Analysis
FIPRA Explainer: Breaking down the 2.39 trillion euro European Recovery and Resilience Budget
The big picture of the European Commission’s proposals for the European recovery and resilience after the Covid19 crisis is composed of the long-term EU budget 2021-2027 (1.1 trillion euros) and the recovery instrument “new generation EU” fund running from 2021-24 (750 billion euros).
This is the first time the European Commission has been asked to raise such voluminous funds of 750 billion euros from the capital markets.
This package comes on top of what has already been decided during the confinement period of 540 billion euros for immediate financial support towards Member States, business and labour market [European Stability Mechanism (ESM) 240 billion euros, European Investment Bank (EIB) 200 billion euros, Support to mitigate Unemployment Risks in an Emergency (SURE) 100 billion euros respectively].
These are mainly loans and guarantees, with some grants from SURE. This financial support package was basically to be used during the Covid19 lockdown in order to address emergencies and keep business on hold so it is then easier to restart the economy. The ECB has simultaneously agreed to intervene aggressively on the bond markets in order to provide liquidity up to 1.5 billion euros.
It’s the first time, by increasing the ceiling of the EU budget, that the Commission as an institution and not as Member States should raise those funds with obviously much favorable conditions and very low interest rates. It breaks with a number of taboos and sets the Union on the course of much closer economic governance.
The EU proposal for the “new generation EU” of 750 billion, (500 billion grants and 250 billion loans) together with the 1.1 trillion proposal for the new the Multiannual Financial Framework (MFF) for the periods 2021-2027 and the already decided emergency package of 540 billion, adding all the sums together the total amount of funds on the table is 2.39 trillion. This is a lot of money and it is the first time the European Commission has been asked to raise such voluminous funds from the capital markets.
Breaking taboos & embracing closer economic governance
The most innovative and expansionary element of this proposal is the new generation EU fund. The 750 billion euros should be raised from the capital markets through a “common issuance” by the European Commission using as guarantee the EU budget. It’s the first time, by increasing the ceiling of the EU budget, that the Commission as an institution and not as Member States should raise those funds with obviously much favourable conditions and very low interest rates. It breaks with a number of taboos and sets the Union on the course of much closer economic governance.
From the 750 billion, 500 billion will be given to the Member States as grants and the other 250 as long-term loans. The proposal should be agreed fast and the funds should be transmitted to the real economy as soon as possible. It is interesting that the announcement itself, even before the proposal has been legally adopted, has had a positive influence on the financial markets. The spreads for new Italian debt has been reduced by 40 points immediately in the aftermath of the proposal. Going back will immediately have adverse effects on the markets.
The prediction is that the proposals will be adopted as such. I believe that this will happen basically because there is a fundamental shift in the German position. The Germans have realised that there is no money in Europe for a recovery and that a prolonged depressed economy in the eurozone would threaten the German economy.
The prediction is that the proposals will be adopted as such. I believe that this will happen basically because there is a fundamental shift in the German position. The Germans have realised that there is no money in Europe for a recovery and that a prolonged depressed economy in the eurozone would threaten the German economy.
The only possibility was to raise funds through the capital markets at the European level. If the operation is successful and if the markets see this as a safe asset investment then in practice we have created a “safe asset” at the European level which will help to move faster towards monetary and fiscal integration. That means that rather soon we will expect the completion of the banking union and the capital market union.
Then Europe will be in a different situation where indeed it can have more competitive growth vis-à-vis the other big economic entities in the world (US and China). I don’t believe there is any possibility for certain Member States (like the frugal 4) to stop this proposal. Probably some extra conditionality will be associated in the existing proposal for reimbursing the available funds.
How are the funds going to be transmitted?
The biggest chunk of money of the recovery fund is going to be given to the Member States through the existing and well-defined channels as the structural funds and programmes.
Member States should propose recovery programmes, which will be part of the national stability programmes and will be embodied in the European semester process. This provides for benchmarking and monitoring, probably through a reinforced surveillance.
The stability programmes should be established fast. Member States have to provide them as soon as possible and they have to be inline with the main EU priorities as the green and digital transitions. The private sector should push the national governments to construct as soon as possible those national plans and they should provide their assistance to create specific proposals such as around the green, digital, health, pharmaceuticals sectors.
Some of the funds are going to be spent on big strategic European projects. Those projects most probably will be financed by the strategic investment facility which through leverage is expected to provoke investments of 150 billion. Those European projects will incentivise somehow the Member States to align their priorities for growth at the same priority sectors.
Introducing 5G or 6G broadband all over Europe will help enormously the creation of a digital financial internal market, which is needed to boost the capacity of raising funds, providing liquidity for investments for economic and sustainable growth in the EU. Likewise, the clean transition fund will boost investments in the green economy and energy shifts.
The key is to get the Commission’s proposal to increase the European budget, while new own resources by introducing new taxes will take some more time to find agreement. The repayments of the loans will only start at the end of the next financial perspectives and run for a period of 30 years (2028-2058).
I believe that Germany and France have understood the benefits of creating european synergies and they are willing to move fast. In order to achieve agreement on the proposal, they are going to split the discussions and they are going to concentrate for the moment on the increase of the EU budget ceiling. The repayment discussion will be left for later including the ideas for new sources of income, such as carbon tax, digital tax etc.
The key is to get the Commission’s proposal to increase the European budget, while new own resources by introducing new taxes will take some more time to find agreement. The repayments of the loans will only start at the end of the next financial perspectives and run for a period of 30 years (2028-2058).
Speed is of the essence
There is time for discussion on the best ways of increasing the EU budget’s own resources.
There will also be direct financial support (mainly loans, guarantees and equity) to target areas and companies through the EIB and the European Investment Funds (EIF). Although, EIB mainly provides financial assistance through the national promotional banks they have since the last Commission (the Juncker Commission) directly financed projects above 25 millions.
New financial possibilities are the ones foreseen under the pillar “kickstart the economy” and in particular:
– The new solvency support instrument: aims to unlock 300 billion in investments
– the Upgrade InvestEU: aims at 240 billion in investments
– The new strategic investment facility: to generate investments up to 150 billion in strategic sectors such as green, digital and key value chains in the internal market.
They are also foreseen extra individual funds such as: EU4Health (9.4 billion), Horizon Europa (94.4 billion), External Action (16.5 billion).
It remains to be seen where and how fast the money will be invested. This time the EU understands the importance of making the difference and strengthening its economic performance towards a more competitive european at the global level. There is a sense of urgency also prompted by the forecasts from the Commission and the OECD that look increasingly worrying.
Speed is of the essence. The corporate world should push the EU for accelerated and simplified procedures and ask governments to establish their national plans as soon as possible.
