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The new European Recovery Fund – Part 3

August 3, 2020

It is hard not to share the widespread enthusiasm for the € 750 billion agreement reached earlier this week. A brand-new facility that represents more than 5% of European GDP at a time when governments need to push for a powerful recovery seems exactly what is needed. It also innovates sharply from past practice and demonstrates an impressive level of solidarity. And yet, beyond the headlines, and the relief, there is less than meets the eye and reasons to be concerned. I describe these concerns in three parts. In the first part, I show that the effective amounts are likely to be much smaller and to come too late. In the second part, I argue that moral hazard concerns, which complicated the negotiations, have been too widely set aside. In this third part, I share my fears about the way the 750 billion will be used.




How to do a Eurobonds operation without calling it Eurobonds? Eurobonds have become a lightning rod in much of Northern Europe and, yet, the Covid crisis has made some form of Eurobonds unavoidable. The seemingly clever solution has been to have the European Commission borrow on its own account. A tad too clever, however. If it is the Commission that borrows, then it must be the Commission that spends, and its spending has long been controversial with lingering doubts about its usefulness. At this stage, you might become concerned that the clever circumvention of the word Eurobond will come at a price. My own bet is that the outcome will be administratively complicated, politically driven and likely to involve quite a bit of waste.


Reading the conclusions of the July 17-21 Summit is challenging. It intentionally mixes up the traditional seven-year budget (set at €1074.3 billion per year) and the €750 billion recovery plan. The idea is that the plan is a temporary boost – an “extraordinary recovery effort” – that complements the Commission’s traditional budget, nothing like Eurobonds. It also presents dozens of spending plans, old and new, denominated by fancy useless names – such as RescEU or Horizon Europe – and acronyms apparently designed to discourage most readers. 


The official presentations of the Summit’s historical success emphasize that €390 billion will be distributed as grants to member countries by the Commission over three years, alongside loans totaling €360 billion. Much of the attention is focused on the grant part, which amounts to some 2.8% of the EU GDP, to be disbursed over 2021-3. This is a lot of money, almost as much as the traditional budget of the Commission.


Member countries will have to use that money to pay for expenditures that the Commission deem a good cause. The first step is that 77.5 billion of that money is already set aside for some pet programs of the traditional budget. The lion’s share (47.5 billion) is earmarked for React EU, supporting ailing industries, which conjures up visions of zombie firms and powerful lobbies. In the end, we end up with 312.5 billion for the grant part Recovery and Resilience Facility (of course, it’s called RRF), which also includes 360 billion for loans as noted above.


Countries will have to apply to the Commission to claim the grants. Here comes the good cause part. With member country approval, the Commission has determined that much of the grants will go to the “green transition” and to the “digital transition”. The green transition, which takes over the Green New Deal championed by President von der Leyen, aims at cutting carbon emissions by 40% by 2030 mostly through subsidies to people and corporations, in contrast with the costless adoption of a more effective common carbon tax. Likewise, the digital transition program aims at boosting relevant technologies largely through subsidies, with a role for research and training. It is a disquieting distant echo of the Barroso Commission’s Lisbon Strategy adopted in 2000 to “make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world” (Amazon was created 6 years before, Facebook 4 years later, without any subsidy). European ambitions can be baffling.


It remains to be seen whether spending for these good causes will deliver what they promise. What is sure is that there is a disconnect between “recovery”, which calls for immediate action, and the two “transitions”, which are long-term objectives. Surely, the title of Recovery and Resilience Facility is a misnomer. Indeed, the title for the all-encompassing 750 billion plan, Next GenerationEU, better defines the underlying ambitions, which are aiming more at the long term than at boosting the recovery. A cynical view is that it does not matter where the money goes as long as it is promptly injected somewhere in the European economy. Even so, it is easy to imagine the scores of committees that will select projects at the national levels to be submitted to the Commission, which will of course set up its committees. With a pot money to be dished out runs into the hundreds of billions, it is equally easy to imagine the pressure that lobbies and individual corporations will apply to get a slice of the humongous cake.


Of course, national governments will weigh in. As explained in Part 2, a key element of the agreement is that some countries will get back more money than they will contribute, others less. A number of criteria will determine how much that means for each country. Here again, it is easy to imagine how each government will try to twist the attribution of grants in its favor, not to mention in favor of its preferred projects and its own politically sensitive good causes. After all, this is what happens with the standard Commission’s budget, which Next GenerationEU is officially designed to boost.

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