Generali Group

                                 

          23 July 2021 - 10:45

          Next Generation EU: the European political-economic response to the Covid-19 emergency

          The EU debt-sharing scheme will support the European recovery by focusing on the resilience of member states and it will be crucial to avoid the economic fragmentation within the European Union

          Covid-19 is the latest in a long line of crises that the European Union has witnessed in recent decades. From the oil shock of the 1970s to the great recession of 2007-2008, Europe has often faced seemingly challenging issues.

          Unlike previous crises, however, this time the EU has responded adequately, bringing a recovery tool to the table – the Next Generation EU – that, for the first time, includes a European recovery plan and a EU-wide debt-sharing scheme. It is based around a stimulus package worth more than 2 trillion euros at current prices – the EU's long-term 2021-2027 budget (1.2 trillion euros) supplemented by more than 800 billion euros – with which the EU will secure resources for its policy priorities, such as digitisation and the “Green Deal”, and aims to support recovery by investing in regions, farmers, businesses, researchers, students and citizens in general.

          Most importantly, the Next Generation EU (NGEU) will issue large volumes of common EU debt instruments on global markets: this is a temporary measure to deal with the pandemic, but in coming years it could help accelerate the development of a more ambitious and integrated European fiscal policy. The EU will issue Eurobonds through the Next Generation EU and the SURE programme to finance loans and subsidies to member states. The bonds will be used with goals and methods largely decided at Community level, and will favour the countries that have suffered most from the pandemic.

          The Next Generation EU envisages common guidelines that focus on the strategic priorities in which the EU aims to invest in the coming years and decades, namely the green and digital economy, youth, education and research.

          With the 2021-2027 Multiannual Financial Framework, the NGEU could be the first step towards a permanent increase in the size of the EU budget, although this would also require a thorough reform of the European Stability Mechanism (ESM), which in turn would require a reform of the treaties, something that is not yet on the cards.

          Nevertheless, it would be unfair to deny that the EU has responded effectively to the pandemic, perhaps more so than ever before, and certainly more effectively than during the European sovereign debt crisis of 2008.

          While the European Economic Recovery Plan – approved at the end of 2008 at the height of the crisis – was only intended to coordinate national fiscal stimulus packages financed by each member state, the Next Generation EU establishes a joint financing model to support public spending and reforms in the EU.

          Under the final agreement reached in July 2020, the European Commission is authorised to raise up to 750 billion euros on the capital markets. These funds can be used to provide loans of up to 360 billion euros and grants of up to 390 billion euros. These will be disbursed by the end of 2026 and repaid no later than 31 December 2058.

          The NGEU issuance will increase the EU’s outstanding debt by roughly 15-fold, constituting the largest ever euro issuance at supranational level. Although the loans will be repaid by the beneficiary member states, the European Council has decided to reform its own resources system and ensure that grant repayments are covered by contributions based on gross national income and by new EU resources.

          A coordinated European policy response to Covid-19 is essential to avoid imbalanced recovery and economic fragmentation, while promoting economic resilience in member states.

          The EU’s response to the crisis also has implications for the future planning and implementation of the European governance framework. First, while expansionary fiscal policy is needed to support recovery, it is important that future fiscal rules effectively support the reduction of high public debt in good times. Second, the Next Generation EU constitutes a new and innovative element of the European fiscal framework, as it will result in the issuance of a considerable amount of supranational debt in the coming years. It has also signalled a political willingness to design a common fiscal instrument when the need arises.

          This innovation, although a one-off, could also set an important precedent for the Economic and Monetary Union, which still lacks a permanent budgetary capacity at supranational level for macroeconomic stabilisation in serious crises.