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By: Jessica Chai
During the tumultuous European bureaucratic processes in late 2020, European Union countries have finally settled on approving a Covid-19 recovery package. The package is set to be one of the largest stimulus packages ever financed in Europe. Of the whooping €2.018 trillion budget ($2.39 tril), a prominent project makes up a considerable portion of the package. As stated by the European Commission, NextGenerationEU (a landmark €800 billion ($946 bil) recovery instrument composed in July 2020) aims to alleviate Covid-19 damages through targeting research and innovation via Horizon Europe, climate transitions via the Just Transition Fund, and transnational preparedness via rescEU and the new EU4Health program.
Specifically, the European Commission states that it will pay attention to:
Modernizing the common agricultural policy in order to maximize production
Diverting 30% of the EU funds to fight climate change (the highest share of the European budget)
Biodiversity protection
Gender equality
What are the mechanisms of financing?
The European deal is composed of two elements, according to the European Commission. First is the regular EU budget (Multiannual Financial Framework) of nearly €1.1 trillion ($1.3tn), and the aforementioned Next Generation EU fund. While the EU’s long term plan will continue to be financed through conventional revenue sources such as customs duties, Member State contributions based on Value-Added Tax, and contributions based on Gross National Income, some new climate-oriented revenue sources will be added, such as country contribution based on non-recycled plastic packaging waste.
In addition, due to the strenuous budget, the European Commission will borrow on markets at more favorable rates than the many Member States and redistribute the amounts. To raise funds until 2026 for the ambitious project, however, requires 5% of EU GDP (15 trillion dollars as of 2020 according to the official European Commission site), including loans and grants. Therefore, the Commission has committed to a diversified funding strategy. By June 2024, the Commission will propose new sources of revenue such as a Financial Transaction Tax, a monetary contribution linked to the corporate sector, as well as a common corporate tax base.
Unfortunately, the fiscal projections are reliant on the European Commission operating in a favorable financial situation, as most member states’ economies have declined due to pandemic circumstances. Thus, Europe’s leaders generally agree that the European Commission, though acting in the favor of the member states, may incur debt at an unprecedented scale. To account for the large budget, in addition to the potential funding mechanisms mentioned above, the NGEU may be funded by borrowing over six years, with bonds issued at maturities extending to 2058, as Economist finds. Indeed, half of the NGEU budget will be distributed as grants, therefore not adding to governments’ post-Covid-19 debt loads, but breaching what had been a redline over substantial intra-EU fiscal transfers. However, this may set a precedent for future crises to be met with collective debt, although the process it took to get all countries on board certainly was rough due to differing Eurozone policies, Economist furthers.
To soften the blow that this financial project will take on the EU’s already strained budget, investors will be aided with a steady stream of safe assets, so as to not disrupt investor confidence. However, many European politicians do not trust the commission to solely handle the reforms of all member states, therefore Economist finds that Dutch prime minister Mark Rutte has installed “emergency brakes” so that any European government can object to another’s spending plans. While helpful for easing short-term bureaucratic tensions, this may later lead to a spiraling web of complications and delays.
How does NGEU coordinate the separate legal frameworks of 27 countries?
Realistically, the NGEU will take a few years to fully implement, as all 27 member countries need to consent before the Commission can borrow in the name of the bloc. In terms of financing distribution, countries that had been hit hardest by Covid-19 will be the main beneficiaries, namely Spain and Italy, receiving nearly 70 billion euros, as found by Eurostat.
To pinpoint legal checkpoints, the EU Commission has decided on a timeline of official dates for member states to fulfill certain steps of the plans. By December 31st, 2023, legal commitments and affirmations must be made. The European Consilium declares that three years later, December 31st, 2026, will be the deadline for all related payments for efficient plan implementation.
What are some policy changes to look for in the future?
As stated above, the European recovery project includes a diverse array of socio-economic projects. Much of the budget will be directed towards major infrastructure work combined with environmental projects, such as developing the network of recharging stations for electric vehicles. The European Consilium and Economist further state that these sustainable transitions require national plans to allocate at least 37% to climate-related projects and a minimum of 20% to digital alternatives, potentially creating a “vast green stimulus”.
The NGEU will consist of seven distinct programs that devote materials towards different issues, developed by the European Commission. These seven are:
Recovery and Resilience Facility (financial support)
ReactEU (cohesion policies)
Horizon Europe (climate research and innovation)
InvestEU (investment and union policies)
Rural Development (agriculture)
Just Transition Fund (diversification of coal economies)
RescEU (civil protection and humanitarian aid).
While most of these policies will be implemented across the European Union, there is no guarantee that each country will enforce equal regulations, due to the country-specific nature of the EU recovery plan. However, in a broad sense, all countries will unite towards the common goal of strengthening growth potential, job creation, and economic and social resilience.
Discussion Questions
How will Brexit affect the cohesion of European bureaucracy?
Will East European political tensions between the Baltics and Russia hinder the pandemic recovery for West European states?
Will the candidates for the 2024 European elections disrupt the process of implementing NGEU?
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