The Recovery and Resilience Facility could remain a one-off crisis measure—or point to a permanent EU fiscal arrangement.
When the pandemic hit in the spring of 2020, not only were individual European Union member states quick to react but the EU as a whole swiftly changed gear. Fiscal and state-aid rules were suspended, the European Central Bank launched an emergency bond-buying scheme, the SURE programme was initiated to refinance national short-time-working schemes and the European Stability Mechanism was expanded.
But it was clear that this was not enough to undergird recovery and that a medium-term support programme was needed. National capitals were anxious not to repeat the ‘blame game’ of the eurozone crisis of the early 2010s and to reduce over-reliance on the ECB, which had taken most of the policy strain after 2012 (with the open-ended, ‘whatever it takes’ commitment by its then president, Mario Draghi).
Helped by some favourable political changes—not least a change at the German finance ministry—and the perception of the coronavirus as a common shock, in July 2020 policy-makers launched NextGenerationEU. It was a blueprint for a recovery, rather than an austerity programme. Its cornerstone, the Recovery and Resilience Facility (RRF), was subsequently agreed—after difficult negotiations and hold-ups, not least because of rule-of-law issues in Poland and Hungary—by the end of 2020.
The articles in this series have looked at different aspects of the RRF, including its funding, the substantive contribution of national recovery plans and the political processes behind their formulation. This concluding contribution steps back to consider the historical significance of the facility. Is it a hastily concocted stop-gap or does it mark a sea-change in European integration? This requires exploration of its impact so far and its future potential.
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Suggestions that the RRF will take its place in the history of European integration typically start with its sheer size, with a headline figure of more than €670 billion. This is spread across all countries and five years, however, and less than half comes as grants. Thanks to the efforts of the four ‘frugal’ member states (Germany having defected from that group), loans predominate, their take-up limited so far. Rather than sheer quantity, it is the structural features of the RRF which can lay claim to be path-breaking.
The European Commission is authorised to raise loans on international capital markets on behalf of the EU and make resources available to member states. While this is not entirely unprecedented, it is the first time it has been done for all member states and on anything like such a scale: unlike national government budgets, that for the EU has always been fully funded. Servicing of RRF-borrowing is fully Europeanised, folded into the overall EU budget.
In contrast to the eurozone crisis, the RRF is heavily redistributive, making a substantial macroeconomic impact in lower-income countries and those worst hit by the pandemic, while representing merely an add-on for those with less pressing needs. In Greece, Romania, Croatia and Italy the RRF allowance (grant plus loans requested) amounts to more than 10 per cent of annual gross domestic product.
The bonds issued create a lasting safe asset for the EU—final repayment will not occur until 2058—which can be bought and held by the ECB and domestic and foreign financial actors. They are ‘euro bonds’ by any other name. This will go some way to stabilise the financial structure, easing the ‘doom loop’ between national banking systems and government budgets: these bonds will not be subject to rising ‘spreads’—their excess over benchmark rates—in times of financial tension, shielding government finances (from interest-rate spikes) and bank balance sheets (from severe capital losses).
Lastly, the requirement to submit, and obtain approval for, national recovery plans, as well as the linking of disbursement to the achievement of agreed milestones, gives the European institutions a lever with which to exert influence over important national economic policies. In all these respects the RRF undoubtedly marks a sea-change.
Overblown claims of a ‘Hamiltonian moment’ for Europe, comparable with the assumption of state debt at the federal level in the United States after the war of independence, should however be treated with caution. Most fundamentally, existing public debt has not been ‘federalised’ and the RRF is explicitly conceived as a one-off response to the Covid-19 crisis.
A fiscal Europe this is clearly not—at least not yet. Nor, importantly, does it provide for investment in EU-wide public goods, such as cross-border rail or electricity links. It is a federal support programme for national initiatives, albeit lightly co-ordinated around common goals, such as decarbonisation and digitalisation.
This risks diseconomies of scale and duplication, while the reliance on national actors raises concern about misuse of funds, which in turn entails reputational risks. The medium-term EU budget (2021-27) was also scarcely expanded or reprioritised. Whether this can change for the next Multiannual Financial Framework starting in 2028, with the incorporation of new ‘own resources’ on the revenue side, is a key open question.
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At least as important as the big issues of principle is how the RRF has been rolled out over the last year and a half. So far, on the surface, the picture is encouraging but these are early days.
Most of the national plans were submitted by the deadline of May 2021. In Hungary, Poland, Bulgaria and the Netherlands, submission was however delayed and hold-ups continue with Hungary and Poland (though agreement with Poland, facing huge challenges because of the influx of Ukrainian refugees, may be imminent.) Thirteen per cent of the financial allotment in national plans has been made available as ‘pre-financing’ and the biannual payments available on passing reform and investment milestones have started to be approved and transferred (Italy received €21 billion in mid-April, for instance).
On the financing side, the commission has encountered a healthy appetite from investors for RRF-related bonds. Bonds have been issued across the yield curve (from three months to 30 years). Almost one third have been green bonds, in high demand among investors seeking assets addressing ‘ESG’ (ecological, social and governance) concerns.
Interest rates on the bonds have only slightly exceeded those for benchmark German Bunds and are roughly in line with French rates. An initial spread on Bunds of around 0.2 percentage points has widened to around half a point as interest rates have been swept up, yet it has remained much smaller than spreads on some national bonds. Last autumn Italian (ten-year) Bund spreads were scarcely higher than for EU bonds but they have widened sharply to more than two percentage points. Italy’s use of EU funding, rather than issuing more national bonds—as it would otherwise have had to do to finance public investment—has therefore considerably sheltered it from the risk of interest-rate hikes.
