Blog Post

Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?

The European Commission’s original allocation mechanism really favoured lower-income countries and to a large extent was based on pre-COVID economic data. The modification adopted by the European Council gives more consideration to the country size and the adverse economic impact of COVID-19. As a consequence, by using the Commission’s May 2020 economic forecasts, I estimate that only Germany and France will get more grants from the EU’s recovery fund compared to the Commission’s original proposal, while other countries will get less.

By: Date: July 23, 2020 Topic: European Macroeconomics & Governance

The grand EU budget deal reached by the European Council on 21 July 2020, which includes a one-time €750 billion recovery fund named ‘Next Generation EU’ (NGEU), is unprecedented. For the first time in its history, the EU will borrow from capital markets to finance expenditures throughout the Union.

The NGEU deal includes some notable modifications compared to the Commission’s original proposal. It reduces the overall amounts of grants and guarantees and increases the amount of loans. It abolishes certain instruments, including all proposed funding for non-EU countries. And it alters the cross-country allocation method of the largest instrument, the Recovery and Resilience Facility (RRF).

In Table 1 I compare the overall amounts available for the various recovery instruments with the original proposal of the Commission.

In this post, I focus on the changes in the allocation key for the recovery instruments that was decided (see the methodology here). Overall, the allocation key has shifted from favouring low-income countries towards better considering the country size and favouring those countries that were hit by a stronger decline in GDP. It thus became closer to an insurance system.

The most important change relates to the cross-country allocation of the RRF. 70% of the grants provided by the RRF shall be committed in the years 2021 and 2022, according to the Commission’s original proposal. The remaining 30% shall be committed in 2023, for which “the 2015-2019 unemployment criterion is replaced, in equal proportion, by the loss in real GDP observed over 2020 and by the cumulative loss in real GDP observed over the period 2020-2021” (see points A15 and A16 here).

To understand the importance of this change, let me briefly recall the Commission’s original cross-country allocation proposal for the RRF (see further details in  my previous post, particularly in the annex). That allocation depends on (a) the 2019 population, (b) the inverse of 2019 GDP per capita, and (c) the 2015-2019 average unemployment rate, all relative to the EU27 value. Relative GDP per capita is measured in current euro values (not in purchasing power parity) and the inverse of its ratio to the EU average is capped at 1.5. The unemployment rate ratio is capped at 1.5 for countries with GDP per capita below the EU average and at 0.75 for countries with GDP per capita above the EU average.

Therefore, only one out of the three indicators (population) depends on the size of the country, the other two indicators (GDP per capita and unemployment rate) are independent from the country size. The three ratios are multiplied with each other. That means that the population ratio sets the country’s population share in EU population; that share is then multiplied by ratios around 1, whereby eg, an unemployment rate ratio (the ratio of the country’s unemployment rate to the EU’s unemployment rate) higher than 1 increases the country’s overall share in the RRF allocation, while an unemployment rate ratio below 1 decreases it. Yet the 0.75 cap on the unemployment rate ratio for higher-income countries, as well as the use of the inverse GDP/capita ratio (which is further enlarged by using current euro values and not purchasing power parity values) further favour lower-income countries.

In short, the Commission’s original allocation mechanism really favours lower-income countries. Such a favouring is also very significant in the allocation of the ReactEU funds. This favouring is the main reason why eg, Bulgaria, Croatia and Greece were expected to obtain grants and guarantees amounting to about 15% of their GDP from the recovery tools (see my calculations on Figure 1 here, and Table A1 on page 51 of Commission Staff Working Document here).

The proposed RRF allocation mechanism is confirmed by the European Council for 70% of RRF grants. However, for the remaining 30%, the unemployment ratio indicator applied is replaced by the loss in real GDP. In its conclusions, the European Council does not specify how to measure “the loss in real GDP”, but this expression has been used by the Commission for the allocation mechanism of ReactEU; it is meant to describe the fall in the constant-price euro value of GDP, which is in line with the meaning of “the loss in real GDP”.

However, the fall of GDP valued in constant-price euro depends on the country size. The larger the country, the larger the euro value of the GDP fall. Hence, an indicator that is independent of the country’s size (unemployment rate) is replaced by an indicator that very much depends on the country’s size (loss in real GDP). In its conclusions, the European Council does not indicate any additional criteria for consideration of real GDP loss regarding the RRF. In contrast, ReactEU has a complicated cap system for a similar GDP loss indicator . The ReactEU capping was explicitly confirmed by the European Council (see point A20 of the conclusions).

