The recovery fund faces a tricky passage by Christian Odendahl and John Springford
The Commission’s proposed recovery fund is macroeconomically meaningful. The ‘frugals’ should focus less on negotiating away the transfers to harder-hit countries, and more on how the money is spent. The European Commission has turned the €500 billion EU recovery fund proposed by Angela Merkel, the German chancellor, and Emmanuel Macron, the French president, into a €750 billion front-loaded grant and loan programme integrated into the EU budget. This could be a historic step forward for the EU. For the first time, the EU is likely to agree a common fiscal response to a severe economic shock that goes beyond the pre-existing EU budget, which takes no account of the economic cycle; and the response is based on EU-issued debt, rather than immediate payments by member-states. The plan recognises the pain that COVID-19 has imposed on some parts of Europe, especially in the south. But the forthcoming negotiations will be tricky: it is unclear how much spending will be allocated to hard-hit regions and sectors, and how much will benefit increasingly authoritarian governments in Hungary and Poland. There is a big risk that the gap between northern and southern Europe will widen as a result of the COVID-19 crisis. Further divergence would undermine the single market, bolster anti-EU sentiment in some countries, notably Italy, and make the EU even harder to govern than it is now. Designing the recovery fund to avoid further divergence is the key challenge for the Commission.
Ursula von der Leyen announced the Commission’s proposal on May 27th. The Commission wants sizeable grants for countries that are poorer and hardest hit by COVID-19. These grants would be paid out in the first four years of the next EU budget period, between 2021 and 2024. Under the Commission’s plan, the EU would borrow collectively at very long maturities (with bonds maturing between 2028 and 2058). Member-states’ share of repayments would be determined by their national income per capita a long time in the future. Frontloaded grants of €500 billion – roughly 3.5 per cent of 2019 EU-27 GDP – are economically significant. Italy would receive around 1 per cent of GDP per year to spend between 2021 and 2024, complementing its own national stimulus. But it would not add to Italy’s public debt, as the repayment would be a collective responsibility. The recovery fund will not turn the EU into a fiscal union, but if member-states agree to the Commission’s proposal, investors will be more confident that the EU will stand together in a severe crisis, both now and in the future. As we explained in a recent research paper, there are several reasons why COVID-19 will be more damaging to the economies of southern Europe. Italy and Spain were hit first by the