Next Generation EU
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The Next Generation EU (NGEU) fund is a European Union recovery package to support member states hit by the COVID-19 pandemic. Agreed to by the European Council on 21 July 2020, the fund is worth €750 billion. The NGEU fund will operate from 2021–2023, and will be tied to the regular 2021–2027 budget of the EU's (MFF). The comprehensive NGEU and MFF packages are projected to reach €1824.3 billion.
Europe was struck by its initial wave of the COVID-19 pandemic in March 2020. The first-hit and the hardest-hit country in the EU was Italy, promptly settling the contaminated zones in lockdown, putting health concerns over financial concerns. Gradually the other Member States entered the first wave of the pandemic, and on 17 March 2020, all Member States had reported cases of COVID-19. Rapid responses depended on the country: most Member States were initially hesitant, not wanting to close everything or impose a nationwide lockdown, fearing that that would cripple the economy; but two weeks after the first confirmed cases, most countries secured their borders and established a national lockdowns. From the economic perspective, the propagation of Covid-19 virus across Europe plunged the continent into a deep economic crisis, and national economies were struggling due to the widespread lockdown. From mid-March 2020, all Member States saw their national debt and public spending rise, mainly due to increasing expenditure on national healthcare and health-related products, and on measures to cope with the economic crisis. In general, most Member States adopted similar measures to address the economic crisis, by providing substantial aid packages to businesses and enterprises.
Gradually EU institutions agreed to adopt measures to tackle the economic crisis and help the Member States. In mid-March, Christin Lagarde, President of the ECB, adopted the Pandemic Emergency Purchase Program (PEPP), a temporary purchase program of €750 billion to deal with the pandemic emergency. The Governing Council of the ECB had established that the purchases were made to an extent "necessary and proportionate" to achieve the "objectives of the mandate". On 4 June 2020, the ECB decided to extend this program and added 600 billion to it, for a total of €1350 billion. On 19 March 2020, the Commission adopted a temporary framework allowing member states flexibility to support their national economies with state recovery packages followed two days later by the Council, which agreed on more flexibility on fiscal rules "by initiating the general escape clause of the stability and growth pact". On 15 May, the ESM also stepped in and created the "pandemic crisis support".
After a while, it became clear that the different measures implemented were not enough to fight the economic crisis caused by the pandemic; debates on how to deal with the situation led to a confrontation between Northern and Southern Member States. Italian Prime Minister Giuseppe Conte, backed by Spanish Prime Minister Pedro Sanchez, proposed the corona bonds as a measure to recover from the crisis, consisting of the emission of joint public debt at the EU level, and thus creating a solidarity mechanism for the redistribution of debt between the European states. This measure was endorsed by 7 other member states: France, Belgium, Greece, Portugal, Ireland, Slovenia, and Luxemburg. However, the Frugal Four (Austria, Sweden, the Netherlands, and Denmark) led by Germany refused this proposition, scared that they would have to repay their debt in case of default. The leap forward was made by the Franco-German axis, when on 18 May 2020, they came up with a proposal, an aid package of 500 billion of euros in grants, that would give liquidity to Member States affected by the crisis. This "Recovery Fund" package would be acquired by the Commission, which would borrow the money on financial markets, incorporate it in the EU budget, and distribute it to the Member States. On 27 May 2020, the Commission presented the "Next Generation EU" plan. It is a proposal worth 750 billion euros, a common ground between the 1000 billion asked by the most hit countries, such as Italy and Spain, and the 500 billion proposed by France and Germany. This huge recovery fund would be integrated in the EU budget for a total of 1.85 trillion euros. The aim of this plan is to establish a solid foundation for the Europe of the next generation.
Regardless of a first failed attempt, at the European Council meeting on 17 July 2020, an agreement upon the recovery package and the MFF 2021–2027 was reached. Nevertheless, some issues, addressed in the upcoming Council meetings, were still present. In the first place, the Frugal Four wanted to reduce the amounts of grants and asked for stronger conditionality for the expenditure of the funds. Furthermore, there were concerns on which programs to fund: the Frugal Four wanted more funds on R&D, Digital Economy and green investments, while the Friends of Cohesion (Southern and Eastern European Member States) wanted the allocation to Cohesion Funds to be the same. Lastly, there were problems linked with the "rule of law" conditionality. Finally, on 10 November 2020, the European Parliament and the Council reached a definitive agreement which integrates the 2021–27 MFF of 1074,3 billion euros and the temporary instrument for recovery Next-generation EU of 750 billion euros. The deadline for the presentation of national plans is 30 April 2021. Even though proposals were already sent to the Commission from mid-October 2020, those proposals will help the Commission in understanding in which direction the Member States are going and eventually re-orient and assist the national governments' with modifications.
The NGEU agreement
The objectives of the agreement
The Next Generation EU (NGEU) – 360 billion euros in loans and 390 billion euros in grants - breaks away from the austerity policy adopted after the 2008 financial crisis as the EU's main response to economic crises. The NGEU, adopted in conjunction with the 2021–2027 Multiannual Financial Framework (MFF), demonstrates that the EU Member States can collectively agree on policy, along with funding, to tackle large-scale crises.
The EU has launched the COVID-19 recovery plan for several objectives. The primary objective is to help its Member States to repair the immediate economic and social damages caused by the coronavirus pandemic. Additionally, prepare a better future for European next generation.
Secondly, alongside tackling the economic and social impacts of the COVID-19 pandemic, the plan has other objectives. It also aims to assist the green transition, digital transformation, smart, sustainable, and inclusive growth and jobs, social and territorial cohesion, health and resilience, policies for the next generation, including education and skills.
The third objective is modernizing the EU facilities. Therefore, more than 50 percent of support for the plan will be spent on modernization. Such as research and innovation, via Horizon Europe, fair climate and digital transitions, via the Just Transition Fund and the Digital Europe Programme, preparedness, recovery and resilience, via the Recovery and Resilience Facility, rescEU and a new health program, EU4Health.
In addition to the aforementioned issues, the package also focuses on modernizing traditional policies, such as cohesion and the common agricultural policy, on maximizing their contribution to the Union's priorities, fighting climate change, with 30% of the EU funds, the highest share ever of the European budget and biodiversity protection and gender equality. Thus, it plans to strengthen the EU’s Single Market and invest in shared European priorities.
More broadly, the EU Next Generation agreement consist of the following objectives:
1. To support the Member States through investments and reforms:
A new Recovery and Resilience Facility, worth €560 billion, will offer financial support for investments and reforms, including green and digital transitions and the resilience of national economies and linking them to EU priorities. This facility will spread to the European Period. It will be equipped with a grant facility of up to €310 billion and loans of up to €250 billion can be obtained. Support will be provided by all Member States, but will be concentrated where it is most affected and where flexibility needs are greatest.
By 2022, under the new REACT-EU initiative, €55 billion will be allocated in addition to the cohesion policy program, based on the seriousness of the socio-economic impacts of the crisis and the relative well-being of the Member States.
In addition to the Just Transition Fund, up to €40 billion will be proposed strengthening to help Member States accelerate their transition to climate neutrality.
An additional budget of €15 billion will be provided for the European Rural Development Fund to support rural areas in making the necessary structural changes in line with the European Green Deal and achieving ambitious targets in line with the new biodiversity and Farm to Fork strategies.
2. To stimulate the EU economy by encouraging private investment:
A new Solvency Support Instrument will mobilize private resources to urgently support sustainable European companies in the most affected sectors, regions, and countries. It can be operational from 2020 and will have a budget of €31 billion aimed at providing €300 billion insolvency support for companies operating in all economic sectors and preparing for a cleaner, digital and flexible future.
InvestEU, Europe's flagship investment program, will be raised to €15.3 billion to stimulate private investment in the projects of the Union.
A new Strategic Investment Facility of up to €150 billion will be generated under InvestEU to increase the resilience of strategic sectors, especially those linked to the green and digital transition, and key-value chains in the domestic market, thanks to the €15 billion contributions from Next-Generation EU.
3. Measures taken to prevent the lessons learned from the crisis from happening again:
With a budget of €9.4 billion, a new Health Program EU4Health will be organized to strengthen health security and prepare for future health crises. The additional budget of 2 billion euros, the Union's Civil Protection Mechanism, will be expanded and strengthened to equip the Union to prepare for and respond to future crises. A budget of €94.4 billion will be provided for Horizon Europe to support vital research in health, resilience and green and digital transitions. Europe's global partners will receive €16.5 billion in support for additional external action, including humanitarian aid. Other EU programs will be strengthened to fully align the future financial framework with recovery needs and strategic priorities. Other tools will be strengthened to make the EU budget more flexible and responsive.
