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750 bn of EU funds to make Member States resilient



           


The NextGenerationEU instrument brings down several walls (photo: European Commission)
The NextGenerationEU instrument brings down several walls (photo: European Commission)
EU. On Tuesday 10 November 2020, after ten weeks of tough negotiations, the European Parliament and the European Council reached an agreement on the long-term budget (Multiannual Financial Framework - MFF) for the period 2021-2027 proposed by the European Commission. Now at a record €1,800 billion, it includes the financing of the NextGenerationEU recovery plan instrument, and the adoption of additional funds amounting to €16 billion for key programmes to help EU countries mitigate the consequences of the health crisis.

The Parliament is being given a greater role in overseeing the financing of the recovery. It gets to meet regularly with the European Commission and the European Council to assess the implementation of the funds made available under NextGenerationEU. "This is a win-win agreement", summarises Jan Olbrycht MEP, co-rapporteur of the MFF. "We have found a solution to strengthen the policies, without violating the agreement sealed by EU leaders in July on the next MFF and the NextGeneration recovery fund".

"We now need to continue our efforts to reach an agreement on the next long-term budget and NextGenerationEU before the end of the year. Citizens and businesses hard hit by the coronavirus crisis need help. Our recovery plan will help us turn the challenge of the pandemic into an opportunity for recovery, driven by the green and digital transition", says Ursula von der Leyen. The budgets have yet to be formally voted by the Parliament and the Council.

The taboo of a Community debt is falling

But nothing was won in advance. When the President of the European Commission suggested, at the end of May 2020, the creation of NextGenerationEU, a temporary €750 billion recovery instrument to finance national programmes in all Member States, she did not meet with unanimous approval. However, on 21 July 2020, it managed to reach a political agreement with the European Council on the package of measures proposed by what it calls the "European Marshall Plan".

"Several walls have come down with a growing budget from 1.1 to 1.3% of GDP and therefore no austerity; a counter-cyclical instrument in the budget that is no longer just an investment budget; the continuation of Community policies; and the fact that the EU has to borrow, because the budget must remain balanced", explains Henry Marty-Gauquié, Honorary Director of the EIB. Borrowing on behalf of Member States to enable them to benefit from the lowest rates granted to its institution breaks a taboo. "We are moving from a pooled debt to a Community debt," he stresses.

Proposed at the end of March 2020, by nine European countries, mainly the three southern European countries most affected by the first wave of Covid-19 (France, Italy and Spain), the creation of "Corona Bonds" will make it possible to rely on the excellent ratings assigned by the rating agencies to the European Union: AAA by Fitch and Moody's and Aaa by S&P. These are the best possible ratings. Thus the EU has been able to borrow at 0.000% and 0.100% for 10- and 20-year bonds respectively. In September 2020, Greece had obtained a rate of 1.23% and France 0.7% for ten-year bonds.

Jacques Delors proposed this idea as early as 1993. The Frenchman, then President of the European Commission, intended to finance future projects. It has since been submitted many times, without success so far. At least not at this level. "There have indeed been precedents with the ECSC (European Coal and Steel Community) and Euratom (financing of nuclear power stations and nuclear waste treatment plants), as well as balance of payments loans, but they were then very limited and very controlled," says Henry Marty-Gauquié.

750 bn for NextGenerationEU

This time, the European Council and the European Commission meet again, while coming up against the dam erected by Angela Merkel. Not only Germany, but also the Netherlands and other so-called "frugal" countries have finally reluctantly opened the floodgates, while the "Corona Bonds" simply risk turning against them. If the main beneficiaries fail to repay, solidarity will force other, more solvent member countries to get their hands on the money. So they risk paying for the bad guys.

