Blog Post

Three-quarters of Next Generation EU payments will have to wait until 2023

Because of hurdles in designing, approving and implementing European Union programmes, less than a quarter of the €438 billion in grants planned under the new EU recovery instruments is expected to be spent in the next two and a half years, when recovery needs will be greatest. Well-functioning financial markets can help bridge the gap between urgent spending needs and late-arriving EU disbursements, but more effort is needed to frontload EU payments.

By: Date: June 10, 2020 Topic: Macroeconomic policy

The falling government bond yields of Greece, Italy and Spain reflect the market’s positive assessments of the landmark economic initiatives unveiled last month. Following the 18 May Franco-German proposal, the European Commission proposed a new recovery facility, Next Generation EU, which would borrow money in the name of the European Union to finance EU-wide expenditures. This was a bold move. Primarily aimed at cyclical stabilisation, it would involve redistribution across member states: “Action at the Union level is thus necessary to achieve a fast and robust economic recovery in the Union.” Speed is of the essence, and the proposal rightly emphasised the need to put in place and implement the Next Generation EU instrument quickly. However, a major policy challenge remains unsolved: how to bring forward expected pay-outs from the new EU recovery instrument so that they are early enough to support economic recovery from the pandemic-induced recession.

The incorporation of the temporary Next Generation EU into the EU’s next multiannual budget would take advantage of a well-established framework, already subject to various checks and balances. The temporary instrument would add €433 billion in grants, €67 billion in guarantees and €250 billion in loans (measured at 2018 prices) to the €1,100 billion ‘standard’ seven-year EU budget for 2021-2027. Considering the urgency of EU budget support, the Commission also proposed to add €11.5 billion (at current prices) to the current 2020 annual budget, of which €5 billion would be grants and €6.5 billion would be guarantees.

However, the EU budget is a slow-moving machine. As operational programmes have to be designed, approved and implemented, EU budget commitments are typically paid down over many years (see Figures 1 and 2 here). The Commission has emphasised that commitments from the new recovery instrument should be frontloaded. But expected payment amounts in the Commission’s sectoral regulation proposals are somewhat hidden in annexes. Their aggregation reveals that the proposed recovery instrument will be subjected to the same time constraints as usual (Figure 1).

  • Commitments related to the combined €438 billion grant component of Next Generation EU and the 2020 annual budget amendment are indeed frontloaded: 78% of total commitments are scheduled to be agreed in 2020-2022. However, the Commission expects that barely 24.9% of the total new firepower for grants would be spent in 2020-2022, when the recovery needs will be greatest.
  • Moreover, these payment plans presuppose 100% absorption rates, while in practice absorption rates vary: for the 2007-2013 budget, national absorption of available structural and cohesion funds ranged from 48% in Croatia to 95% in Estonia and Portugal.
  • The time profile for the smaller guarantee component (€73 billion) is similar, with 63% of commitments made in 2020-2022, but only 31% of payments.
  • The €250 billion in loans would be fully committed in 2021-2022 and 43% paid out in these two years, supposing 100% demand for loans and, again, a 100% absorption rate.

Since EU debt will be issued to finance the recovery instrument as payments are being made, backloaded payments also imply that the increased supply of safe assets will come rather late.

The Commission expects that barely 24.9% of the total new firepower for grants would be spent in 2020-2022, when the recovery needs will be greatest.

Well-functioning financial markets can help bridge the gap between the urgent recovery needs and the later EU budget pay-outs. Countries could borrow and spend immediately to support their economic recoveries and the EU funds could be used when they will be available later, hence allowing countries to borrow less later. Still, it is crucial to frontload EU payments to support economic recovery.

Recommended citation
Darvas Z. (2020) ‘Next Generation EU: 75% of grants will have to wait until 2023’, Bruegel Blog, 10 June, available at https://www.bruegel.org/2020/06/three-quarters-of-next-generation-eu-payments-will-have-to-wait-until-2023/


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Blog Post

European governance

Does the war in Ukraine call for a new Next Generation EU?

The European Union should take significant economic measures in response to the war in Ukraine, but a new Next Generation EU is not needed yet.

By: André Sapir Topic: European governance Date: May 17, 2022
Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

China’s Covid policy to be year’s largest economic shock

Beijing’s ‘dynamic zero-Covid’ policy could devastate the domestic economy, but the effects will also be felt globally.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 26, 2022
Read article Download PDF More on this topic
 

Blueprint

European governance

Greening Europe’s post-COVID-19 recovery

This Blueprint includes some of the Group’s most prominent voices on the different aspects of the multidimensional issue of green recovery.

By: Simone Tagliapietra, Guntram B. Wolff, Georg Zachmann, Laurence Tubiana, Laurence Boone, Antoine Dechezleprêtre, Jean Pisani-Ferry, Klaas Lenaerts, Thomas Wieser, Ottmar Edenhofer, Mirjam Kosch, Michael Pahle, Ian Parry, Robert N. Stavins, Sabine Mauderer and Tomasz Koźluk Topic: European governance Date: February 23, 2022
Read article More by this author
 

Blog Post

European governance

How has growth changed what countries get from the European recovery fund?

Adjustments to growth forecasts mean some countries will get 10% more than expected and others 20% less in grants from the EU Recovery and Resilience Facility. But the benefits of more quickly rising growth rates dwarf foregone recovery funds.

By: Zsolt Darvas Topic: European governance, Macroeconomic policy Date: February 17, 2022
Read article Download PDF More on this topic
 

Policy Contribution

European governance

The failure of global public health governance: a forensic analysis

The emergence of the Omicron variant in November 2021 was a stark reminder of the high overall cost of the persistence globally of extremely unequal access to vaccines and treatments. What are the reasons for these failures of global collective action?

By: Anne Bucher, George Papaconstantinou and Jean Pisani-Ferry Topic: European governance Date: February 17, 2022
Read article More on this topic
 

Blog Post

Venture capital: a new breath of life for European entrepreneurship?

Whether the dynamism of European venture capital of the past two years can be sustained and kick start a credible alternative to bank finance in the European Union remains to be seen.

By: Maria Demertzis and Lionel Guetta-Jeanrenaud Topic: Banking and capital markets Date: February 10, 2022
Read article Download PDF More on this topic More by this author
 

Policy Contribution

European governance

Does Europe need a Health Union?

This Policy Contribution assesses the rationale for a Health Union. Section 1 provides a historical perspective on health provisions in the European Union treaties. Section 2 gives an overview of the achievements of EU health policies. Section 3 explores the need for an overall health strategy and section 4 identifies the areas that would benefit from closer integration.

By: Anne Bucher Topic: European governance Date: February 8, 2022
Read article More by this author
 

Blog Post

European governance

The puzzle of European Union recovery plan assessments

Identical European Commission assessments that EU countries’ recovery plan cost justifications are ‘medium-quality’ undermine trust in the assessments and raise questions about whether recovery money will be well spent.

By: Zsolt Darvas Topic: European governance, Macroeconomic policy Date: February 8, 2022
Read article Download PDF More on this topic
 

Working Paper

The effect of COVID certificates on vaccine uptake, public health, and the economy

An analysis of the incentive effects of COVID certificates on vaccine uptake, health outcomes and the economy.

By: Miquel Oliu-Barton, Bary Pradelski, Nicolas Woloszko, Lionel Guetta-Jeanrenaud, Philippe Aghion, Patrick Artus, Arnaud Fontanet, Philippe Martin and Guntram B. Wolff Topic: Digital economy and innovation Date: January 17, 2022
Load more posts