Moreover, fighting climate change appeared to be one of the most crucial objectives of the NGEU. The EU Commission issued that 37% of the Recovery and Resilience Plans proposed by member states must at least allocated to climate change-related projects.
One of the aims of this agreement is to deepen the Economic and Monetary Union. After years of recovery, the European economy, employment, growth, and investment are all settling on a stable footing, returning to pre-crisis levels or beyond. Public finances continue to improve, the banking system and the foundations of the EU's Economic and Monetary Union are stronger. Therefore, the EU prioritizes the further deepening of the Economic and Monetary Union by providing a Budgetary Instrument for Convergence and Competitiveness for the euro area to support Member States’ growth reforms and investment, taking full advantage of the flexibility allowed within the Stability and Growth Pact, focusing on completing the Banking Union, and strengthening the Euro’s international role.
|1. Single market, innovation and digital||€10.6 billion|
|2. Cohesion, resilience and values||€721.9 billion|
|3. Natural resources and environment||€17.5 billion|
Recovery plan and fund
The European Union has adopted a recovery fund of €750 billion, of which €390 billion will be in the form of grants and the rest in the form of loans for the period 2021–2026, which will be financed by issuing a common debt. Next Generation EU is a temporary instrument designed to help repair the immediate economic and social damage caused by the COVID-19 pandemic. With these funds, Europe wants to be greener, more digital and more resilient to better adapt to current and future challenges. This Recovery Plan would complement the measures agreed by the Eurogroup for a total of €540 billion in support of health spending, unemployment and short-time work, and credit to the private sector. The important element remains the Recovery and Resilience Mechanism (RRF), which amounts to €672.5 billion between grants and loans to support investment and reforms, with a focus on the ecological and digital transition.
– Recovery and Resilience Facility: this largest component has €672.5 billion of funding in the form of loans and grants. The objective is to mitigate the economic and social consequences of the pandemic, allowing European economies to be more resilient and better prepared for the challenges of ecological and digital transitions.
– Support for Cohesion and Territories in Europe (REACT-EU): this part has a budget of €47.5 billion. This is a new initiative to put in place crisis response measures to address the consequences of crises. This would contribute to a green, digital and resilient economic recovery.
– NextGenerationEU will also bring additional funds to other European programs or funds such as Horizon 2020, InvestEU, Rural Development or the Just Transition Fund (FTJ). Horizon 2020 implements the Innovation Union to ensure Europe's global competitiveness. This program is seen to stimulate economic growth and create jobs, and guarantees 80 billion euros of funding. The European Union wants to promote recovery, green growth and employment by supporting investments that bring visible progress, hence the InvestEU program. This plan is intended to generate more than €372 billion of additional investment. In addition, supporting an economy in rural areas that promotes rural development (Feader) is also essential. Indeed, Fearder budget amounts to €95.5 billion and includes a contribution from NextGenerationEU to help meet the challenges posed by the pandemic. Lastly, Just Transition Fund (FTJ) is a cohesion policy instrument to support a transition to climate neutrality, and will support all Member States.
|Recovery and Resilience Facility||672,5 (loans: 360 – grants: 312,5)|
|ReactEU (regional cohesion)||47.5|
|Just Transition Fund||10.0|
|RescEU (natural disaster relief and health crisis)||1.9|
NextGenerationEU figures per EU country:
|Recovery and Resilience Facility||338|
|Just Transition Fund||17,500|
|European Agricultural Fund for Rural Development||8,070.5|
To finance this Recovery Plan, the Commission will borrow on the markets at favorable rates and redistribute the amounts. The Commission will use a diversified financing strategy to raise up to €800 billion (5% of EU GDP) until 2026 for NextGenerationEU at the most advantageous conditions. Indeed, the Commission will issue bonds to finance loans to the EU and to third countries under four programs, but it will also issue bonds to finance the NextGenerationEU program.
1. Funding strategies:
The funding strategy combines the use of different funding instruments and techniques with open and transparent communication to market participants. It will allow the European Commission to raise the necessary volumes in an efficient and seamless manner. This strategy combines:
- an annual borrowing decision: this will provide transparency and predictability to investors;
- structured and transparent relationships: with the bank supporting the program;
- multiple funding instruments: to access the market and manage liquidity needs;
- a combination of auctions and syndications: to ensure cost-effective access to financing.
2. Funding instruments:
In order to successfully implement the Recovery Plan, the Commission is issuing 3-to-30-year bonds. EU-Bonds are the main means to implement a financing plan. The NextGenerationEU program will give the Commission the opportunity to consolidate a regular presence with EU-Bonds. Second, the Commission will issue shorter-term securities, known as EU-Bills. These securities will provide access to the money market and the ability to determine the size of each transaction. Finally, private placements of EU-Bonds involve placing small amounts with investors from different institutions.
3. Funding plans:
The Commission will publish regularly: an annual borrowing decision and semi-annual funding plans. This is essential to ensure sound financial management where transparency towards the Parliament and the Council is elementary. On the one hand, the annual borrowing decision will set a maximum for the operations planned over a period of one year and will fix the amounts of short and long-term financing. On the other hand, the semi-annual funding plans will indicate the borrowings to be carried out during the next six months and will aim to guarantee the availability of funds to cover payment needs. The Commission will thus publish: the targeted amounts to be financed, the auction dates, the indications and the overall volumes of the operations.
Rule of law
The Next Generation EU recovery plan is one of the most ambitious projects, in which the financial budget is associated with certain risks. The main concern was focused on member states that wanted to benefit from the NGEU recovery project, but which still have corruption on the government level and fail to comply with the rule of law. It creates a huge spread of dissatisfaction amongst EU high authorities regarding the link between disbursing EU funds and the lack of effective mechanisms to enforce the rule of law.
In 2020 Poland and Hungary continued to oppose the rule of law mechanism linked to the EU's 7-year budget. The rule of law is a foundational requirement, it basically requires each country to have an independent judiciary, to allow the media to be free, to have a clear separation of powers between the legislature and the judiciary. The principle of rule of law is inescapable for any democracy today in the EU. However, Poland and Hungary after the compliance with the rule of law and entering the EU have been showing over time the deterioration of rule of law. In these countries there's been an attempt to control the judiciary, and attacking the media, violating LGBTQ and Women's Rights.
Article 7 of the Treaty on European Union procedure allows investigation of the member states that don't comply with the rule of law, sanctions can be implemented. Art 7 procedure has been opened against first Poland and then Hungary. The actual end of the procedure has never been achieved. The reason is that all the countries of the EU except the member state being investigated have to agree. In this case Hungary threatened to veto art 7 against Poland and Poland did the same for Hungary, providing protection. They were negotiations of new rule of law mechanism, making the disbursement of EU fund conditional upon the respect of rule of law. Poland and Hungary benefited for many years from the funds despite the violation of rule of law. To adapt to the new mechanism, there is a need for a QMV. That means that Hungary and Poland cannot veto this mechanism.
However, things are more complicated because the rule of law mechanism together with the new generation recovery plan is part of the new European budget cycle which is a 7-year cycle, and it is in relation to that where unanimity is required. That's where Poland and Hungary have been pausing the process. Their veto has politically blocked the entering into force of the next generation EU recovery fund and the disbursement of funds all across the EU.
The EU faces a dilemma, on the one hand, Germany and a few other countries are trying to find a compromise; on the other hand, most EU governments led by NL argue with that. There are a few other options, one is the possibility to adopt the new mechanism and EU recovery plan through an alternative process to exclude Hungary and Poland from benefiting from recovery funds. There are controversies at the moment about what are the possible options, and it's not clear how this deadlock will be solved. In the meantime, there is a delay of disbursements of the European funds as well as the EU budget itself. In case of reaching an agreement, Hungary will receive €11 billion, and Poland €40 billion. Since the Polish and Hungarian government predicted their positions could lead them to lose out on EU funding, they decided to hold the entire budget to ransom – including the Covid-19 recovery plan.
To receive support from the RRF, member states – technically assessed by the Commission – need to submit national Recovery and Resilience Plans (RRP), including targets, milestones and estimated costs. Eventually the European Council will politically approve the proposals voted by qualified majority.
The RRP must outline how each member state intends to use these investments to contribute to the green and digital priorities foreseen by the Commission. To do so, two targets have been set: 37% of the spending must be channeled to green and 21% to digital related actions. Member states need to comply with the objective of EU climate neutrality by 2050.
The deadline for submission of the Recovery and Resilience plans is 30 April 2021. Member States are encouraged to submit a preliminary draft plan from 15 October 2020.