This change in the RRF allocation mechanism mitigates the favouring of lower-income countries in the Commission’s proposal, and benefits larger countries and those that suffered larger losses in GDP due to the pandemic.

Beyond the country size issue, Germany further benefits from the changed allocation criterion, because it had a very low unemployment rate in 2015-2019. France also benefits beyond the country size issue, because even though it had a higher unemployment rate than the EU average in 2015-2019, its unemployment rate indicator was subject to the 0.75 cap applied for higher income countries.

The allocation criteria of instruments other than the RFF has not been changed by the European Council, except a small change for ReactEU: Luxembourg will get an extra lump sum €100 million and Malta an extra €50 million.

For estimating the impact of the change in allocation criteria, I use the May 2020 Commission economic forecasts. I find that only three countries, Germany (by €20.4 billion), France (by €12.4 billion) and Italy (by €5 billion) will get more grants from RFF, all other countries will get less. And since grants in other recovery instruments were cut substantially for all countries, only Germany (by €13.4 billion) and France (by €7.4 billion) will get more grants from the overall recovery package compared to the Commission’s original proposal (see Table 2). Overall, Italy will get €1 billion less in grants, Spain will get €9.5 billion less, while Poland will get €11.4 billion less.

The overall envelope for guarantees available for EU countries in the recovery instruments was drastically cut from €61.6 billion to €5.6billion. In that way, all EU countries will be entitled to less than 10% of the guarantees initially proposed by the Commission (Table 3).


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

Oct
14
16:00

Next Generation EU debt: how is it structured?

The impact of EU debt on the EU market of safe assets.

Speakers: Gert-Jan Koopman and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic
 

Blog Post

Government-guaranteed bank lending six months on

In March and April 2020, European governments announced massive credit support programmes. After an initial surge, take-up appears to be stabilising (with a lag in Italy), despite second wave shocks in some countries. More recent data confirms that fiscal capacity has not visibly constrained national governments in the support they have provided so far.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: European Macroeconomics & Governance Date: September 29, 2020
Read about event More on this topic
 

Past Event

Past Event

From playing field to player: Europe’s strategic autonomy as our generation’s goal

At this online event Charles Michel spoke about the importance of Europe's strategic autonomy.

Speakers: Charles Michel and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 28, 2020
Read article More on this topic More by this author
 

Blog Post

Will European Union countries be able to absorb and spend well the bloc’s recovery funding?

To help finance the post-coronavirus recovery, the European Union is raising large amounts to pass on to its members. But absorption of EU funds is typically slow and some countries might struggle to spend what they can get, even if they will have broad freedom to design spending programmes. The focus should be on worthwhile spending, not just on absorbing EU funds.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 24, 2020
Read article Download PDF More on this topic More by this author
 

Policy Contribution

Why has COVID-19 hit different European Union economies so differently?

All European Union countries are undergoing severe output losses as a consequence of COVID-19, but some have been hurt more than others. Factors potentially influencing the degree of economic contraction include the severity of lockdown measures, the structure of national economies, public indebtedness, and the quality of governance in different countries. With the exception of public indebtedness, we find all these factors are significant to varying degrees.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 22, 2020
Read article More on this topic More by this author
 

Opinion

Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read article More by this author
 

Parliamentary Testimony

House of Lords

Employment and COVID-19

Testimony before the Economic Affairs Committee at the House of Lords, British Parliament on Employment and COVID-19.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation, House of Lords, Testimonies Date: September 9, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 3

Third day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 3, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 2

Second day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 2, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 1

The Annual Meetings are Bruegel's flagship event which gathers high-level speakers to discuss the economic topics that affect Europe and the world.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 1, 2020
Read article More on this topic
 

Blog Post

Emerging market central banks and quantitative easing: high-risk advice

Central banks in emerging markets with weak currencies should not resort to unorthodox monetary tools such as quantitative easing as a response to the crisis triggered by COVID-19. Preferable alternatives include shifting public spending away from less pressing needs, moderately increasing public debt and falling back on official development assistance.

By: Marek Dabrowski and Marta Domínguez-Jiménez Topic: Global Economics & Governance Date: August 26, 2020
Read article More on this topic More by this author
 

Opinion

The Challenges of the Post-Pandemic Agenda

This opinion piece has previously been published in Project Syndicate. PARIS – There is a growing possibility that the COVID-19 crisis will mark the end of the growth model born four decades ago with the Reagan-Thatcher revolution, China’s embrace of capitalism, and the demise of the Soviet Union. The pandemic has highlighted the vulnerability of […]

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 28, 2020
Load more posts