The COVID-19 pandemic is more than just a health crisis. National leaders across the Union are struggling to find a balance between maintaining strict lockdown measures in order to contain the spread of the crisis and diminishing the socio-economic damages. The Commission’s autumn forecast projects that the EU economy will contract by 7.4% in 2020, the worst recession since World War II. The current resurgence of the pandemic and the second wave of lockdown measures is likely to interrupt the projected recovery of the EU economy, and it will take another two years to return to pre-crisis growth levels. The intensity of the shocks will also differ significantly among Member States, sectors and even companies. These deviating dynamics trigger both imbalances and risks of fragmentation across the Union and intensifies the risk of increasing social and economic inequalities. EU Member States are thus subject to significant levels of uncertainty, making a sound recovery plan for the resilience of their economies more important than ever before. What would this recovery plan be?
Next Generation EU - an ambitious recovery package
Faced with the COVID-19 pandemic, the European Union and its Member States have taken unprecedented measures. Nationally, Member State governments have implemented policy measures that sheltered jobs and incomes. At the European level, the response to the crisis can be divided into two phases. In the beginning of the crisis in March, the EU relaxed its fiscal rules under the Stability and Growth Pact (SGP), in order to allow Member States to take the necessary fiscal measures, such as guarantees and liquidity support. Moreover, the EU created SURE: a short-term work scheme instrument for temporary support to mitigate unemployment risks. Currently, SURE is fully operational and the first disbursements of 17 bn EUR have already been made to Italy, Spain and Poland. This phase consisted of a quick response to the crisis that provided the necessary emergency support to Member States.
In the second phase in May, the Commission launched Next Generation EU, which is not only meant to “repair” the economic and social consequences of the crisis, but to also “prepare” for the future. In addition to the multiannual EU Budget, the so-called Multiannual Financial Framework (MFF) 2021-2027, the Commission initiated the Recovery and Resilience Facility (RRF). The RRF is a new recovery instrument of 672.5 bn EUR in grants and loans, and aims to strengthen the resilience of EU economies and to foster the green and digital transition of Member States. To benefit from the RRF, Member States should submit their draft Recovery and Resilience Plan (RRP) outlining public investment and reform agendas, before 30 April 2021. Their plans should outline how the RRF funding will contribute to the recovery, resilience, and the green and digital transition of their national economies, in line with their country-specific recommendations (CSRs) from 2019 and 2020. Specifically, the Commission set out green and digital targets: 37% and 20% of the total funding received must be allocated towards green and digital projects respectively. The rest of the funding must adhere to the ‘do not significantly harm’ principle: projects must not significantly harm any of the six environmental objectives covered by the EU Taxonomy.
Challenges ahead
Swift implementation will be essential to support a strong economic recovery in EU Member States. The Commission estimates that Next Generation EU could add up to more than 2%of GDP on average, benefiting the whole Union in terms of growth and jobs. However, the success of the RRF is dependent on the efficient allocation of funding towards new public investment and reforms. Evidence about past European Cohesion Funds suggest that absorption at the national level is typically slow, especially in the Member States hit hardest by the pandemic. Weak absorption capacity means that the speed of implementation of these funds is hindered, which could result in absorption delays of the RRF funds and the implementation of related projects. Due to the severity of the COVID-19 crisis, quick delivery of the RRF funds is extremely important for the recovery of national economies, hence there are challenges ahead for the smooth implementation of the RRP’s.
Moreover, there is the concern regarding ‘additionality’. To function as a fiscal stimulus package, RRF funds must be directed at projects and investment that would otherwise not have happened. If Member States use the RRF funding for current public expenditure, this would significantly reduce the multiplier effect of fiscal spending and hence the additional benefits that the RRF could trigger.
Subject to great uncertainty
The EU’s response to the COVID-19 crisis is of unprecedented size: Next Generation EU is a unique and historic opportunity to support and accelerate changes in the European economy towards a more sustainable and resilient growth model. However, the Recovery Package is not exempt from challenges, and with the resurgence of the pandemic, economic uncertainty increases as well. The next stages of the negotiation process between the Commission and individual Member States under the RRF are therefore crucial to ensure that Next Generation EU becomes the driver of truly transformational change that it wants to be.
Written by Yentl Stutterheim, co-authored by Mathilde Cournut.
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