The European Commission intends to strongly link the European recovery plan to the need to fight climate change with the objective of reducing greenhouse gas emissions by supporting the energy and ecological transition sectors with the rationale of, in the words of Ursula Von der Leyen "build[ing] a Green Europe, which protects our climate and our environment and which creates sustainable jobs."
An overall climate target of 30% will apply to the total amount of expenditure from the MFF and NGEU in compliance with the Paris climate accord and in line with the objectives of the European Green Deal, the flagship initiative to address the climate emergency that seeks to make of the EU the global leader on climate change and achieve carbon neutrality by 2050. Regarding the NGEU, this share now amounts to 37% of the total amount, following the agreement reached on 18 December 2020 between the European Parliament and the Council of the Union on the scope of the different dimensions of the Recovery and Resilience Facility (RRF).
To avoid the risks of greenwashing, the European Commission drafted on 28 November 2020 a taxonomy to classify, among the industries responsible for more than 80% of greenhouse gases, economic activities according to their ecological impact and to direct investments towards projects that it recognises as "sustainable" through the recognition of a "green label". While the classification of energy activities introduces a cross-cutting 100gCO2e/kWh lifecycle emissions threshold, the separate classification of energy sources deserving of the green label and therefore of being financed by the NGEU is the subject of heated debate. They oppose, in particular, the promoters of natural gas as a "transitional energy" fearing to be rejected from the label because of their emission level which exceeds the threshold, defended in particular by Germany and the Eastern European countries in which natural gas represents a significant part of the electricity mix, and on the other hand those of nuclear energy, Its inclusion in the taxonomy is defended by France and the Czech Republic. These tensions have led the Commission to postpone publication, fearing that it will be rejected by a qualified majority vote of the Member States and MEPs.
National economies and recovery and resilience plans
With the departure of the UK, there was also the hope of phasing out national rebates in the EU. But instead of this, the budget deal provides NGEU-skeptical Germany and the so-called Frugal Four Denmark, the Netherlands, Austria, and Sweden with even larger rebates, in total 53.2 billion € for the 2021–2027 budget period financed by all Member States according to their GNI. Germany and France support grants and loans as financial instruments to strengthen European economies during the COVID-19 crisis in 2020 in their joint position papers. Germany and France wanted to show leadership and pave the way for unity in the EU.
Until the economic crisis following the COVID-19 pandemic, Germany was the strongest advocate for fiscal restraint and austerity in times of crisis. However, with the emergence of the COVID-19 crisis, it has changed this position by supporting a grant instrument and large-scale common EU debt issuance.
On the other hand, as known Frugal Four, Denmark, Nederlands, Sweden, and Austria have coordinated their positions due to the high stakes. Thus, they were mostly in favor of supporting common debt issuance and loans in the NGEU.
Furthermore, Southern European countries, Italy and Spain wanted grants to be allocated with as little conditionality as possible. They had high backlogs before the Covid-19 outbreak and already had high budget deficits. Following the impact of the 2008 financial crisis on economies and welfare states, trust in the EU has declined. Although the leaders of Italy and Spain met shortly before the July 2020 European Summit, they did not formally coordinate their positions with the NGEU.
With regard to the Eastern European countries, Poland and Hungary were the strongest actors who argued for a strong link between the NGEU and the MFF, as they were net beneficiaries. This position was supported by other Visegrad countries, Czechia and Slovakia and Friends of Cohesion. Therefore, these actors insisted that the NGEU should be temporary and the MFF should be the main vehicle targeting underdeveloped regions.
The pandemic has had a major impact on the German’s economic growth, transport, production, and so on. Indeed, in 2020 the economy was affected by a severe recession. The beginning of the pandemic led to a decline in price-adjusted GDP of 5.0% at the end of the year. Besides, the measures taken to contain the pandemic affected the provision of services and the production of goods. Economic output fell, even collapsed in practically all areas, except for the construction sector. Nevertheless, expansionary monetary and fiscal policy measures were put in place with a 130 billion economic plan to support the economy. With this program, the country aims to prevent bankruptcies, mass layoffs and increased poverty. The situation is still critical, but citizens' expectations are gradually improving.
The state wanted to fight the impact of the health crisis by creating measures to preserve the supply of health care, supporting small businesses and the self-employed, putting in place measures to boost the real economy, and sharing fiscal aid to companies to strengthen their liquidity. Recently, the government has adopted this program until December 2021. However, the German economy cannot absorb all of the negative effects of the pandemic. Indeed, the country needs stronger stabilization measures.
Germany's national position towards the plan was rather perplexing. Indeed, this Recovery Plan has long perplexed Angela Merkel, who refused to pay to help other European countries in crisis, she changed her mind during spring of 2020. Agreeing that more than 300 billion euros of subsidies will be distributed to those most affected by the health crisis. Nevertheless, the Constitutional Court has suspended the ratification process of the European recovery fund because of an appeal against the mechanism used, based on a common European debt. In April 2021, the Recovery Plan is still not in application because of a complaint filed with the German Constitutional Court. The debate between Germany and the European Recovery Plan is still open.
Priorities of the government
The government wanted to act very quickly to counter the economic impact of the health crisis. Indeed, the partial unemployment measures have been taken over by the State by paying employees 60% of their salary, which means 550 billion euros granted to companies, a sum increased on 1 April to 1,200 billion euros. To do this, Germany relied on its very healthy finances, on a budget surplus of almost 50 billion euros before the health crisis, and public debt reduced to 60% of GDP.
Strong fiscal measures are also a German priority. This has strengthened the capacity of the health care system and protected jobs and businesses. Guarantees have been provided and capital injections made by the authorities to preserve liquidity and solvency. In addition, accelerating digital transformation through improved digital public services and infrastructure deployment would reduce the cost of future containment.
Germany wants to absorb the economic consequences, which has led to the first aids being focused on the following areas: health and protective equipment measures, cash payments for the self-employed and small businesses, increased social benefits, provision of guarantees, tax revenue reductions, and tax deferrals. In addition to the federal government's expenditures, the employment agency is using the reserves it has built up to cover expenditures for the short-time work scheme.
Apart from the economic aspect, health priorities are also important. The German government wants to ensure the provision of health care in times of crisis. Sanitary measures are still in effect and the vaccination campaign is progressing. It is important to keep in mind that the government has made it clear that it will spend as much as necessary to combat the crisis while ensuring that temporary measures, such as the extension of the short-time working scheme and liquidity support, have a clear end date, to facilitate the transition to a more sustainable fiscal situation during the recovery.
Moreover, the priority for Germany is to support this Recovery Plan which would allow Europe to recover. Indeed, the control of the crisis linked to COVID-19 and the economic recovery are part of the German federal government's program. During Germany's presidency of the Council of the EU, the country has stated that it wants to conclude negotiations on a European climate law enshrining the goal of climate neutrality by 2050, to implement the EU's Healthy Nature Strategy, and to use digital technology for environmental protection and innovation, which are the priorities of the Recovery Plan. Germany expects the Heads of State and Government to agree on the recovery fund and the multi-annual financial framework, which includes a commitment to the principle of the rule of law and a mechanism to protect the budget.
Allocation of resources
This Recovery Plan will enable Germany to achieve a short-term economic growth (around €78 billion), to invest in green and future technologies (around €78 billion) and to have a European and international solidarity (€3 billion in addition to the efforts provided for in the European Commission's recovery plan). Furthermore, the ‘Next Generation’ instrument would help member states absorb shocks by providing the weaker economies with grants.
In this context, Germany has shown the way to better rebuild by focusing on economic and environmental concerns. Indeed, its Recovery Plan is not just about boosting the economy, but about creating a more sustainable future economy. Germany's actions can give impetus to the European Commission's recently proposed €750 billion European Recovery Plan, as well as to the Green Deal that frames the EU's transition to a low-carbon economy. At the heart of its measures are numerous investments, including €50 billion, aimed at reducing the carbon footprint but also promoting development in low-carbon industries.
In addition, Germany is planning €2 billion to fund efficient hydrogen projects. This would support the transition away from coal, with funds for industrial-scale projects and energy supply. A further €2 billion will go to energy-efficient building retrofits providing employment and environmental benefits. The rest of the package will focus on consumption, support for companies hit hard by the COVID-19 crisis, health, artificial intelligence research, public spending and support for international partners, especially within the European Union. The importance of development and humanitarian aid is also emphasized by the German government. Germany remains the economic and political heavyweight of Europe. Its wealth is accompanied by enormous influence, which is reinforced by the country's six-month presidency of the European Union in the second half of 2030 and its active role in the Recovery Plan.
Furthermore, Germany's recovery and resilience plan provides a total of 27.9 billion euros. “The maximum financial contribution in grants available to Germany under the Regulation amounts to €25.6 billion. As the estimated cost of the German plan is higher than Germany's allocation, any additional amount will be covered by Germany”.
