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  • Writer's pictureEuropean Waves

The EU Recovery Plan for the Covid-19 pandemic

In our Explained section, we are taking a closer look at either a buzzword, key concept, theory, or a person that has been or is influential in discussion on the EU and Europe. This edition deals with the EU Recovery Plan for the Covid-19 pandemic. How the EU should deal with the Covid-19 pandemic has been discussed extensively in the media and to be honest we have been getting a little dizzy from the astronomical figures being thrown about amidst a tsunami of political jargon in this package. Was it €750 billion or €500 billion? What’s the deal with coronabonds? And does the recovery plan have something to do with the European Stability Mechanism? These questions and more will be addressed below.

The EU Recovery Plan for the Covid-19 pandemic is entitled NextGeneration EU. It is supposed to be a temporary recovery instrument, set to run from 2021 to 2026, to repair the more immediate economic and social damage of the Covid-19 pandemic. The Recovery Plan will supplement the Multiannual Financial Framework (the MFF, or long-term budget of the EU) 2021-2027. Together the MFF (~€1 trillion) and Next Generation EU(€750 billion) are meant to provide the €1.8 trillion (that is €1,800,000,000,000) deemed necessary to rebuild the European economy after the pandemic.

NextGeneration EU – Understanding the numbers

NextGeneration EU was proposed on the 27th of May by the European Commission. Two months later, the EU heads of state or government agreed on the general content of the package. (We all remember a very long and tense EU summit, where Mark Rutte, the Prime Minister of the Netherlands, was dubbed ‘Mr. No’ and ‘Dr. Superstrict by the Italian media for being very uncooperative). Four months later, on the 10th of November, the European Council and the European Parliament reached an agreement on the package.

The €750 Billion of funding from NextGeneration EU will be made up of both loans and grants. The European Commission together with France and Germany pushed for €500 billion of this total to be given as grants – though with conditions attached. However, due to the opposition from the Frugal Four (the Netherlands, Austria, Denmark, Sweden plus Finland), a lengthy negotiation reduced this amount to €390 billion.

The largest part of the €750 billion will go to the Recovery and Resilience Facility (RRF). The Facility consists of €672.5 billion, of which €360 billion will come in the form of loans, and the remaining €312.5 billion as grants. Spain (€69.5 billion), Italy (€68.9 billion) and France (€39.4 billion) are set to receive the highest grants.

In order to receive the grant money, EU governments have to submit their reform plans by the end of spring 2021.  In their reform plan, governments must mark 37% of their funds for a green transition – with another 20% allocated towards initiatives designed to further digitalise the economy of the recipient state. Additionally, the recovery funds should help reduce regional and social inequalities, improve education and crisis-preparedness, and enhance economic cohesion. First pay-outs are expected in the summer of 2021.

In addition to the grants s received, each Member State can also request loans of up to 6.8% of their Gross National Income (GNI). The RRF also has a governance mechanism that allows individual Member States to raise objections if they feel that one nation is not fulfilling its obligations in return for the recovery funds.

An additional €47.5 billion will go to the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU). These funds can be spent through either the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Fund for European Aid to the most Deprived (FEAD) or the Youth Employment Initiative (EYI). This money should be primarily spent on projects that will improve crisis repair mechanisms, for example investments in products and services for health services, support to SMEs and job maintenance. Additionally, funds should be used to make the economic recovery greener, more digital (think infrastructure, skills development), as well as more resilient (think economic measures in sectors affected most by the pandemic, job creation, youth employment measures).

The remaining funds will be spent through other European programmes or initiatives such as the Just Transition Fund (JTF) (€10 billion), InvestEU (€5.6 billion), rural development (€7.5 billion), Horizon2020 (€5 billion) and RescEU (€1.9 billion).

What’s the deal with coronabonds?

Back in March and April of 2020, the term coronabonds was everywhere. But what where they again precisely? Coronabonds are much like regular bonds – joint debt issued to the Member States. Rather than borrowing on the market as individual nations however, all Member States would borrow money together. Collective debt would result in a much lower interest rate for countries with higher debt ratios, such as Italy, Spain and Greece –  investors would feel secure in the knowledge that their funds are backed by the relatively stronger European economies of Germany and France. Prior to the European Council summit on the 26th of March, a joint letter was signed by Spain, Italy, France, Belgium, Luxembourg, Ireland, Portugal, Greece and Slovenia calling for coronabonds to be issued. They argued that the Covid-19 pandemic was an external crisis, and so countries with high debt should not be punished extra by having to borrow money with much higher interest rates. However, this was met with strong opposition from the Frugal Four (in particular the Netherlands) and Germany. The initial proposal was not taken up and coronabonds seemed to disappear as quickly as it was brought up.