"This crisis has shown us that we have internationalised our value chains too much, confusing the value and the cost of what we were relocating. We have given too much to China, and at the same time, we are going to be indebted to the Chinese," notes Henry Marty-Gauquié. NextGenerationEU's €750bn budget includes €390bn in grants and €360bn in loans repayable by the beneficiary countries. They are allocated a predefined envelope according to specific criteria such as the number of inhabitants, GDP per capita and unemployment rate before the start of the pandemic (2015 to 2019). The national plans that they will support are currently (15 October to 31 December 2020) under discussion with the European Commission services, within the framework of the European Semester (cycle of coordination of economic and budgetary policies) to see if they comply with the institution's recommendations. Thus, 37% of expenditure will have to be in line with the environmental objectives set by the EU, including carbon neutrality by 2050, and 20% will have to cover expenditure on the digitalisation of the economy.

Grants will be allocated to the Member States most affected by Covid-19 (mainly Spain and Italy, but also France). 70% of this sum will be committed in 2021 and 2022 and 30% in 2023 to foster the resilience of sectors contaminated by the consequences of the health crisis. For 2023 benefits, the unemployment criterion will be replaced by the decline in GDP in 2020 and 2021.

The European Recovery Plan feeds into national plans

SURE will help Member States to finance their short-time working measures (info: European Commission)
SURE will help Member States to finance their short-time working measures (info: European Commission)
Confronted with economies still recovering from the 2008 crisis, "The European institutions immediately proposed an instruction manual and solutions to the tune of €544 billion. However, the Member States had already taken measures without taking Europe into account, in particular by closing their borders", comments Henry Marty-Gauquié. This first financial support announced in April 2020 and supported by the European Investment Bank (EIB) via a pan-European guarantee fund of €25 billion, opened the door to the €750 billion promised by the EU to irrigate the various schemes deployed by the Member States. Thus France launched a €100 billion recovery plan at the beginning of September 2020. Judged by Euler Hermes to be "balanced, with one third of the effort focused on employment and demand in the short term and two thirds on medium-term measures concerning productive investment and ecological transition", it will be 40% financed by the EU. Italy will contribute €20bn and Spain €80bn.

The launch of the SURE (Support to mitigate unemployment risks in emergency) scheme gives the "the". Announced at the beginning of April 2020 by the President of the European Commission, SURE mobilises €100bn to guarantee, mainly, the short-time working schemes undertaken by the Member States.

To finance it, the European Commission has therefore had recourse to borrowing. On 20 October 2020, it issued its first social bonds for a total of €17 billion. The first €10 billion bond was to be repaid in October 2030, and the second €7 billion in 2040. Both issues were a phenomenal success as the "Corona Bonds" were subscribed at thirteen times the capacity, in one hour. "This shows the great appetite of investors and means that the market was expecting such a response", underlines Rym Ayadi. For the president of Emea (Association of Euro-Mediterranean Economists) and director of Emnes (Euro-Mediterranean Network for Economic Studies), "the important thing is to know how these funds will be used. They must be monitored to ensure that they achieve their original purpose, while reducing the incentives for countries to deviate from the path of fiscal discipline".

"€750bn is not enough!"

Six days after the issue, the first payments were made to Italy (€10bn), Spain (€6bn) and Poland (€1bn). Eventually, these three countries will receive a total of €59.9bn under SURE, including €27.4bn for Italy, €21.3bn for Spain and €11.2bn for Poland. To date, the European Council has approved €87.8 bn for seventeen Member States. Further emissions of up to €100 billion are planned for the period 2020-2021, including €30 billion by the end of 2020.

"The construction of Europe is a success despite the diversity of its Member States. In my opinion, it should serve as a model for other unions. In the face of this common health threat, the EU has shown the world what is possible. Unity is strength in action! This is commendable and should be applauded in every corner of the world", Rym Ayadi said. "This is a historic moment for the EU and I hope it will also be a new beginning for the union", comments Dacian Cioloş, MEP, co-rapporteur of the CFP.

This bond issue marks a first step. A first tranche of €200bn of the NextGenerationEU recovery fund will be raised in 2021. "There is no doubt that the EU will be able to borrow the €750bn," says Henry Marty-Gauquié. While launching, "€750bn won't be enough!". The honorary director of the EIB believes that "to counter a crisis that will last ten years, and while we are over-indebted for thirty years, we will need to foresee between €2,000 and €2,500 billion. The United States is going to spend $4,000 billion."


Frédéric Dubessy


Tuesday, November 17th 2020



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