17 June 2020

Bruegel: 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.

When European leaders convene this Friday (19 June), each will mainly look at how much her or his country can expect to receive from the European Commission’s recovery proposals. However, the Commission has so far shied away from publishing an estimate of national shares.

Limited guidelines were provided however on the estimated overall cross-country allocation in the Commission’s two recent proposals: the €750 billion ‘Next Generation EU’ plan and the additional €11.2 billion amendment to the 2020 annual budget. Cross-countries allocation proposals have been published for only three out of the twelve different instruments that make up the package: the Recovery and Resilience Facility, the Just Transition Fund and agricultural subsidies. Guidance is vague for the other nine, which account for about a third of the grant and guarantee components. The Commission either provided the detailed methodology behind cross-country allocations without any estimate (REACT-EU); indicated broad principles for cross-country allocations (Solvency Support Instrument and Invest EU); or provided no guidelines for cross-country allocation – for good reasons that I discuss.

A Commission staff working document (page 52) uses an “illustrative allocation key” assumed to be the same for all grant, loan and guarantee components of the package. But the regulation proposals, on the contrary, explain that each instrument will be allocated differently, and that there may even be no cross-country allocation key at all.

Moreover, three out of the 12 instruments operate in non-EU countries: Neighbourhood, Development and International Cooperation; Humanitarian Aid; the European Fund for Sustainable Development. Therefore, contrary to what some allocation estimates circulated in the media and on Twitter wrongly assume, no EU country will directly benefit from those instruments but all will contribute to their financing.

This post estimates the overall cross-country allocation of the recovery package’s grants and guarantees. Some countries would obtain 15% of their GNI in grants and guarantees; others less than 1%. The Commission’s proposal contains strong redistributive elements that will mainly benefit those countries hardest hit by the COVID-19 crisis, and those with the lowest GNI per capita. However, while some might try to identify winners and losers in the Commission’s proposal by focusing on each country’s ‘net contribution’, even a minor positive economic impact over the long term would be sufficient for the proposal to benefit all EU countries, even those that receive relatively small amounts. Finally I find that some countries would benefit from the proposed EU loan facility by more than one percent of their GNI in present value terms.

Grants and guarantees working for both insurance and redistribution

The overall package is composed of €438 billion in grants (including €5 billion for non-EU countries); €73 billion in guarantees (of which €11.5 billion is for non-EU countries); and €250 billion in loans. All figures here are measured at 2018 prices unless otherwise specified.

Methodology

In the annex, I summarise the cross-country allocation methodologies proposed by the Commission, so let me only highlight here a few key conceptual issues and my main assumptions.

RRF – Recovery and Resilience Facility (€310 billion in grants from ‘Next Generation EU’): the basic cross-country allocation (with a number of caps and adjustments that benefit lower-income countries) would depend on (a) 2019 population, (b) the inverse of 2019 GDP per capita, and (c), more problematically, the 2015-2019 average unemployment rate. Why would a facility that aims to “achieve a fast and robust economic recovery in the Union” use outdated data from 2015-2019? Representatives of various countries

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