Covid-19 has reached France on 24 January 2020 with the first victim recorded in Bordeaux who travelled through Wuhan. 28 January 2020 marked the first death caused by COVID-19 both in Europe and outside of Asia of the same victim. Emmanuel Macron announced on 12 March 2020 that all schools and universities across the country would be closed while Édouard Philippe announced on 13 March 2020 that all bars, restaurants, cinemas, and nightclubs would be closed. Emmanuel Macron announced on 16 March 2020 that a national lockdown would begin on 17 March 2020. The lockdown was planned to last for 15 days, but was enlarged to last for 30 days, and then, on 13 April 2020, Emmanuel Macron announced that the lockdown would last until 11 May 2020. The lockdown was progressively lifted starting from 11 May 2020 as daily cases have been dropping 100 per day. Bars and restaurants were allowed to reopen in Paris on 14 June 2020, followed by schools, cinemas, Gyms, and other establishments on 22 June 2020, while the Borders with non-EU countries were reopened on 1 July 2020. Emmanuel Macron announced on 28 October 2020 that France would enact a second national lockdown from 30 October 2020 that would last until 1 December 2020 at least. Emmanuel Macron announced on 31 March 2021 that France would enact a third national lockdown that would begin on 3 April 2021 and would last for at least a month.
The National Institute of Statistics and Economic Studies (Institut national de la statistique et des études économiques) reports that France suffered its worst recession since the Second World War a result of the Covid-19 pandemic. GDP shrank by 8.3% following three lockdowns. Household consumption also fell 7.1%. INSEE however predicted an even more severe impact of 9% loss of GDP, but the French economy withstood the shock. Consumption has also declined 5.4% as a result of lockdowns. Investment declined by 9.8% as a result of the falls in exports by 16.7% and in imports by 11.6%. INSEE reports that unemployment in France rose from 7.1% in 2018 to 9.0% in 2020.
Priorities of the government
France Relance, presented by the government on 3 September 2020, refers to the plan that consists in building the France of 2030 by transforming the economy through the focus on three areas: competitiveness, cohesion, and ecology. The plan entails the investment of €100 billion into the relevant sectors.
France Relance will allocate €34 billion to ensuring competitiveness. By upgrading national production, investing in new technologies, reducing taxes on production, increasing support for research, training and development, France strives to regain the economic sovereignty both for France and Europe. France will namely target five sectors for investments: health, inputs for production, electronics, agrifoods, and industrial 5G. France moreover strives to reduce its carbon footprint by reversing the process of outsourcing back to France by investing into new technologies under the Investments for the Future Programme (PIA) to promote innovation in digitalisation, medical and health research, zero carbon energy, sustainable agriculture, transport, and mobility. The government strives to increase France's appeal for research and entrepreneurship by lowering taxes on production by €10 billion a year from 1 January 2021. Taxes on production in France account for 3.2% of GDP in 2018 compared to an average of 1.6% across the European Union.
France Relance will allocate €36 billion to ensuring cohesion. France will focus on investing into decreasing inequalities by supporting young and vulnerable people who seek employment. France will also respond to the need for acquiring new skills by the workforce as a result of the ecological transition, circular economy, and digital technology, by increasing the availability of vocational training by about 400 000 people and by transforming the training systems. Investments in vocational training will also be aimed towards strategic sectors through the allocation of €1.6 billion for increasing the number of certificate-based training.
France Relance will allocate €30 billion to ensuring ecology. The ambition of France consists in becoming the first major economy in Europe to achieve carbon neutrality by 2050. France will support projects across the country intending to encourage the industrial use of hydrogen by creating the Important Project of Common European Interest (IPCEI). France will also allocate €1.2 billion to encourage the use of Bicycles and public transport and to improve the quality of the existing services. France will also improve the quality of its rail network to increase the availability of trains in the less densely populated areas and to link Urban areas with Rural areas, thus speeding up professional mobility, improving the overall experience, especially for people facing reduced mobility, and developing the transport of goods to cooperate hand-in-hand with businesses, logistics, and Ports under sustainable economy. France will also strive to satisfy the demand for local agriculture and increase its food sovereignty by shifting its agricultural model towards more resilient solutions.
Allocation of the resources
France Relance will require €100 billion. €40 billion will come from the Next Generation EU as France has requested €40.9 billion in grants under the Recovery and Resistance Facility. 50% of the budget will be allocated to the ecological transition with the objective of reducing the gas emissions by 55% compared to the 1990 by 2030. MaPrimeRenov, an initiative introduced under France Relance, will contribute particularly to the transition by renovating homes towards the sustainable use of energy. 230 000 applications have been submitted as of May 2021. The European Commission has however set a couple of criteria for eligibility: 37% of the budget must be devoted to environmental objectives of the EU, in particular carbon neutrality by 2050, and 20% must be devoted to the economic digitalization.
France will be the third largest beneficiary of the funds under the Next Generation EU, amounting to 11.7% of all subsidies. France's allocation of up to €40 billion under the Next Generation EU will go along with almost €3 billion under the React-EU. France, however, will not receive Loans, only grants. The French plan, in line with the priorities set by the European Commission, will pursue three strategic objectives: competitiveness, cohesion, and ecology. Each objective will be allocated 35% of the 100 billion under France Relance, with 40 billion coming directly from the Next Generation EU.
France Relance is divided into 25 components and 68 measures based on the three objectives defined by the European Commission. 12 sub-areas have been defined for clarity: tax reduction of production (20%), employment and training (14%), future investment programme (11%), transport (11%), energy transition in business (9%), investment in hospitals and research (9%), energy renovation of buildings (7%), other aids (7%), local community (5%), business support (3%), improving soil quality and biodiversity (3%), industrial development (1%).
Italy was the first and hardest hit country during the covid-19 pandemic. Since the beginning of the crisis, the government in power decided to implement a nationwide lockdown, to safeguard the health of its citizens. Those conditions resulted in a devasting effect for the already fragile Italian economy. According to statistics, since the beginning of the crisis, the country entered a deep economic regression, losing 9% of its GDP in 2020, equal to a loss of 156 billion of euros of wealth. The crisis affected all sectors of the Italian economy, industrial production and export decreased both by 9% and 17% respectively, compared to 2019. The lockdown and the closure of borders hit hardly the services sector, such as tourism, an important source of revenue for the national economy, the national agency of tourism calculated that in 2020 foreigner tourists were 49% less compared to 2019, this had an impact also to related sectors such as the food services, hotel industry and other social economic activities. Moreover, the pandemic also deeply affected the employment rate, with a loss of almost 1 million jobs in mid-2020. To respond to the economic crisis, the government adopted different set of measures, to give assistance and liquidity to family household and enterprises hit by the crisis. We can observe that the Italian public debt increased rapidly since the beginning of the epidemic. As of the beginning of 2021 it reached 160% of the GDP, this is a spread phenomenon across the EU, since there was an increased expenditure for healthcare and economic and social assistance. In this regard, the Italian government pushed for a joint European action to tackle the covid-19 crisis. After different proposals and strong opposition with other member states, the Italian government welcomed the commission's proposal for the Next Generation EU's plan.
Priorities of the government
A first draft of the Italia Recovery Plan was sent to the Commission on 12 January 2021, by the previous government in power, led by Giuseppe Conte. However, the proposal faced some skepticism within the government coalition and caused the collapse of the government. Consequently, as of 13 February 2021, Mario Draghi became the new prime minister of Italy, and, in his installation in power, he made it clear that the national recovery plan was his number one priority. The final version of the document called, PNRR (Piano Nazionale di Ripresa e Resilienza) was sent to the commission 30 April 2021, with significant differences compared to the old document and respecting the deadline imposed by Brussel.
Italy is the biggest beneficiary, by absolute value, of the NGEU funds. The total amount of resources in the PNRR is 235,1 billion of euros, the RRF funds destined to Italy are 191,5 billion euros in total, 68,9 billion of euros allocated through grants and 122,6 billion in loans, to be spent within the 2021–2023 period, with an additional 13 billion from the REACT-EU fund. The Italian government has also allocated 30,6 billion of euros, through a complementary fund, financed by its national budget. The national plan is coherent with the structure foresaw by the NGEU agreement, using 38% of the funds for "green transition" projects, and 25% for "digitalization" projects. The PNRR is developed based on three main priorities, which are gender inclusion, the education, training, and employment of Youths in line with the European Flagships projects for sustainable growth, and territorial cohesion with 40% of the resources destined to the "mezzogiorno". the national plan foresees 6 missions:
- Digitalization, Innovation, Competitiveness, and Culture
- Green revolution and Ecological transition
- Infrastructure for sustainable mobility
- Education and Research
- Inclusion and Cohesion
On parallel of those missions the government will also implement different structural reforms, answering the Commission’s Recommendations. The government will apply 2 horizontal reforms, to the Public Administration and to the Judicial system, consisting in structural innovation of those sectors to improve the efficiency, equity and competitiveness of the country. It will also adopt enabling reforms, in order to simplify and rationalize national legislation, by removing administrative, legal and procedural obstacles that influence negatively the quality of public services offered to its citizens and businesses. Finally, the government will implement support reforms, to alleviate the socio-economic impact of the covid-19 crisis. Those reforms will impact and increase social equity and the competitiveness of the production system and will be adopted throughout the implementing period of the PNRR.
