Analysis: Should We Celebrate 750 Billion from the Recovery Fund?

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In the European Union, they love big and impressive announcements. Especially when the purpose is to create the right atmosphere for them to act, as in the first phase they are simply at stake in the complex field of negotiation, above and below the table, which we eloquently call the consultation and decision process.

And this applies to the recovery package announced again by the European Commission, which is still on track to reach its final form, despite the impetus given by the Franco-German agreement that there may be extensive borrowing even at European level, a kind the first cowardly step towards “reciprocity of risk”, a concept that for years was a real curse within the European Union.

Against this background – and to get a picture of the real institutional steps – what the European Commission announced on Wednesday 27 May is the plan drawn up by the European Commission to tackle the acute economic crisis and the recovery of the European economy. In particular, the Commission announced its € 750 billion proposals for the Next Generation EU program, which it proposes to finance by borrowing from the EU itself, which is added to the already announced € 540 billion package (the combination between in the SURE program for the job subsidy, the ESM’s extraordinary credit line for the pandemic and the guarantees for borrowing from the European Investment Bank) and the 1.1 trillion euros of the 2020-2027 Multiannual Financial Framework (as it is now the official name). the European budget).

This proposal must be approved by the Member States and the European Council and, of course, be implemented.

Analysis: Should We Celebrate 750 Billion from the Recovery Fund?

The magnitude of the crisis in Europe

The European Commission has accompanied the announcement of the plan with a Staff Working Document in which it tries to assess in detail the financial needs of the European Union. This document is of particular value because it gives a true picture of the magnitude required to restart the European economy and at the same time allows us to better see any potential effects of the proposed package.

The starting point is the Commission’s well-known estimate that in the second quarter of 2020 the dynamics of the shrinking European economy will reach 14% (compared to the corresponding quarter of 2019) and that we are heading for a decline of 7.4% in total for 2020. , which will only be partially covered by an estimated 6.1% recovery in 2021. In fact, he recalls that the two “negative scenarios” added to the main one and based on the possibility of a “second wave” of the pandemic predicted an 11% recession. or even 16% for 2020.

The working text, stressing that the recession will be shared unequally, with European countries suffering much more, recalls that so far there have been major discrepancies in the packages announced nationally, which also reflects real economic discrepancies within the EU. Typically, the aid programs approved by the member states (including the UK) on May 1 reached 1.9 trillion euros, but the distribution was uneven: Germany has announced a 996 billion program (half of the aid given to Europe and equal to 29% of German GDP), France 324 billion (13.4% of French) GDP), Italy 302 billion (17% of Italian GDP), while other countries have announced much smaller programs. This finding reflects the very large deviations that European countries have in terms of their real resilience in the face of the crisis.

The text of the paper also assesses the impact of this recession on liquidity and capitalization of companies and attempts to make an assessment of what the European economy’s investment needs are at the moment. It initially estimates that the recession will create a decline in investment of € 846 billion in 2020 and 2021. It adds to the investment needs arising from the two EU strategic plans, the green transition and the digital transformation, which are estimated at 595 billion euros for the next two years. In addition, they estimate the gap to be covered in public investment spending at around € 100 billion. In this context, they estimate that we are talking about total investment needs in the two years 2020-2021 of 1.5 trillion euros, in addition to the basic needs that were estimated in the previous Commission forecast. In addition, it is estimated that 135 billion euros will be needed for employment programs in 2020, an additional 150 billion euros for unemployment benefits by 2027 and 70 billion euros in additional spending on health systems. In this context, they make an estimate of an additional 192 billion additional annual investment needs in the social infrastructure.

As for state budget funding, the commission’s working text estimates that the Member States will need an additional € 1.7 trillion in loans by 2020 and 2021, which will be added to their basic lending needs, which were estimated at 3, 7 trillion euros. So we are talking about a total loan of 5.4 trillion euros.

Analysis: Should We Celebrate 750 Billion from the Recovery Fund?

The possible impact of the measures

The working text makes a fairly optimistic assessment of the impact of the overall package (recovery program and multi-year fiscal framework). He believes that the total volume is equivalent to 5.4% of the annual GDP of EU27 or 1.35% for each year, but will have multiplier effects. He estimates that it will increase EU GDP by 1.75% in 2021 and 2022 and up to 2.25% in 2024, that in the medium term it will create 2 million in the EU while emphasizing that because of its bulk finances public investment. This means that it has significant multiplier effects and will ultimately lead to a reduction in the debt / GDP ratio, especially in countries with the largest debt problem.

The issue of funding

The open question remains that of funding. The Commission’s proposal from the outset was for the funds for the Next Generation EU to be covered by a loan that the European Union would make as such, exceptionally. The joint French-German proposal of Merkel and Macron also moved in this direction.

In this regard, there have been objections from countries such as the Netherlands, Sweden, Denmark and Austria, which have traditionally been opposed to the conversion of the EU into a debt union. The objections focused on two points: not to have a permanent mechanism and the amounts to be given to the Member States as loans, so as not to transfer the burden to taxpayers, unlike countries that were pushing for Euro-bonds that would finance subsidies and which would gradually lead to a recyclable euro-loan.

The commission tried to find a compromise, clarifying that it was an extraordinary mechanism. He is moving in two directions. First, the 250 billion in the recovery fund will be given in the form of loans, so their repayment will be guaranteed that way. With regard to the remaining amount of this extraordinary European loan, the Commission is proposing an extension of the “EU’s own resources” limit. This will take the form of an extension of the limit on the amounts absorbed for the budget of up to 2% of the gross national income of the EU, through an amendment to the relevant decision. This extended margin will, among other things, guarantee the loan, while it will return to the previous limits when the amounts have been repaid. According to the Commission, this corresponds to a temporary and extraordinary increase in “own resources” by 0.6% of European gross income. In addition, it proposes to the EU’s existing “own resources”, ie national contributions, duties and contributions on the basis of value-added taxes, to increase resources from the expansion of the air and pollutant trading system, in addition. companies benefiting from the single market, the cross-border carbon adjustment mechanism and the digital tax on large companies.

Analysis: Should We Celebrate 750 Billion from the Recovery Fund?

Negotiations are now underway

There will be a lot of negotiation around these proposals. This will also guarantee that the measure will be temporary and therefore we do not have a “Hamilton moment” and a step towards the depth of unification, but also the cost of repaying the loan, as the expansion of national contributions is always a matter of controversy within EU (which has also led to delays in negotiations and a multi-year fiscal framework).

Countries such as the Netherlands, which have a “net contribution” to the budget (what they give us more than they receive) are reacting to the expansion of the burden.

On the other hand, countries with a high debt burden and high costs from the crisis do not want tools that only imply additional borrowing but also want a clean subsidy.

The Commission’s own proposal for a possible distribution seems to take into account the needs of countries that have had the greatest costs from the pandemic, such as Italy and Spain. However, it is clear that other countries will also demand significant sums of money, and the distribution will be the subject of negotiations, a negotiation that should be done by the President of the European Council, Charles Michel.

At the same time, for the weaker countries, such as Greece, which cannot unfold national packages depending on them e.g. of Germany, every euro of additional subsidies counts, so they will push for relatively quick completion and activation of the relevant measures.

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