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Next Generation EU: Will it make such a Difference?

Posted on 13 May 2021
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Next Generation EU: Will it make such a Difference?

 By Alvaro Perez Cardenes, The European Institute for International Law and International Relations.

The Covid-19 pandemic has been an unprecedented crisis in our lifetimes. Governments have had to place strict lockdowns, where non-essential shops have been closed; curfews have been set and even like in the case of Spain, and the population have had to endure several months of confinement, where they could only go out of their houses for essential activities like going to the pharmacy. These measures resulted in a severe economic decline, due to the obvious stop on the economic activity, which was regarded as non-essential by the different governments, which has resulted in the bankruptcies of a significant number of companies that have not been able to endure these hard times, as well as its consequent rise in unemployment. The European Union and its Member States quickly understood the severity of the situation and that acting collectively was the best way for achieving a satisfactory solution for the economic crisis that had resulted from the health crisis that we are currently still experiencing (Facino, 2021). This article will seek to give an explanation about what the Next Generation EU (NGEU) programme (also known as the EU Recovery Funds) consist of. In addition, the different critiques and compliments that these funds have received since they were agreed on will be assessed. Finally, this article will tackle the possible future consequences that these funds could have on further EU integration.

What is actually the Next Generation EU programme?

As just mentioned on the outset, the Covid-19 pandemic has had disastrous consequences for the EU not only as a health issue but also as an economic one. Countries, especially in the southern border of the EU, like Spain or Italy have been experiencing the worst economic situation, which have led to the concerns that the divide between the Northern and the Southern countries of the Union could be widening, which could have precipitated even the collapse of the single market. Therefore, after arduous negotiations between all the Member States and the EU institutions, they came up with the Next Generation EU programme. This programme looks to support the actions that have been carried out by the European Central Bank (ECB), which has been doing and strenuous job of maintaining the liquidity and so avoiding a very real sovereign debt crisis. Not only that but, it also seeks to reinforce the new credit lines that have been accepted by European Stability Mechanism and the European Investment Bank (Feás and Steinberg, 2021). 

The Next Generation EU programme will seek to be a crucial tool for the economic recovery of the EU by distributing around €800 billion of EU funding over the next five years. In order to do that the European Commission will issue an estimated €750 billion of common debt, which will be backed by all the different members of the Union, which is one of the most important aspects of the deal and some have considered it as a crucial step for further integration. The Member States have decided to do this because the Commission offers most of them the possibility of borrowing money at a cheaper rate than if they were borrowing it themselves. The funds will be distributed in two ways. Firstly, it will be issued as grants, which is money ‘donated’ to the different countries and secondly as loans which is money that the different members will have to repay to the EU with interests. The European Commission has planned to repay this debt through new sources of revenue, for example on behalf of the EU it will issue bonds on financial markets. In addition, there will be other forms of revenue for the EU, which will take the form of European taxes like a plastic levy or tariffs on highly polluting products, which not only seek to raise money for the European Union, but also act as an incentive for companies and consumers to move towards greener solutions (Arnold and Fleming, 2021; Feás and Steinberg, 2021; Facino, 2021). The NGEU will be integrated into the EU’s budget, as it is expected that this framework will enable the funds to be distributed successfully (Darvas, 2020). 

These recovery funds will be distributed among the different Member States taking into account different criteria like population or the economic situation in which they find themselves in, for instance Spain expects to receive around €150 billion from the Next Generation EU programme plus €80 billion in transfers. Nevertheless, before receiving any of the funds these nations will have to submit a deeply detailed plan explaining where and how they will be spending this money, as well as, the provisions that will be put in place in order to ensure that the money will not be lost for example, Spain and Italy must include improvements to the government procurement rules, which would safeguard the well-expenditure of the funds (Arnold and Fleming, 2021; Feás and Steinberg, 2021). Not only that but, the different Member States will have to take into account their Country- specific recommendations (CSRs), before doing their expenditure plan. These CSRs look to help the nations be able to absorb the huge amount of investment that will come through the NGEU programme and that they are able to implement these funds with a focus on recovering from the Covid-19 pandemic by investing in green and digital projects, as well as reforms to improve the efficiency of the public sector, which the EU consider key areas for the economic future of the Union. The CSRs obviously vary between countries, for instance Italy received four CSRs. Firstly, they must focus on the pandemic, maintain the economy and back the recovery. Nevertheless, when the economic conditions enable Italy, it should ensure the sustainability of its debt. Secondly, Italy must produce forms that ensure income replacement and social protection, as well as the preservation of jobs. Thirdly, it must grant liquidity to the real economy and boost public and private investment in green and digital areas like energy, research and innovation, sustainable public transport, waste and water management or digital infrastructure. Finally, Italy needs to enhance the efficiency of the judicial system and the effectiveness of its public administration (Arnold and Fleming, 2021; Darvas, 2020).