Allocation of resources
The PNRR allocates its resources to 16 specific components grouped in 6 missions, with the aim of implementing investments, projects and structural reforms to achieve the objectives foreseen by the NGEU agreement. The government decided to use all the possible resources of the RFF, equivalent of 191,5 billion, already allocating in the PNRR the first 70% of the grants given to the country which must be spent between the 2020–23 period. Those missions will be financially complemented by the REACT-EU fund resources destined to Italy, which amount of 13 billion euros, and by a complementary fund (C.F.) of 30 billion euros financed by the country’s national budget.
A. MISSION 1: Digitalization, Innovation, Competitiveness, Culture (40.73 RRF / 0.80 REACT-EU / C.F. 8.54) = 50.07 Billion euros
The first mission aims at increasing the competitiveness, productivity, and digitalization of the Italian economy and public sector to have a positive impact on private investments and to give a more efficient public service to its citizens and businesses; it divides its resources in three components:
- The first component allocates 9.75 RFF / 1.20 C.F. billion of euros, in order to digitalize, innovate and securitize the Public Administration, with the objective to make P.A. more accessible while offering more efficient services. Different projects are foreseen to develop digital infrastructure, pushing the administration to use digitalize data and upload them on the “cloud” and strengthening cybersecurity defense systems.
- The second component allocates 24.30 RFF / 0.80 REACT-EU / 5.88 C.F. billion, to promote innovation and digitalization in the production system, it will act in different economic sector and incentives investment in technology and R&D. this component also foresees strategic assistance to the digitalization and innovation of S&MEs to support the internationalization processes and the competitiveness of industrial supply chains.
- The third component allocates 6.68 RFF / 1.46 C.F. billion to boost the tourism and Culture sectors, hardly hit by the crisis, and with a big weight on the national economy.
B. MISSION 2: Green revolution and Ecological transition (59.33 RFF / 1.31 REACT-EU / 9.32 C.F.) = 69.96 Billion euros
The government took the PNRR as a chance to allocate a consistent amount of money to foster development and investment for ecological transition to meet the sustainable developments goals and European Green Deal goals, in 2030 and reach net neutrality in 2050. This mission has 4 components:
- The first component allocates 5.27 RFF / 0.50 REACT-EU / 1.20 C.F. billion to increase sustainability on the one hand, by modernizing and developing new waste treatment plants and fill the infrastructural gap in the south of Italy, to realize the flagship project for circular economy, and on the other hand, to develop a smart and sustainable agricultural supply chain.
- The second component allocate 23.78 RFF / 0.18 REACT-EU /1.40 C.F. billion, to develop industrial know-how leadership in the transition sector, to be more competitive at the European and international level, with the aim of reducing dependence on extenral innovative technology (sustainable transport, batteries for the electric transport sector, etc.).
- The third component allocate 15.22 RFF / 0.32 REACT-EU / 6.72 C.F. billion to increase the energy efficiency of public and private buildings, the funds will be directly issued to citizens through allowances .
- The last components, with 15.06 RFF / 0.31 REACT-EU billion, put in place different projects and actions that will make the country more resilient to climate change, protect biodiversity and to assure the security and efficiency of the water system.
C. MISSION 3: Infrastructure for sustainable mobility (25,13RFF /0.00 REACT-EU / 6.33 C.F.) = 31.46 Billion euros
The third mission aims at creating, by 2026, a more modern and sustainable transport infrastructure system, and reducing the infrastructure gap between the south and north of Italy, which represent an impediment for economic convergence in the country. This mission foresees 2 components:
- The first component allocates 24.77 RFF / 3.20 C.F. to modernize and develop the trainway system, and to boost the train infrastructure in the south of Italy in order to increase the connectivity between regions.
- The second component, with 0.36 RFF / 3.13 C.F. billion, will be used for the air transport system.
D. MISSION 4: Education and Research (30,88 RFF / 1.93 REACT-EU / 1.00 C.F.) = 33.81 Billion euros
The fourth mission aims at improving the national education system, by investing and increasing the efficiency and quality of the education structure. The aim is also the reduce the school dropout rate and to increase the number of workers with a tertiary diploma. This mission foresees 2 components:
- The first component, with 19.44 RFF /1.45 REACT-EU billion, aims at increasing the educational offer, from kindergarten to universities,
- The second component, with 11.44 / 0.48 REACT-EU / 1 C.F. billion aims at increasing investment in R&D, favoring the transition towards a know-how-based economy.
E. MISSION 5: Inclusion and Cohesion (19.81 RFF / 7.25 REACT-EU / 2.55 C.F.) = 29.62 Billion euros
The fifth mission has the objective to fulfill the priorities of the PNRR, by increasing investment to fight gender discrimination, increase the inclusion of youths in the job market, and to rebalance territorial disparities in the "Mezzogiorno". This mission foresees 3 components that answer to the Commission's recommendation and will be complemented by different structural reforms:
- The first component allocates 6.66 RFF / 5.97 REACT-EU billion to implement reforms with the aim of transforming the job market, by creating different instruments that would facilitate the job transition, protection of workers, and increase the employment rate.
- The second component issues 11.17 RFF / 1.28 REACT-EU / 0.13 C.F. billion for social cohesion and inclusion.
- The third component will employ 1.98 RFF / 2.43 C.F. billion for territorial cohesion, aiming at strengthening the economic competitiveness of the "Mezzogiorno" regions.
F. MISSION 6: Health. (15,63 RFF / 1.71 REACT-EU / 2.89 C.F.) = 20.22 Billion euros
The resources of the sixth and final mission will be invested to strengthen the resilience of the national Healthcare system, weakened by the pandemic.
The PNRR foresee the participation of multiple actors at the domestic level. The fulfillment of the structural reforms will be completed by the specific competent Ministries and administrations, however regarding the engagement of specific interventions and projects, the central administrations, the regional and local entities will be responsible to coordinate and implemente them. In addition, the government arranged a governance scheme which provides a structure for coordinating and monitoring the national recovery and resilience plan. This structure will be set up within the Ministry of Economy and Finance, it will also be the point of contact for the European Commission.
As an EU Member State, Denmark has a well-developed and robust welfare system that makes Danish society one of the most egalitarian in the entire world. Denmark is a technologically advanced, highly developed country where the government and all other community organizations exercise important regulatory functions in society to provide comprehensive services that benefit all citizens.
Before COVID-19, the Danish economy had a solid industry and trade base, lacking significant macroeconomic inequalities. As a result of the COVID-19 crisis that broke out in Europe in general and Denmark in particular, the positive trends of economic development came to an unpredictable halt in early March 2020, causing a financial crisis that needed a rapid response. Due to the measures taken by the Danish government in a timely manner to curb the spread of the epidemic, the economy experienced a sudden slowdown followed by a decline.
Denmark was one of the first states in Europe to act decisively against the coronavirus COVID-19 when it hit Europe by declaring a national lockdown and closing its national borders. In the first half of 2020, the Danish economy was badly affected. As a small country with an open economy and a structural balance of payments surplus, Denmark's economy is heavily dependent on foreign trade. As such, the country recorded its deepest fall in GDP in the first half of 2020 (−7.7% per year in Q2 alone) due to the COVID-19 crisis. Since the initial spread of the coronavirus in Denmark was essentially under control, the Danish economy could withstand the worldwide crisis caused by COVID-19 relatively firmly.
Priorities of the Government
The Danish government's priorities and resilience plan include improving energy efficiency, promoting renewable energies, strengthening sectoral integration through electrification, transforming the transport sector for more sustainable mobility, and the transition to a circular economy. However, the Danish article further emphasizes the importance of Europe's digital transformation and the EU's need to be more self-sufficient in terms of "certain technologies critical to future economic development and security in Europe", especially 5G.
A. Scale and accelerate investments in the green transition, including:
- Expansion of renewable energy infrastructure to ensure the free flow of renewable energy throughout the EU and to facilitate the rapid deployment of renewable energy.
