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: Date: September 15, 2020 Topic: European Macroeconomics & Governance

This opinion piece has previously been published in El Pais, Il Sole and Rezpospolita, LeMonde and FAZ.

El País logo

logo of Il Sole 24 Ore Italian newspaper

Le Monde logo

In late July, the European Council created the European Union recovery fund, a major new policy instrument that could substantially increase the stability of the EU and its monetary union, and under which the bloc will for the first time borrow and pay out large sums as grants. But the Council deal lacks a clear strategy to ensure the money boosts inclusive, sustainable growth and avoids corruption. This gap must be plugged, because the recovery fund will be delegitimised if wasted. The ongoing negotiations between the European Parliament, the Commission and the Council (the trialogue) provide an opportunity for improvement and should focus on three crucial points.

First, the goal needs to be more clearly stated: providing a boost to Europe’s sustainable growth potential. The current focus on speedy disbursement suggests policymakers still hope the EU funds can play a countercyclical role, but this will not work. The Council wants to commit 70% of the main instrument, the recovery and resilience fund (RRF), in 2021-2022, but only a quarter of disbursements are planned for these two years. All EU countries can go to the markets to borrow and it is national budgets that can and should be used to support economies reeling under the immediate effects of the pandemic. EU funds, meanwhile, should be part of a medium-term strategy clearly focussed on quality spending. This will provide some protection against the permanent damage to Europe’s growth potential COVID-19 is likely to leave in its wake. The EU funds should thus be about medium-term growth objectives and not countercyclical fiscal policy.

The second question then is how to achieve quality spending that would boost sustainable growth. The European Council conclusions from July include some vague statements about linking EU funds to the European Semester, the EU’s annual process to steer member states towards inclusive and sustainable growth and digital transformation. But the European Semester has proven to be a rather ineffective bureaucratic process that EU countries too often disregard.

It is easy to see how such a bureaucratic process will trigger a bottom-up approach driven by special interests in EU countries. in which spending plans are labelled, as requested by the European Commission, “green, social and digital.” Plans will be sent to Brussels and result in large pay-outs with little benefits. While the design of the recovery fund, with its predominant focus on the RRF, puts national governments in charge, clear conditions are still crucial for sustainable growth goals to be achieved. A recent study proposes the use of recovery funds for major structural reforms, such as in the education system, public administration efficiency and climate goals. The new EU funding is a unique opportunity to provide the ‘carrot’ for genuine structural reforms.

Quality spending requires good governance. The third issue is therefore monitoring so that spending achieves its goals and is free of corruption. Unfortunately, EU funding has a mixed record of avoiding corruption. Meanwhile, academic work has confirmed that the vast amounts of common agricultural policy funds do not achieve Europe’s green goals despite repeated claims to the opposite. The current governance of EU funds can be regarded as unsuitable for achieving stated political goals.

The European Parliament rightly insists on a strong say. A better ‘red-card’ procedure to stop pay-outs in case money does not achieve the political ambitions is needed. The currently proposed process foresees the Commission asking for opinions from the Economic and Financial Committee, a group of top finance ministry officials, on whether political targets of the funds have been achieved. The committee shall strive for consensus but if one or more countries disagrees, the matter will be referred to the European Council. But state secretaries discussing a Commission report will not provide the accountability necessary for the EU’s biggest borrowing programme. Even members of the European Council will not challenge their peers unless there are blatant breaches of agreements.

Instead of intergovernmental debate, real political accountability is needed to avoid corruption and the failure to achieve the EU’s political ambitions of green and inclusive growth. This political accountability should also ensure that the interests of the EU as a whole are considered. The European Parliament should therefore insist on receiving regular and detailed reports from the Commission and should hold hearings with the involved Commissioner to bring about transparency and public accountability. Moreover, the Parliament should entrust the European Court of Auditors and the European corruption watchdog OLAF with constant monitoring of the spending.

