25 March 2022

LSE: A Hamiltonian moment for Europe? Demystifying Next Generation EU and the EU’s recovery funds

The Next Generation EU (NGEU) programme represents a crucial first step towards fiscal mutuality against common shocks in the EU, changing the way the Union finances itself.

This is why the LSE European Institute recently hosted a panel event aimed at bringing together experts to explore the design and implementation of the NGEU programme, weighing the positives against the negatives. In this article, Renato Giacon and Corrado Macchiarelli draw together some insights from the panel discussion.

The Next Generation EU programme is changing the way the EU finances itself. Never before has the European Commission borrowed at such a large scale on financial markets. Meanwhile, six EU member states (Cyprus, Greece, Italy, Portugal, Romania, and Slovenia) have decided to make the leap of faith and have included a formal request for concessional loans in their adopted Recovery and Resilience Plans with the aim of overcoming not only their large funding needs post Covid-19 but also a decade of low investment expenditure.

These developments raise a number of key questions, notably how the Next Generation EU programme and the EU’s recovery fund (the Recovery and Resilience Facility – RRF) should be designed and implemented to better focus on effective, efficient, equitable and sustainable ways of spending EU and national money for bankable projects; successfully mobilise private sector funding from institutional investors, international financial institutions, and commercial banks; and deliver the promised medium to long-term benefits in terms of economic convergence, complexity and higher growth patterns that EU countries can derive from it.

The national Recovery and Resilience Plans – that each EU member state is asked to compile and stick to – are embedded in the European Semester, the EU’s framework for economic policy coordination, with grants and loan payments to EU member states released only upon the successful implementation of performance-based milestones. These are defined both in terms of investments and reforms, with the additional request to achieve ambitious green and digital targets. Such enhanced policy steering at the EU level must balance different national agendas driven by often competing political economy needs. The mechanism represents strong external market discipline both in the funding and the investment framework, which finds a precedent only in the experience of some EU countries such as Greece under the Enhanced Surveillance Framework post-2010.

The European Bank for Reconstruction and Development

Some light was shed on these topics at a recent LSE event by Ines Rocha of the European Bank for Reconstruction and Development (EBRD). Drawing on operational insights provided by the active role of the EBRD in the implementation of the NGEU programme and the deployment of the Recovery Funds, she made the point that large grants-funded projects under the Recovery and Resilience Facility are usually included ex-ante in countries’ Recovery and Resilience Plans, while smaller projects that are part of broader investment programmes might be selected through public tenders or similar procedures. Private sector projects to be financed via Recovery and Resilience Facility loans mainly depend on the international financial institutions, national promotional banks and commercial banks’ pipelines, creating an important private sector-led investment stream in the implementation of the programme.

Furthermore, EU countries – which have requested EBRD engagement in the delivery of their Recovery and Resilience Plans – have recognised that the EBRD is strategically aligned in its own priorities and country strategies with the national Recovery Plans. The EBRD can assist the countries in delivering policy objectives and leverage the EU recovery grants and loans by attracting other private co-financiers to facilitate successful programme delivery.

The most typical sectors of EBRD intervention include the areas of: green growth (such as financing renewable energy, electricity storage projects, hydrogen production, green cities, clean mobility, and improving the energy efficiency of buildings); accelerating the digital transformation (5G, gigabit networks and fibre optic networks, broadband projects, digital upskilling and reskilling programmes, support for the digitalisation of businesses with a particular focus on SMEs, start-ups and greater cloud usage); and financing research and development, as well as innovation projects outside the digital sector such as in the field of climate innovation (i.e. fertilisers and cement sectors).

The most concrete EBRD engagement under the recovery funds so far has been in Greece through the Corporate Loan Facility. The programme will combine up to €500 million of Recovery and Resilience Facility concessional loans managed by the EBRD, up to €500 million of EBRD commercial own-resources financing, and financing from private investors and commercial banks. The EBRD signed an Operational Agreement with the Greek Ministry of Finance in November 2021. From the point of view of project structuring, the Greek Recovery and Resilience Facility is unique insofar as it promotes financial discipline by private sector final beneficiaries which have to pay back the loans, encourages proper risk assessment by market players in the absence of Greek state guarantees, and leverages Recovery and Resilience Facility funds through co-financing with private sector funding sources.

Gaps and opportunities

At the same event, LSE’s Anthony Bartzokas singled out the NGEU programme as a new important tool to support investment recovery in the EU, funded through the Commission’s borrowing on the capital markets. Furthermore, there are early positive signals from markets with NGEU-related announcements already demonstrating a significant spread-compressing effect on euro area sovereign borrowing costs.

LSE

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