- Promote renewable energy generation, especially offshore hybrid projects, through EU regulation and mobilize financing. 3. Increasing industry integration, especially through increased electrification
- Improving and digitizing energy efficiency in buildings to promote job creation and reduce emissions.
- Greening the transport industry, including light and heavy-duty vehicles and transport
- The transition to a circular economy, the promotion of the best available clean technologies, water efficiency and bio-based and nature-based solutions.
- Promote the best available clean technologies (water, resources, air, chemicals)
- Biological and nature-based solutions, including a focus on the food industry
B. Develop new technology facilitators and update our regulatory framework to make Europe a digital pioneer, make the Single Market work for business and with 5G, artificial intelligence and quantum communications, and an accelerated presentation. Expansion and electrification of the European energy system supporting the climate-neutral target.
- A life science industry that provides Europe's innovative capacity to maintain and develop essential medicines and medical equipment.
- Develop hydrogen and X power supply centers and green industrial ecosystems around these centers. Power-to-X can help decarbonize the industry and contribute to sustainable transport solutions such as zero-emission shipping. In combination with Carbon Capture, Use and Storage (CCUS), "hard to eliminate" emissions from the largest CO2 emitters can be significantly reduced.
- New technology, such as research and innovation in artificial intelligence and quantum technology and communications, increases Europe's digital capacity.
Allocation of Resources
To prevail this crisis, the Danish government has applied its own plans and the plans that have adopted by the EU. Under the Recovery Plan, NGEU, adopted by the EU, the Danish government will receive grants and loans to address the impact of the COVID-19 pandemic on the national economy. With Recovery and Resilience Facility (Maximum grant allocations), Denmark will be allocated by 1.6 billion EUR under the current prices. Alongside Recovery and Resilience Facility, Denmark will receive 178 million EUR under REACT-EU for 2021. It will be also allocated by 46 million EUR under Just Transition Fund and by 54.3 million EUR for 2021 and 2022 under Breakdown of European Agricultural Fund for Rural Development.
Denmark is a special case due to opt-out from the Eurozone. The Krone is Danish currency in which the EU grants and loans are received with the Krone. The Krone is part of the European Exchange Rate Mechanism (ERM) II.
As a small-sized open economy, Belgium, as well as many other countries, will not be able to escape the consequences of the pandemic. Belgium is one of the counties hit hardest economically by the second wave of the pandemic, which can be explained by the duration of the confinement and the drastic measures taken to fight the virus. The impact on the economy proved to be much greater than it was initially estimated. Nearly 40% of Belgian household spending is influenced by COVID-19 restrictions and 70% of GDP will be impacted by this lockdown. Belgian economy is highly integrated into global supply chains which have been disrupted by the coronavirus, more precisely, the strong ties with Germany pose a significant risk in this regard. Having the second largest port in Europe and many logistic and international companies active in that area, makes an economic activity "slow down" elsewhere very sensitive to the Belgian economy. Considering Belgium's position as a trade center imports are expected to develop in line with exports, ensuring a contraction in 2020 and a rebound in 2021. Moreover, unemployment will be a huge issue in all areas, more precisely in sectors such tourism, leisure, hotels, restaurants and arts where the likelihood of bankruptcies will be much higher. The positive effects for the economy will be delayed due to the fact that the de-confinement is expected to be more gradual.
Priorities of the government
The Belgian policy strategy in response to the COVID-19 outbreak is first of all to protect public health. At this point, a diversity of health-related measures have been introduced. Nevertheless, health-related measures have also significantly impacted socio-economics. Consequently, measures have been taken on both health-related and socioeconomic levels. To protect public health safety measures have been taken in the forms of confinement and curfew, limiting the movement of persons to a minimum. In regards to the socio-economic impact of the virus, the measures to support the health care system, companies, self-employed, households have been introduced in the forms of deferral of payments of federal taxes, loans, invocation of temporary unemployment.
The government is taking measures to fight the consequences of coronavirus had on society but the COVID-19 pandemic has led to a global health crisis, and as a consequence Belgian economy will have to endure multiple shocks: economic, supply, demand shock. At this point different levels of government have been taking measures to alleviate the socio-economic effects of the pandemic. In regards to the EU recovery plan, following the recommendations of the European Semester Belgium will improve the measures to effectively address the crisis and support recovery. Strengthening the resilience and health system will be prioritized, as well as mitigating employment and ensuring effective implementation of measures supporting the liquidity of firms and businesses. Furthermore, the focus will be on investment on green and digital transition in addition to research and innovation, such areas as sustainable transport, more energy-efficient buildings, digital infrastructure will benefit from the investments.
Allocation of resources
The Federal Government and the governments of the federal entities that make up Belgium have reached an agreement on a first draft of a Plan for Recovery and Resilience and on the distribution of funds. Belgium will benefit from billions of euros in grants and loans which is considered an important step in Belgian economic recovery strategy. At times when the economy of the country is hit particularly hard the Recovery and Resilience investment plan is meant to help renew the economy and make it stronger.
The Next Generation Recovery plan is supported by such political actors as the Federal Prime Minister Alexander De Croo who confirmed that the projects funded by the program are ready to start. In the interim, at a federal level Secretary of State Thomas Dermine will be responsible for coherent communication between beneficiaries of the funds. However, the Flemish Prime Minister Jan Jambon admits that while receiving funds would be beneficial, it wasn't easy to negotiate with other governments. He comments that it is important to find an agreement for everyone to benefit from the plan and calls it "defensible".
After reaching an agreement on the first draft of a Recovery and Resilience plan and on the distribution of funds Belgium can benefit from approximately 5 billion euros in grants and loans. Furthermore, on 11 January 2021 Belgian authorities reached an agreement on how the funds will be allocated between local governments in the regions. According to the agreement Flanders region will receive the lion's share of about 2.25 billion euros. Wallonia in its turn will benefit from 1.48 billion euros and the federal government will receive 1.25 billion euros. Brussels will receive 495 million euros, the French Community will receive 395 million euros while the German Community will receive 50 million euros. The Flemish Government formed the basis of the recovery plan at Flemish level, launching a plan, called "Vlaamse Veerkracht" which includes innovations in digital transformation and the transition of Flanders to a more sustainable economy. Wallonia region in its turn has launched a similar program called "Get Up Wallonia" which sees as a task enabling stronger economic, social, environmental and territorial development.
The funds will be used in accordance with the recommendations given by The European Semester and will be invested in improving projects related to sustainability, green digital transition, mobility and welfare. The funds will also help to strengthen the resilience of the health system as well as improving the business environment.
The disruption of the Covid-19 pandemic has severely affected the Spanish economy as a result of the strict lockdown measures imposed by the national executive. The declaration of the State of Alarm announced by the PM Pedro Sanchez on 13 March led to the nationwide closure of non-essential shops and activities. This drastic fall of the social life and economic activity determined a rapid deterioration of the main economic and financial indicators. The previous day to the announcement of the State of alarm the Madrid stock exchange experienced its biggest collapse in history by losing 14.06% of its value.
Compared to other countries, the heavy reliance of Spain on the travel and tourism industry has deepened the economic fallout of coronavirus crisis: the arrival of tourists in 2020 plummeted by 77% with respect to the previous year which generated €56 billion losses for the tourism business. According to the National Statistics Institute (INE), gross domestic product fell dramatically by 10.8% during 2020. In this sense, the Covid-19 recession constitutes the second deepest drop of Spanish GDP besides the outbreak of the Spain civil war in 1936 when the economy collapsed nearly 26%. Moreover, private consumption witnessed a remarkable drop around 12,4%, the largest setback since record-keeping started in 1970. By sectors, in 2020 agriculture was the only one to increase in terms of GDP contribution which growth 5,3% compared to 2019. On the other side, home and infrastructure construction declined around 14,5% while service sector and industrial production fall by 11,1% and 9,6% respectively. The labor market has also been particularly affected: 623.000 workers have lost their jobs in 2020 while almost 1 million have adhered to the temporary workforce reduction mechanism commonly knew as ERTE (Expedientes de Regulación Temporal de Empleo, in Spanish). The unemployment rate has, therefore, reached a peak of 16,13% in the third trimester in 2020, two points higher than the year before the pandemic.
In response to the crisis, one of the earliest priorities of the Spanish government was to activate the Urgent Action Plan and the approval of a guarantee facility up to 100.000 million euros. Thereafter, the Cabinet, trade unions and employers approved the Agreement on Economic Recovery and Employment in July 2020 which laid the foundations for accelerating the recovery and the creation of quality employment. The Plan envisaged measures extending the short-time work schemes (ERTE), training of workers in the digital sphere, boosting the green transition and implementing telework legislation. Under this framework, a public support programme for business solvency and investment up to 50 billion euros was launched. This plan consists, on the one hand, of a Solvency Support Fund, endowed with 10,000 million euros to invest in strategic companies. On the other side, the Official Credit Institute made available an additional investment guarantee facility for an amount of 40.000 million euros.
