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: European Macroeconomics & Governance

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 about event More on this topic
 

Upcoming Event

Jul
7
14:00

An EU budget for Europe's future with Johannes Hahn

How do we make the EU fit for future?

Speakers: Zsolt Darvas, Johannes Hahn and Mehreen Khan Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic
 

Policy Contribution

The financial fragility of European households in the time of COVID-19

The concept of household financial fragility emerged in the United States after the 2007-2008 financial crisis. It grew out of the need to understand whether households’ lack of capacity to face shocks could itself become a source of financial instability.

By: Maria Demertzis, Marta Domínguez-Jiménez and Annamaria Lusardi Topic: European Macroeconomics & Governance Date: July 2, 2020
Read about event More on this topic
 

Past Event

Past Event

Impact and additionality assessment in the time of COVID-19

Understanding the impact and additionality of policy interventions.

Speakers: Ugo Albertazzi, Benoit Campagne, Andrea Conte, Zsolt Darvas, Maria Demertzis, Francesco Di Comite, John Earle, Matteo Falagiarda, Áron Gereben, Helmut Kraemer-Eis, Hans Peter Lankes, Iana Liadze, Andrew McDowell, Nicola Pochettino, Debora Revoltella, Mattia Romani, Simone Signore, Natacha Valla, Georg Weiers and Marcin Wolski Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 30, 2020
Read about event More on this topic
 

Past Event

Past Event

The need for market-based finance after COVID-19

How do COVID-19-caused financial dislocations inform policy responses?

Speakers: Maria Demertzis, Gabriel Makhlouf and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 29, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Redefining Europe’s role after the Covid-19 Pandemic

How will the Covid 19 crisis change the role of the EU in Europe and the world?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 25, 2020
Read about event More on this topic
 

Past Event

Past Event

Redefining Europe's role after the COVID-19 pandemic

Amidst COVID-19: how to keep markets integrated when states play a bigger role in the EU and its neighbourhood?

Speakers: Gabriele Bischoff, John Erik Fossum, Kalypso Nicolaïdis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 25, 2020
Read about event More on this topic
 

Past Event

Past Event

COVID-19 in CEE and Europe’s neighbourhood: Do we need a Vienna Initiative 3.0?

How is the Vienna Initiative evolving to respond to the crisis caused by COVID-19?

Speakers: Thomas Wieser, Pierre Heilbronn, Mark Le Gros Allen, Piroska Nagy Mohacsi and Boris Vujčić Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2020
Read article More on this topic More by this author
 

Opinion

A tale of two pandemics

The two narratives briefly examined here cast light on different aspects of the EU in the times of Covid-19. Euroskeptic nationalists typically propagate claims of EU failure but have been rather subdued during the pandemic as mainstream governments have taken over their trademark policy of closing borders to foreigners. Nonetheless, the grip on power of several pro-EU mainstream leaders, including President Emmanuel Macron in France, Prime Minister Conte in Italy and Prime Minister Pedro Sanchez in Spain, remains tenuous.

By: Michael Leigh Topic: European Macroeconomics & Governance Date: June 23, 2020
Read about event More on this topic
 

Past Event

Past Event

The role of AI in healthcare

How can AI help us fight through a pandemic crisis?

Speakers: Dimitris Bertsimas, Georgios Petropoulos, Effy Vayena and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 23, 2020
Read article Download PDF More by this author
 

Parliamentary Testimony

Italian Parliament

EU priorities and the recovery during Covid19

Testimony at the Committee on EU Policies of the Italian Chamber of Deputies.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Italian Parliament, Testimonies Date: June 18, 2020
Read about event More on this topic
 

Past Event

Past Event

Biological threats and EU preparedness: How can we make the system more resilient?

Can the EU handle biological threats?

Speakers: Maria Demertzis, Magnus Normark, Ilkka Salmi, Jukka Savolainen, Anne Sénéquier and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 18, 2020
Read article More on this topic More by this author
 

Blog Post

The EU’s recovery fund proposals: crisis relief with massive redistribution

Poorer European Union countries and those hardest hit economically by the COVID-19 crisis could obtain up to 15% of their GNI in grants and guarantees from the EU’s proposed recovery instruments. Yet the proposal would represent a net benefit for all EU countries, even if there is only a small positive economic impact over the long-term. The proposed very long-maturity loans would lead to non-negligible benefits, exceeding 1% of GDP for some countries.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2020
Load more posts