If the RRF were fully tapped by the member states—they all took advantage of their potential allotment of loans—commission borrowing on financial markets would need to be on a par with that of the largest sovereign borrowers (Italy, France and Germany) over the next few years. Member states have until August 2023 to decide on their demand but, apart from substantial loans taken up by Greece and Italy, they have been reticent. As of the end of February, €224 billion remained untapped.
Of course, those whose national borrowing costs are lower than for RRF loans have no financial incentive. Countries such as Spain could benefit from lower borrowing costs yet have taken a wait-and-see position. Unused, the availability of the loans sends a signal to markets, acting as a kind of insurance against shifts in sentiment. With interest rates now rising and spreads widening once more, it is likely more governments will avail themselves of RRF loans.
It is not possible at this stage to analyse the effectiveness of the projects coming into being on the ground by virtue of RRF funding. Questions have been raised as to whether some member states, particularly where RRF finance is very substantial as a share of GDP or investment, will be able to absorb the funds in productivity-enhancing ways. In other countries RRF-labelled projects have—not least due to the time pressure to deliver national plans—partially substituted for endeavours national governments would in any case have taken and financed from national means. Time—and further research—will tell.
One thing is though clear: possible extensions to the RRF are contingent on the emerging evidence showing that, overwhelmingly, European money has been well spent by national actors. Signs of wasteful spending, not to mention corruption, would be inimical to efforts to extend the programme.
If the assessment of the RRF so far is broadly positive, what about the facility’s potential role in the future?
The medium-term EU budget and the question of ‘own resources’ will be crucial. Discussions are at various stages on possible sources of genuinely European financial means: the carbon-border-adjustment mechanism (a legislative proposal is due this year), a tax on digital services/companies and ecological taxes such as on plastics or aviation fuel. If agreement cannot be reached, member states will have to increase their national contributions to the EU budget from 2028—this ought to focus minds. Strategically, a greater role for own resources would be significant in weakening the juste retour mentality—the obsessive national bookkeeping of (supposed) direct financial benefits and costs of EU membership—in favour of the much more important question of what Europeans can best (or even only) do together.
The implications of the RRF for policy co-ordination will be a further area of debate. Apart from the agreed thematic foci, such as decarbonisation, member states are to invest and reform in line with their country-specific recommendations (CSRs) under the European Semester. To date, this appears to have been a low bar: the commission does not appear to have threatened to withhold approval for any national plan on this criterion.
Some see this as an opportunity finally to give some teeth to the CSR process—and to the Macroeconomic Imbalance Procedure to which it is related. Others are concerned about the potential for heavy-handed interference from Brussels in national policy-making. The sensible solution is, on the one hand, to limit recommendations to issues which are clearly of common interest (where there are cross-border spillovers) while, on the other, bringing more pressure to bear to ensure that national policies avoid freeriding and duly consider broader European requirements. Additionally, access to RRF funding can be used to ensure commitment by member states to universal norms, such as the rule of law.
Following this logic, the principles underpinning the RRF could be used to unblock one of the thorniest problems in economic-governance reform. There is widespread agreement that the eurozone fiscal rules need to change to ensure that they do not unduly curtail public investment.
Numerous economically sensible proposals for some version of a ‘golden rule’—the principle that public investment, unlike current spending, ought to be deficit-financed—have been proffered. But these have foundered politically on a lack of trust between member states, reflected in argument over the appropriate definition of public investment to be exempted from spending constraints under the fiscal rules.
Providing European funding for national public investment along the lines of the RRF (but likely with a lower degree of redistribution between countries) elegantly solves this problem: member states have to receive ex ante approval of spending projects from the commission and ultimately their peers on the Council of the EU. And the idea goes beyond the golden rule in that all countries could benefit from low interest rates to finance their investment. I expect this avenue to be explored in commission proposals in the near future.
This brings us, finally, to the issue of whether the RRF should remain a one-off crisis response or whether Europe needs additional, dedicated ‘facilities’—up to and including a permanent one. There is certainly no shortage of challenges broadly on a par with that of emerging stronger from the pandemic.
The fall-out from the war in Ukraine—with the need to shift away from Russian fossil energy (RePowerEU) while sticking to the decarbonisation agenda, together with the huge reconstruction needs in what is set to become a (large) EU member state—is an obvious example. But greater foreign-policy and defence co-operation more generally requires that policy-makers’ good intentions be backed by financial means. At a minimum, some of the unused borrowing potential of the existing RRF should be repurposed, although with caution given its insurance function for potentially vulnerable countries.
More promising would be to seize the opportunity of the ‘polycrises’ facing Europe to set up additional RRF-type schemes (again, without necessarily implying such a high degree of redistribution between countries). They would offer an institutionally well-founded way forward to address these crucial challenges, in a way that promotes cohesion and gives Europe a shared purpose and the means to achieve common goals.
There is an urgent need to invest in genuinely European public goods, such as transport and (renewable) energy interconnection between countries. A permanent borrowing capacity for the EU to finance such projects and a substantial stock of liquid safe assets, like US Treasuries, serviced by European revenue sources—now that really would be a Hamiltonian moment for the European project!
This is the last of a series on the National Recovery and Resilience Plans, supported by the Hans Böckler Stiftung