Priorities of the government
The disbursement of EU funds is not automatic, but it is conditioned to the elaboration of a National Recovery and Resilience Plan no later than 31 April 2021 and which has to be technically examined by the European Commission. As required by the European authorities, the plan should include a detailed analysis of reforms, estimated costs and a timetable, and be aligned with European priorities. In this regard, in October 2020 the Government of Spain publicly presented the Plan España Puede, a basic outline of the future Recovery and Resilience Plan. The final version has been presented by the PM Pedro Sanchez on 14 April 2021. Later on, during the last week of April the Spanish government finally submitted the Plan to the European Commission for its evaluation.
In absolute terms, Spain is the second largest recipient country after Italy regarding the number of European funds received by getting €72 billion in the form of transfers and €68 billion of loans. Specifically, as in the rest of EU countries these funds are channeled through two main schemes: Recovery and Resilience Facility providing Spain about €59 billion until 2023 and REACT-EU whose bulk is around €12 billion. Overall, under the framework of the Next Generation EU the Spanish economy ought to receive an injection of almost €155 billion and €43 billion from the 2021–2027 MFF.
The Recovery and Resilience Plan of Spain is structured around 4 guiding principles whose aim is to be the backbone of the economic policy strategy pursued by the Spanish government. The four transversal axes are closely aligned with the general objectives enshrined under the NGEU and the United Nations Sustainable Development Goals:
- ecological transition
- gender equality
- social and territorial cohesion
Allocation of resources
In addition, the Plan includes 10 levers policies which are crucial to foster economic recovery and employment already in the first phase of the Plan before 2023. The 10 policy priorities are composed by 30 policy components that articulate investments and reform projects seeking to modernize the country. Although most of them are horizontal in nature, some are specifically set up to boost the modernisation of key sectors, such as trade, tourism, agri-food, health, the automotive industry and public administrations management.
- Urban and rural agenda, the fight against rural depopulation and agricultural development (20.7% of the budget)
- Resilient infrastructures and ecosystems (15.0% of the budget)
- Energy transition (9.2% of the budget)
- Modernisation of the public administration (6.2% of the budget)
- Modernisation and digitization of the industrial fabric and SMEs, recovery of the tourism sector and promotion of Spain as an entrepreneurial nation (23.1% of the budget)
- Pledge for science and innovation and strengthening the capabilities of the national health system (7.1% of the budget)
- Education and knowledge, lifelong learning and capacity building (10.5% of the budget)
- The new care economy and employment policies (7.0% of the budget)
- Promotion of the culture and sports industries (1.2% of the budget)
- Modernisation of the tax system for inclusive and sustainable growth.
Several mechanisms and institutional actors are foreseen under the Recovery and Resilience Plan of Spain with the aim to ensure optional fund management. The following structure put in place by the Spanish government intends to monitor and scrutinize the implementation and results of the Recovery and Resilience Plan:
- An Inter-ministerial Commission chaired by the PM
- A Technical Committee in charge of providing technical and legal support to the Inter-ministerial Commission.
- A Recovery Fund Monitoring Unit
- The Sectoral Conference on European Funds jointly with the 17 autonomous communities and 2 autonomous cities led by the Minister of Finance.
- The Conferences of presidents between different autonomous communities
- A regular parliamentary scrutiny mechanism before the Parliament, through the Joint Committee for the EU.
Covid-19 hit the Polish economy throughout 2019 and 2020 affecting all sectors. The GDP of Poland is expected to shrink by 4.3%, unemployment is expected to rise to 7.5%, while inflation is expected to remain at 3.8%.
The Polish economy has been developing constantly since 1989. The current challenges, however, stem from the economic slowdown caused by Covid-19 rather than from economic weakness. Poland's economic struggle namely stems from three fundamental areas: the limitation of economic activity worldwide, the hit on demand and supply chains, and the reliance on the government to bail out all industries.
Unemployment rose from 5.1% in October 2019 to 6.1% in October 2020, meaning that currently more than 1 million people have filed for unemployment in Poland. Registered unemployment, however fails to account for professional inactivity, which would raise the Unemployment Rate even more, as around 3,7 million people in Poland are profesionally inactive. 62% of Consumers acknowledge that financial well-being has decreased along with 70% of entrepreneurs acknowledging that income has decreased. HoReCa has suffered particularly as a result of lockdows. The summer and winter holidays in Poland, for example, are relatively long (summer season lasts between May and September and winter season lasts between November and March), meaning that throughout 2020 and 2021, economic activity in HoReCa lost lost income altogether. The government has deployed several tools to tackle the consequences of the lockdowns on the economic activity: Anti-Crisis Shield 1.0, 2.0, 3.0, 4.0, 5.0, and 6.0.
The Anti-Crisis Shield 1.0 was launched on 1 April 2020, allowing the entrepreneurs who suffered from the economic decline to apply for Benefits to protect jobs by subsidizing the salaries of employees, co-financing the salaries of employees, exempting the private businesses employing up to 9 people from paying state insurance for the period between March and May 2020, granting Loans of up to €1,135 to entrepreneurs, and according benefits for employees who have been obliged to quarantine.
The Anti-Crisis Shield 2.0 was launched on 17 April 2020 and extended the tools lanched under 1.0 to include recently established enterprises that have been registered between 1 February 2020 and 1 April 2020, grant exemptions from paying social security for self-employed entrepreneurs, and expand the range of businesses eligible for the exemption from paying state insurance from 9 employees to 49 employees.
The Anti-Crisis Shield 3.0 was launched on 15 May 2020 and completed the tools launched under 2.0 by directing financial boost to particular sectors, and introducing administrative facilitations, such as electronic correspondence.
The Anti-Crisis Shield 4.0 was launched on 24 June 2020 and introduced provisions regarding the subsidies to the interest rate applicable to bank loans for ensuring financial liquidity to entrepreneurs economically hit by Covid-19 and enforced the requirement to obtain the consent of the Office of Competition and Consumer Protection to take over any company based in Poland or to acquire a considerable amount of shares or stocks, namely up to 20% of shares or stocks in a Polish company, by any entity based outside the European Union, European Economic Area or Organisation for Economic Co-operation and Development.
The Anti-Crisis Shield 5.0 was launched on 15 October 2020 and was directed towards tourism and culture to grant benefits and exemptions from the payment of social insurance for the period between July and September 2020 following the lockdowns.
The Anti-Crisis Shield 6.0 was launched on 14 December 2020 and was directed towards the industries that suffered the most during the second wave of Covid-19 and was extended to additional industrial sectors, such as HoReCa, transport, tourism, and entertainment.
Priorities of the government
The first confirmed case of Covid-19 in Poland was announced on 4 March 2020. 12 people have been hospitalized under the suspicion of COVID-19, 13 have been quarantined, and 1000 were monitored by the authorities on 19 February 2020. 47 people have been Hospitalized under the suspicion of COVID-19, 55 were quarantined, and 1570 were monitored by the authorities on 27 February 2020. The World Health Organization declared on 10 March 2020 that COVID-19 was spreading locally.
The government refused to participate in the acquisition of medical equipment led by the European Union on 28 February 2020. Łukasz Szumowski, Minister of Health, argued that Poland would ensure the acquisition of adequate tools for fighting COVID-19. The government however reiterated the commitment to the initiative on 6 March 2020.
Poland and Hungary threatened to block the negotiations on the MFF and the Next Generation EU. The threat stemmed from partisan politics rather than from Next Generation EU. More than 50% of Polish citizens declare having positive feelings towards the initiative as opposed to only 16% who declare having negative feelings to the initiative.
The government rules by a coalition named Zjednoczona Prawica (United Right) composed of three political parties: Prawo i Sprawiedliwość (Law and Justice) led by Jarosław Kaczyński, Solidarna Polska (United Poland) led by Zbigniew Ziobro, and Porozumienie (Agreement) led by Jarosław Gowin. United Poland and Agreement both have enough seats to halt the parliamentary majority of the coalition.
The government is also tacking domestic pressure from a couple of sources: first, the government lost focus after handling the first wave of COVID-19 relatively well, thus failing to conduct adequate preparation for the second and third waves; and second, the government filled the Constitutional Tribunal with its supporters in a series of illegal moves that have launched conflict the rule of law in Poland, especially the ban on abortion despite foetal defects.
Power struggles within the United Right have occurred following the decline of popular support, with Zbigniew Ziobro in particular, the leader of the United Poland and the Minister of Justice, pursuing an anti-European and anti-German narrative and orchestrating the government's assault on the judicial system.
