17 May 2022

Bruegel's Sapir: Does the war in Ukraine call for a new Next Generation EU?

The European Union should take significant economic measures in response to the war in Ukraine, but a new Next Generation EU is not needed yet.

The COVID-19 crisis will remain a major turning point in the history of fiscal federalism in Europe. Before the pandemic, fiscal stabilisation was the sole responsibility of national budgets. But in 2020, EU leaders decided to create Next Generation EU (NGEU), a new instrument outside the EU budget financed by EU bonds, to stabilise the EU.

NGEU was intended as a one-off measure to deal with an exceptional situation. The war in Ukraine is a new exceptional situation that calls for an economic response. Is a new NGEU required, or is the EU budget a better vehicle?

Common borrowing for common stabilisation

There were at least three reasons for the EU to issue, for the first time in its history, common EU debt to stabilise its economy in the context of COVID-19:

1. The nature and size of the shock: unlike previous crises, in particular the financial and sovereign debt crises, the COVID-19 shock was exogenous and affected all EU countries. It was the biggest economic shock ever to hit the EU, but most crucially people were dying in large numbers in the pandemic.
2. The legacy from the previous crisis: the sovereign debt crisis had left the southern EU countries particularly vulnerable, economically and politically. With these countries again at the epicentre of the COVID-19 shock, there was a real danger of devastating consequences for the economic and political fabric of the whole EU.
3. The geopolitical situation: at the start of the pandemic, the EU was already living in a “fragile world”, as European Commission President Ursula von der Leyen noted at the time. Repeating the mistake of the sovereign debt crisis – reacting to events too late and too little – was simply not an option. The EU had to act forcefully or risk losing its place in the world, and credibility with its citizens.

NGEU, a package of €750 billion in grants and loans financed by joint EU borrowing, was the boldest step taken in response to the crisis. Other measures included relaxation of EU fiscal and state aid rules, establishment of the Support to mitigate Unemployment Risks in an Emergency (SURE) temporary loan instrument with a total envelope of €100 billion, and the introduction by the inter-governmental European Stability Mechanism of a facility to help finance health-related expenditures, though no country has used it.

So far, EU countries have requested nearly €500 billion in grants and loans from NGEU; the main beneficiaries have been the four southern countries (Greece, Italy, Portugal and Spain) that alone have requested 62% of this amount.

Besides stabilisation and redistribution, NGEU also addresses the provision of public goods. Admittedly, it finances primarily national projects, but they must be within the six areas agreed on at EU level, of which the climate transition must account for at least 37% of spending and the digital transition for at least 20%. NGEU thus provides a form of European public goods “by aggregation”, delivered at the national level but respecting EU guidelines.

The COVID-19 and Ukraine shocks: similarities and differences

How does the economic situation created by the war in Ukraine compare to the situation during the pandemic, and how should the EU respond to this new situation?

Like COVID-19, the war in Ukraine is obviously an exogenous shock affecting all EU countries, albeit to a different extent because of geographical, economic and financial differences. However, the size of the growth shock caused by the Ukraine war appears to be far less severe than the COVID-19 shock, at least in the short term. In 2022, the global and EU...

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