Spillover Effects From Next Generation EU

Fiscal Policy DOI: 10.1007/s10272-020-0923-z Oliver Picek Spillover Effects From Next Generation EU In July 2020, the European Commission announced its €750 billion package to revive the postpandemic European economy, Next Generation EU. The programme comprises a number of loans and grants that will be funded by taking out European debt. Although the rules on liability sharing for Next Generation EU prevent a significant mutualisation of the debt, European leaders have taken the long-recognised significant first step towards European financial and political unification that stands in stark contrast to the misguided austerity programmes during the European sovereign debt crisis. Next Generation EU is the European Commission’s €750 billion package to revive the European economy after COVID-19 that is funded by taking out European debt. In haggling over payments from the European Union, member states like to count and negotiate their net payments – the difference between what is paid into common budgets and received from them. This chauvinistic view leaves out the additional induced growth effects triggered by the package both at home (domestic multipliers) and abroad (spillover effects to other EU countries). By capturing a share of economic output from Southern and Eastern European member states that receive more grants, the economies of Northern and Western Europe grow by more than the respective portion of their contributions would suggest. The coordinated fiscal impulse ensures that every country receives a sizeable boost in economic output. Next Generation EU The European Commission’s Next Generation EU package includes €750 billion. Although rightly criticised as not large enough to address the gravity of the economic consequences of the virus, the instrument is nevertheless the first time in recent history that the EU will directly issue a significant form of mutual debt to redistribute and stabilise the economy. In order to finance the package, the European Commission will take out loans during the budget period 2021-2027 – in addition to the regular EU budget – and repay them with member states’ contributions to low interest payments (from 2021 onwards) and sizeable principal amounts (not before the © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. Oliver Picek, Momentum Institut, Vienna, Austria. ZBW – Leibniz Information Centre for Economics next budget period starting in 2028, and no later than 2058). Some commentators have even called this Europe’s “Hamiltonian moment” reminiscent of the federalisation of American states’ debt in the 18th century. The largest and most economically significant part of the Next Generation EU package (€312.5 billion) will be paid out as grants to member states by the new European Recovery and Resilience Facility (RRF), a post-COVID-19 EU reconstruction programme. A smaller portion of the grants (€71.9 billion) will be allocated and implemented through existing EU programmes outside of the new RRF, as shown in Figure 1. Around €360 billion in loans are foreseen, which will yield useful interest rate savings on loans for member states that refinance themselves above the predicted EU bond interest rates. A small sum of guarantees completes the package.1 A time horizon of the payments can be found in Figure 2. The largest portion of the actual payments will presumably be disbursed too late to fight the acute crisis, as around threequarters of the RRF payouts become effective in 2023 or later (see Figure 2). Signed commitments of future payments in the RRF as well as the other grants (non-RRF, e.g. REACT-EU) are envisaged to take place from 2021 onwards in order to frontload as much as possible. The final form of Next Generation EU, however, is not yet enacted into law. The Council will have to get approval for its proposal from the European Parliament. While the total sum of the package and the grants and loans shares are unlikely to change much, the shares for individual facilities and programmes for common European goals may increase. In any case, the plan foresees loans provided by the European Union only for Southern and Eastern EU countries, as others are assumed to be able to finance themselves at a lower or equal rate than European institutions would receive in financial markets. All countries receive grants financed by a loan 1 In particular, the European Council slashed expenses that were planned for European tasks (Just Transition Fund, InvestEU). 325 Fiscal Policy Figure 1 Breakdown of Next Generation EU (€750 billion) Figure 2 Time horizon of Next Generation EU payments 2021-2027, at 2018 prices in billions of euros, current prices 200 150 48% Loans (€360bn) 41.7% Grants: Recovery and Resilience Facility (€312.5bn) 100 50 0 2021 2022 2023 2024 Planned grant payments 0.7% Guarantees (€5.6bn) 9.6% Grants: Other EU programmes (€71.9bn) Sources: European Commission (2020a,b,c,d), Darvas (2020d), author’s representation. that is supposed to be repaid starting in 2028 and ending in 2058. As a result, the distribution of the funds cannot be considered a zero-sum game because economic stimuli can boost growth and employment for all member states while repayment occurs at a much later stage and over a longer time period. 2025 2026 2027 Later Planned loan payments Source: European Commission (2020d), author’s representation. Bank to the crisis (Darvas, 2020c). In any case, the expected effect of loans and guarantees is unclear and difficult to estimate at this point. For the purpose of this paper, we therefore adopt the view that only grants will provide additional future expenditures that increase demand in the crisis-struck economies of the block. After deducting loans and guarantees from the total package sum of €750 billion, approximately €384.4 billion in grants remain. For the European Union as a whole, 3.1% of (the crisis-reduced) expected GDP in 2020 is disbursed via grants and 1.9% via loans over a six-year period. Distribution by country Media, policy analysts, and informally the European Commission have provided a quite detailed preview of the distribution of the funds by country for the original proposal from May 2020 (e.g. Kafsack, 2020; Darvas 2020a,b,c), which was adjusted by the European Council (2020) on 21 July.2 Using a set of assumptions on the eventual allocation rules per country by the Council, Darvas (2020d) has divided up the grants by amounts for individual member states, but not updated the loan amounts per country. The precise suggested distribution of the grant amounts is shown in Figure 3.3 Loans are shown in a brighter shade above the darker grant amounts in percent of local GDP.4 Loans have been criticised for not being an effective way to add expenditure to the (...truncated)