The Rule of law mechanism, which renders granting the financial aid to the Member States conditional on the respect of the rule of law, is the foundation of Poland’s opposition to the ratification of the Next Generation EU. Jarosław Kaczyński declared that the failure to vote or abstention by United Poland would entail the end of the coalition, while Zbigniew Ziobro declared that United Poland would oppose Next Gen EU.
Germany, the rotating presidency at the European Council, brokered a compromise: the European Commission will refrain from implementing the rule of law mechanism while a Member State would challenge its legality at the Court of Justice.
Mateusz Morawiecki, the Prime Minister, accepted the rule of law mechanism at the European Council of July 2020 and December 2020, thus agreeing on the conditionality of the funds upon the European Commission’s assessment of the Member States’ compliance with the rule of law. Zbigniew Ziobro insisted that the move constitutes a treason of the voters of the coalition.
Zjednoczona Prawica (United Right) led by Prawo i Sprawiedliwość (Law and Justice) reached an agreement with Lewica (The Left) on 27 April 2021, green lighting the ratification of the Next Generation EU. Robert Biedroń raised the following comment regarding the agreement: “One of the conditions of our support for the government is building 75,000 apartments for rent. We have also negotiated €850 million to support local Hospitals and that local governments would decide how to spend 30% of recovery fund money". €300 million would be devoted to support restaurants and hotels hit by intermittent lockdowns to tackle COVID-19 while the disbursement of the recovery funds would be supervised by a monitoring committee of government officials, trade unionists, business representatives, local governments and NGOs.
Poland has laid out five components of the Krajowy Plan Odbudowy, the Recovery and Resilience Facility, which refers to the national priorities: (1) resilience and competitiveness of the economy, (2) increase in green energy and decrease in energy consumption, (3) digital transformation, (4) effectiveness, availability, and quality of the healthcare system, (5) green and intelligent mobility.
Poland submitted the National Reconstruction Plan to the European Commission on 1 June 2021. The Law and Justice and the Left finally reached an agreement, sparking disapproval and discontent of the Civic Coalition and of All-Poland Women's Strike. The Sejm voted on the approval of the Recovery and Resilience Facility on 4 May 2021, with the outcome of 290 MPs for, 33 MPs against, and 133 MPs abstaining. The vote thus politically saved the Law and Justice Party from the implosion of the coalition government, as the majority held by only 3 seats. The United Poland party fervently opposed the Recovery and Resilience Facility "(...) arguing it would lead to the creation of a federal Europe by letting the EU take on common debt, and also links the use of the money to not violating the rule of law - a source of friction between Brussels and Warsaw". Prime Minister Mateusz Morawiecki declared following the vote: "I thank everyone who rose above partisan calculations. (...) This vote was a breakthrough. I'm taking it very positively because it turns out that there is a very big majority in our parliament which is aware that we have to work together for our country".
Allocation of resources
Poland is expected to be granted 58,1 billion: €23.9 billion in grants and €34.2 billion in loans. The government will have the time until 2026 to allocate the money. The plans for the allocation will be laid out in the Krajowy Plan Odbudowy (National Reconstruction Plan). The Recovery and Resilience Facility constitutes a fundamental instrument of Next Generation EU by providing €672.5 billion to boost Investments and Reforms through €312.5 billion in grants and €360 billion in Loans.
Poland has submitted the Krajowy Plan Odbudowy, its Recovery and Resilience Facility, to the European Commission. Poland requests €23.9 billion in grants and €12.1 billion in Loans around five pillars of resilience of the economy: (1) business environment, innovation and labor market policy, (2) green energy, (3) digital transformation, (4) sustainable transport, and (5) health system. The plan will focus on improving the quality of air, energy-efficiency in buildings, development of renewable energy, zero-emission transport, and access to broadband internet. Projects cover the Recovery and Resilience Facility until 2026.
EU revenue by own sources
The funding of the Next Generation EU Agreement relies primarily on two financial mechanisms: the collective issuance of bonds and the revenue sources of the EU budget through which the EU and its Member States seek to cover the whole budget expenditure of the recovery package.
With respect to the first mechanism, the European Commission clearly assumes a key role in ensuring long-term sound financing of the stimulus plan. In the wake of the EU leaders Summit held in July 2020, the European Commission got the mandate to issue up to €750 billion of debt on the international capital markets on behalf of the 27 Member States of the European Union. This joint emission of common debt bonds is not the first in European history but it has never been done so on such huge proportion. According to the European Council conclusions, the net borrowing operations are scheduled to end by 2026 whereas the deadline for paying back the due loans and interest rates is set not later than 31 December 2058. In this way, the common bonds are deemed to constitute triple-A-rated debt security by international investors and several credit rating agencies whose interest is to buy safe assets bonds: thanks to this, the European Commission benefits from lower interest rates compared to Member States, notably those that show higher borrowing costs.
In practice, to make the Next Generation EU Agreement feasible, the European Commission needs to modify the Decision on the system of Own Resources of the European Union, commonly known as the Own Resources Decision that defines how the EU budget is financed every year. The amendment entails two major changes: on one side, the Own Resources ceiling is increased by 0.6% points, on the other hand, the headroom envisaged in the Decision is subject to an additional expansion in quantitative terms.
The headroom (of the EU budget) is the margin between the Own Resources ceiling of the long-term budget and the expenditure during the same period. The importance of the headroom resides on the fact that it is necessary in order for the EU to meet in full all its financial obligations and liabilities even in case of economic recession. Otherwise, the EU would no longer be able to preserve its high credit rating status vis a vis international investors which would trigger a general rise in the borrowing costs of loans.
Following Council Decision 2020/2053, the increment in the own resources ceiling is intended to be applied exclusively for the purpose of addressing the COVID-19 crisis. This means that the new Own Resources ceiling exceeds the previous one in nominal terms: the former indeed amounted for the 1.40% of the sum of all Member States Gross National Income (GNI). Instead, the current ceiling enforced after the new Regulation sets a higher bulk which corresponds to 2.00% of the EU Gross National Income. The EU Decision foreseen that once the money borrowed and loans will be completely repaid the newly expanded ceiling will be lowered to the pre-existing level of 1.40% of the total EU GNI.
Additional sources of revenue
The revenue sources of the EU annual budget represent the other mechanism through which the Next Generation EU Agreement is intended to be funded over the implementation years. Until 2020, the sources of income of the EU budget have been basically three: traditional own resources, VAT based own resource, and GNI-based contribution.
Prior to the COVID-19 pandemic, discussions on the introduction of a new system of own resources have taken place at the European level. However, national authorities were hesitant on providing new sources of income. The withdrawal of the United Kingdom and the increasing financial needs of the Union paved the way to reform based on the inclusion of new tax-based resources. Consequently, the European Commission published in May 2018 a proposal for the amendment of the Union's own resources system to introduce a basket of additional resources, notably the Common Consolidated Tax Base, the EU Emission Trading System and a tax on non-recycling plastic packaging waste. The subsequent debates at the Council made visible the strong preference for the adoption of a plastic tax to be included into the MFF 2021–2027 which complements the pre-existing one and it is deemed to be the antechamber of broader reform.
To cope with economic consequences of the coronavirus pandemic, the July 2020 special meeting of the European Council advocated for speeding up the reform with the intention to facilitate debt repayment raised under the frame of the Next Generation EU Agreement and to relieve budgetary stress faced by the Member States.
Moreover, the July 2020 European Council approved to reform the own resources system by providing a further detailed roadmap. To pay back part of the massive financing, the following new resources have been foreseen:
- Carbon Border Adjustment Mechanism according to which goods will be taxed in relation to CO2 footprint released during their production.
- Digital Tax on huge digital corporations whose turnover is over EUR 750 million worldwide and at least EUR 50 million within the EU.
- Revision of the ETS scheme that could be extended to the aviation and maritime sector.
- Financial Transaction Tax: to ensure a fair contribution of the financial sector to national tax revenues through the imposition of a tax rate on certain transactions and derivatives.
As stated in the European Council conclusions, the European Commission is required to deliver its proposal for the adoption of further sources of revenues in line with a specific timeline roadmap: by June 2021 proposals on the CBAM, digital levy, and ETS reform have to be submitted. Thereafter, the Council will decide no later than January 2023. In a second step, the Commission will oversee additional proposals upon the inclusion of a Financial Transaction Tax and a common corporate tax based on big companies whose operations benefit from the Single Market. These two levies will be examined by the Council no later than 1 July 2025.
As of April 30, 2021, the only new source of resources created is the tax on non-recycling plastic packaging wasted that was adopted at the European Council meeting on 10–11 December 2020.
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