The recently announced European Commission’s proposal for an EUR 750bn recovery fund sits next to its plan for a 2021-27 macro budget (MFF) worth EUR 1.1tn and alongside support measures already agreed and worth some EUR 500bn. An overall envelope of some EUR 2.4tn – much of it promises of loans and credit guarantees – for 27 states over up to seven years is obviously small. These amounts alone will not be enough to stem the looming economic and fiscal challenges, nor will they resolve the structural problems still haunting the Eurozone, especially regarding the question of debt mutualization.
However, criticisms solely based on the numbers tend to forget the real, political challenges the European project faces. The encouraging step-change now is that, compared to the financial crisis, key member states are approaching the risk of economic and fiscal turmoil in a politically more proactive manner. They feel not just constrained but also motivated by a political landscape that has become more complicated everywhere across the bloc over the last decade.
To expect a Commission proposal for a new MFF to ban the risk of crises and volatility upfront would be naive in light of the realities of European politics. But the current debate reflects the renewed political commitment of key member states. Respective doubts had still haunted businesses and markets in Europe until as recently as 2015. Instead, the bloc is setting new political precedents. The single most important aspect is Berlin’s acceptance of joint debt issuances, followed closely by France’s ability to drive the conversation jointly with Germany.
Looking ahead, the positioning of four self-declared “frugal” northern states (Austria, Denmark, Finland, and the Netherlands) will be crucial. The Commission responded to their calls for a greater focus on loans by merely adding another EUR 250bn in loans on top of the EUR 500bn in grants already proposed by France and Germany. This politically bold move is unlikely to go without some pushback from the northerners who have long been the bloc’s highest per capita contributors (and have traditionally enjoyed rebates which are again up for debate).
Under the Commission’s plan, the recovery funds would be disbursed via union programs and through the EU budget, thus directed towards projects in line with the bloc’s specific focus areas. The plan contains three overall buckets of measures: supporting member states, helping private investment, and lessons from the crisis. Of the overall envelope, EUR 560bn will be provided through a new “Recovery and Resilience Facility” that will support investments. Countries will be able to apply for these funds by presenting a four-year resilience and recovery (i.e., reform and investment) plan within the framework of the European Semester (the process through which the EU tries to coordinate member states’ economic and fiscal policies). The proposals will have to be aligned with the Union’s objective concerning the energy and digital transition. The funds will be disbursed in installments upon completion of milestones defined ex-ante in the reform plans.
That member states are the ones that must come up with their own reform plans shows that the Commission has learned the lessons from the Eurozone crisis: conditionality in the absence of reform ownership by the member states tends to be rather ineffective. At the same time, it is unclear whether the proposed quarterly reporting framework for the disbursement of the funds will be enough to allay moral hazard concerns by the northern member states. This is especially the case considering recent statements by the Italian government that it would use the money from the recovery fund to lower taxes.
Another question is the role of East European members. The extra funds for the recovery will lower the pressure for redirecting further structural funds from the east to the corona-ridden south. However, the western insistence on linking structural funds to greater compliance with basic standards on good governance and the rule of law remains an especially problematic topic for Poland and Hungary. As every member state will have to sign off on the recovery plan domestically, east-west divisions, therefore, remain another factor to watch.