU concessional resources through the RRF program, followed by Spain, France, Poland and Germany. To have access to these funds, countries will have to present a national recovery plan to be assessed by the European Commission and approved by the European Council by qualified majority.