Is it that simple?

Even though that the Next Generation EU programme has been widely seen as an unprecedented step forward by the European Union in a time of crisis, it has also received significant amounts of criticism. Firstly, some have put into question the effectiveness of this program, due to the fact that some of the countries which are in line for receiving the biggest amounts of help are also countries, which in the past have shown to be unable to properly take advantage of EU funding. Italy and Spain are the countries, which will be the largest beneficiaries of the NGEU. Nevertheless, between 2014 and 2020, Spain was only able to implement 39% of the funds that had allocated from the European Structural Investment Funds (ESIFs), while Italy was not much better as they were only able to absorb 40% of the funds during the same period. Therefore, the question arises that if these countries have not been able in the past to take advantage of EU instruments like the ESIFs, how will they be able to absorb the funds that will be allocated through the NGEU, which are far greater in amount (Darvas, 2020). What is more, even if Commission executive vice-president Valdis Dombrovskis, maintained that a “robust system” will be put in place to ensure that the money will be spent correctly, it has been widely questioned if this will be enough to ensure that governments in countries like Hungary or Poland will not take advantage of these funds and use them to keep going against the rule of law in their home countries. There have been already examples for instance of the Hungarian government being able to use EU funds in inappropriate ways, as the EU’s anti-fraud office asked the government in Hungary to repay money which was used for a metro line as they argued that there were clear concerns of fraud and corruption. Given the size of the funds it is clear that the EU will have a titanic mission ahead of monitoring the use of this money, therefore, these concerns are very legitimate, as a misuse of the funds by any Member State would severely damage the EU´s image among the whole population of the Union, as well as it would create an incredibly negative precedent, which would be very difficult to overcome once the next crisis arises (Arnold and Fleming, 2021). Not only that but, Hungary has already given very serious concerns as Prime Minister Viktor Orbán has stated that he is planning to spend a significant amount of the money in modernising Hungarian universities, but once a closer look is being taken into this proposal, it seems that he is planning on funding universities, which are under the control of foundations that are run by people close to him (Chrysoloras, 2021).

Nevertheless, this is not the only criticism of the Next Generation EU programme, as there are several concerns about the speed of the decision-making that will allow the funds to reach the different Member States in time. Krzysztof Bledowski, who is the council director and senior economist at the Manufacturers Alliance for Productivity and Innovation argued that especially if compared with the United States, he expects the NGEU to be too slow to make any decisive changes, as for instance the 2021 American Rescue Plan Act only took two months between the moment it was proposed to the moment that it was ratified, whereas for the NGEU already eight months have been spent in the ratification process, and there are still some Member States that are yet to ratify it. Therefore, he has argued that he expects that by the end of 2023 only a quarter of the funds will have been able to reach its recipients. What is more, he has stated that the goals of the program are too broad to be able to make any key changes to be significantly effective in any of the areas which it plans to act on (Dempsey, 2021; Valero, 2021). Not only that but there have also been people who have put into question the legality of this program, as for instance Bernd Lucke professor at Hamburg university and co-founder of Alternative for Germany (AfD) brought a complaint with 2,280 fellow German citizens to Germany’s Constitutional Court against the debt-financed recovery fund, which resulted on President Frank-Walter Steinmeier not being able to sign off on legislation amounting to Berlin’s consent to set up the fund, as the complaint needed full examination. Professor Lucke argued that since the EU is meant to present balanced budgets, allowing the European Commission to borrow money collectively would result in pooling the debt risk, effectively transforming the EU into a debt union which according to him goes against the EU treaties (Von Der Burchard, 2021).

