Macro Focus: An analysis of the European Commission’s Next Generation €750 billion recovery plan

Key takeaways:

  • The European Commission unveiled a €750 billion “Next Generation” temporary recovery programme (€440 billion grants, €60 billion guarantees and €250 billion loans) over the 2021-2024 period that would come in addition to the €1.1 trillion allocated to the EU’s budget over the 2021-2027 period. The total funding (Budget+ Next Generation plan) will represent 1.5% of the EU-27 GDP over the next seven years period.
  • The Next Generation will prioritise the green and digital transitions as well as additional cohesion funding targeting the EU’s most deprived regions. The bulk of the financing (Grants+ Loans) would be pre-allocated directly to the Members States that were the most severely hit by the pandemic. Three countries (Italy, Spain and Poland) would get €376 billion or half of the total proposed extra financing. Greece, Romania and Portugal would share an additional €100 billion between them.
  • The novelty of the proposal resides mostly in the fact that for the first time in EU history, fiscal expenditure in the form of grants would be financed through the issuance of debt by the European Commission that would be backed by the Member states, along the line of the French-German initiative unveiled a few days before the Commission’s proposal
  • However, the disbursement of the grants would be split across the 2027-2027 with most of the payments concentrated over the 2022-2024 period. This does not fit with the idea of a massive and concentrated fiscal stimulus package in a classical Keynesian sense. As such, it will perhaps increase potential growth in the MT/LT but it will not – per se – close the gigantic output gap that some countries like Italy will face in the coming years as a result of the coronavirus recession.
  • Hence, while the additional funding is most welcome, the countercyclical policies needed to close a massive output gap will still have to be conducted mostly at the Member State level and will require a quasi-permanent relaxation of the EU fiscal compact rules.

Detailed analysis:

After some soul-searching, the initial collective response of the European Union to the coronavirus pandemic took the shape of an emergency support plan comprised mostly of loans for a total of up to €540 billion, to provide immediate financial resources to the EU countries that needed them for the treatment of the pandemic and for the mitigation of its immediate adverse consequences on workers and businesses (cf. the table below). Among these three instruments, the ESM Pandemic support credit line is the most controversial as it reminds investors of the Euro sovereign crisis and carries with it some stigma. In addition, the Commission relaxed states aid rules and activated the general escape clause in the Stability and Growth Pact giving in effect a “licence to spend” to the Member States.

Institution ProgrammePurposeAmount
European Commission SURE (Support to Mitigate Unemployment Risk in an Emergency)Temporary wage supplementation and income support for the self-employed€100 bn
European Stability Mechanism (ESM) Pandemic Crisis support credit line (interest-free loans for up to 10 years and 2% of GDP)Prevention, treatment and healthcare linked to the pandemic€240 bn
European Investment Bank (EIB): Pan European Garantee Fund (EFG)Support lending to small and medium-sized enterprises €200 bn

The Next Generation proposal unveiled on May 26 by EU Commission President Ursula Van der Leyen goes further with a €750 billion recovery fund consisting of €440 billion grants, €60 billion guarantees and €250 billion loans over the 2021-2024 period (at 2018 constant prices). This goes further than the French-German initiative unveiled ten days earlier, calling for €500 billion EU recovery fund that would be financed by market funding. The financial resources for this plan would be raised by the European Commission on the market and assigned to the countries that are most hardly hit by the crisis within the multi-annual financial framework of the European Union. The novelty of the proposal resides in the fact that for the first time in the history of the European Union, this would be financed by issuing a common debt that would be backed by all the EU member states, through the Commission’s ability to draw additional funds above its budget ceiling, in line with the recent French-German initiative. In a way, this is an implementation of the concept of eurobonds that has been floated in European policy circles for a decade since the outbreak of the Euro sovereign crisis in 2010.

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