However, NextGeneration EU will indeed be financed through some form of collective debt. The EU Commission plans to borrow the €750 billion on the markets rather than raise it from contributions from the Member States. The main argument for that is that the Commission can borrow at much more favourable rates than many Member States – combined with the historically low interest rates seen across the globe. If that doesn’t sound like coronabonds …

Did someone say ESM?

The European Stability Mechanism (ESM) set up during the sovereign debt crisis has remained curiously absent from the discussion on the recovery plan for the EU. During the sovereign debt crisis, the ESM was established to provide financial assistance to all EurozoneMember States experiencing economic difficulties. The word Eurozone is important here, because it means that assistance is not available to all Member States. Given that it already exists and has funding backed by all Eurozone governments, it might still have been easier to use the current mechanism for those who will utilise the single currency. However, despite the ESM establishing a Pandemic Crisis Support, it has not played a significant role in the European recovery for a number of reasons. First of all, the ESM only provides loans, not grants. While this may provide temporary relief, it will still add to the debt burden of Member States, disproportionately affecting weaker economies. In addition, states can also only loan up to 2% of their 2019 GDP. For Italy, Spain, Greece and Portugal this would amount to a total of €70 billion, nowhere near enough to support an economic recovery. Another reason as to why the ESM may have been deemed unsuitable is that the ESM was designed for internal shocks and assumed that the recipient countries were largely at fault. There is thus a certain stigma attached to the ESM. Countries like Italy argue that the Covid-19 crisis is an external shock and has little to do with a state’s economic policy, so they reject the ESM out of principle.

Will it work?

Perhaps the most important question, and also one we cannot exactly answer (just yet). Below we will outline some concerns voiced by critics of  the EU Recovery Plan.

First of all, there is still the question of whether it is enough money to address the severity of the economic consequences of the pandemic. Wolfgang Münchau, for example, has argued that Italy’s financial losses from tourism alone are nearly equivalent to their entire allotted support from the recovery.

Another area  of concern is whether there is sufficient time for the Member States to come up with a detailed enough plan, and whether governments can agree on any plan at all. In Italy, Prime Minister Guiseppe Conte’s plan on how to spend the recovery money has effectively toppled the government, after Matteo Renzi decided to pull out two of his ministers. Mario Draghi – former head of the European Central Bank and now head of a new technocratic government in Italy – is now tasked with creating a suitable programme for the rebuilding of their economy. This is a plan that all parties of their national unity government must agree one – from Articolo Uno on the left, to Lega on the right. Anyone can imagine that this is not exactly an easy task.

When all recovery plans are submitted and the first pay-outs have been made, the funds will still have to be used by the Member States. Spain and Italy – two of the countries hardest hit by the pandemic – also have some of the worst absorption rates in the EU. Absorption rates refer to the rate at which Member States spent EU funds. Between 2014 to 2020, Spain for example only spent 39% of all funds received from the European Union. For Italy, this number was not much higher, at only 40%. There are thus concerns among the EU that administrative and bureaucratic hurdles within nations will prevent the money from being where it needs to be as quickly as possible.

€750 billion to help repair the economic and social damages of the Covid-19 pandemic seems like a lot of money – especially as much of it is earmarked for a digital, green transition, and reducing social and regional inequalities. NextGeneration EU thus has the potential to be one of the key instruments to alleviate some of the inequalities faced within the EU. However, as has been shown in the article, it remains to be seen whether this is actually going to happen. Only just over half of the funds (€390 billion) come in the form of grants, and the remaining €360 billion as loans. These loans will add to the debt burden of Member States, disproportionately affecting weaker economies. There are also concerns whether the funds will be sufficient to address all the economic and social consequences of the pandemic. As the time for the Member States to come up with a detailed recovery plan is limited, this might also have consequences on the durability and sustainability of the recovery programmes. Continuous evaluation and adaptation of NextGeneration EU and the individual recovery plans remain essential.



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