What impact will the Next Generation EU have?

Nevertheless, even though the legality of the NGEU have been put into question by Professor Lucke among others, experts like Lucas Guttenberg deputy director of the Jacques Delors Center and Thu Nguyen policy fellow on EU institutions and democracy at the Jacques Delors Center have argued that the Next Generation EU programme will go ahead as planned, as they believe for instance the German Constitutional Court will not go against a decision that not only has a solid economic and legal basis but that has also been accepted by all the EU governments and that cancelling it could have disastrous effects for the whole of the European economy (Dempsey, 2021).

What is more, several economists have argued that this program will have a decisive impact in the recovery of the different EU economies. Some have argued even that the predictions that the EU and the different Member States have given are particularly conservative and that they expect the EU countries to experience an even greater growth than what the predictions have said. The credit rating agency S&P Global Ratings forecasted that the €400 billion worth of grants, will enable a boost in the GDP of between 1.5% and 4.1% over the next five years. Not only that but, Marion Amiot, senior European economist at S&P Global Ratings argued that the impact of the NGEU could be even greater since the impact of the €386 billion of EU loans and the probable increase in public sector reforms also needed to be taken into account. The International Monetary Fund forecasted a 0.75% boost in the GDP, however they stated that: “the real GDP impact could be twice that or more if the money is well spent and accompanied by needed structural reforms”. Greece is one of the countries that is expected to benefit the most from this program, as the Greek government have predicted that their economy will experience a 7% increase in its GDP by 2026. Nevertheless, this is a very conservative estimate according to some, as Morgan Stanley have argued that the Greek economy probably will experience an increase closer to 12% and S&P has estimated an increase reaching even 18%. As mentioned before, there have been countries like Italy or Spain who have struggled to absorb their allocated EU funding in the past, however, it has been argued that EU countries will not have so many problems with the NGEU as they tend to find it easier to allocate the funds in periods of crises, for instance in the six years after the financial crisis of 2008, the absorption rate of EU funding was at around 90% (Arnold and Fleming, 2021). What is more, some have argued that the Next Generation EU program is already producing tangible benefits in EU countries, for example Laurence Boone, chief economist of the OECD argued that the recovery package “has allowed countries like Italy and Spain to have a strong investment plan. I’m not sure that would have been possible without [it]” (Sandbu, 2021).

Nevertheless, the NGEU is not only important for the economic impact that it is forecasted to have, which will be crucial for the improvement of the EU economies, especially of the countries that have been struggling since even before the Covid-19 pandemic, but it is also crucial due to the fact that if it succeeds it could be a key steppingstone to much needed integration (Tamma, 2021). Crisis have been one of the main engines for European integration, the eurozone crisis led to Member States surrendering some of their sovereignty with the goal of supporting the common currency and the migration crisis that the EU has suffered led to the expanded role of Frontex (European Border and Coast Guard Agency). Therefore, the crisis that has appeared as a result of the Covid-19 pandemic could lead to an important impulse towards fiscal unity at the EU level. The NGEU is an important step towards it, as it has enabled the EU to establish a tax on plastic, which could be the germ of a common European taxation (Bradford, 2020). Many have argued that fiscal integration is the fragment left for completing the EU’s economic and monetary union, showing the importance of this program (Dempsey, 2021). However, this is not without risks, due to the fact that if the Next Generation EU program is deemed a blunder it could severely hinder the possibility of integration. It is clear that the NGEU will have a decisive impact in shaping not only the short-term but also the long-term future of the European Union, thus it is paramount for the European Commission, which will be talking the lead role in this area, to be able to carry out an effective job that silences the critics, especially due to the fact that if it is not able to do this and instead fails in this tasks it will have severely damaged its image for the years to come (Pisani-Ferry, 2020).

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