Negotiators should take the time to design a strong governance mechanism. Europe cannot afford to waste its resources


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Podcast

Podcast

The Sound of Gita Gopinath

IMF Chief Economist Gita Gopinath joins Bruegel Director Guntram Wolff to discuss the uneven recovery from the pandemic with a live clubhouse audience.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 6, 2021
Read about event More on this topic
 

Past Event

Past Event

Divergent Recoveries from the Pandemic: Conversation with IMF Chief Economist Gita Gopinath and Bruegel Director Guntram Wolff

In this episode of The Sound of Economics Live, IMF Chief Economist Gita Gopinath and Bruegel Director Guntram Wolff will debate the uneven recovery from the pandemic.

Speakers: Gita Gopinath and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2021
Read article More on this topic
 

Blog Post

China’s M&A activity rebounds with a clear focus on Europe

Despite the pandemic, China’s interest in overseas M&A started to rebound in late 2020, with European industrial companies still of particular interest.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: May 4, 2021
Read article Download PDF More on this topic
 

Working Paper

Reducing mobility of SARS-CoV-2 variants to safeguard containment

Escape variants can cause new waves of COVID-19 and put vaccination strategies at risk. To prevent or delay the global spread of these waves, virus mobility needs to be minimised through screening and testing strategies, which should also cover vaccinated people. The costs of these strategies are minimal compared to the costs to health, society and economy from another wave.

By: Martin Hellwig, Viola Priesemann and Guntram B. Wolff Topic: Global Economics & Governance Date: May 4, 2021
Read article More on this topic
 

Blog Post

Setting Europe’s economic recovery in motion: a first look at national plans

Plans for spending European Union recovery funds submitted by the four largest EU countries reflect rather different priorities. So far, only Italy is interested in borrowing from the EU.

By: Zsolt Darvas and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: April 29, 2021
Read article More on this topic More by this author
 

Blog Post

Confronting the risks: corporate debt in the wake of the pandemic

As European economies emerge from lockdowns, it is becoming clearer that corporate debt has reached critical levels. A new French scheme, in which the state guarantees portfolios of subordinated debt, shows how financial support could be targeted better.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: April 28, 2021
Read about event More on this topic
 

Past Event

Past Event

Living standards and financial resilience across Europe

What has the impact of the pandemic on households’ financial resilience been, and how should policy makers respond?

Speakers: Romina Boarini, Zsolt Darvas, Maria Demertzis and Daniel Tomlinson Topic: European Macroeconomics & Governance Date: April 21, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

[LIVE] The idea of Europe: more than a feeling?

What can 70 years of news(paper articles) and how we talk about 'Europe' tell us about pan-European identity? Is there even such a thing as a European public sphere?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 16, 2021
Read article More on this topic
 

Blog Post

The impact of COVID-19 on artificial intelligence in banking

COVID-19 has not dampened the appetite of European banks for machine learning and data science, but may in the short term have limited their artificial-intelligence investment capacity.

By: Julia Anderson, David Bholat, Mohammed Gharbawi and Oliver Thew Topic: Finance & Financial Regulation Date: April 15, 2021
Read article More on this topic
 

External Publication

Wealth distribution and social mobility

This report explores the distribution of household wealth in the EU Member States and analyses the role of wealth in social mobility.

By: Zsolt Darvas and Catarina Midões Topic: European Macroeconomics & Governance Date: April 1, 2021
Read article Download PDF More by this author
 

Working Paper

The unequal inequality impact of the COVID-19 pandemic

Less-educated workers have suffered most from job losses in the COVID-19 pandemic, and it is quite likely there was a significant increase in European Union income inequality in 2020.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Global Economics & Governance Date: March 30, 2021
Read article More on this topic More by this author
 

Blog Post

New EU insolvency rules could underpin business rescue in the COVID-19 aftermath

Corporate bankruptcies are set to rise in the context of COVID-19. EU countries should speed up adoption of recent insolvency reforms and, in addition, offer consistent treatment to restructuring finance.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: March 24, 2021
Load more posts