Can Europe’s recovery fund live up to expectations?
The €800bn European recovery fund aims to kick-start the Eurozone’s economy in an ambitious response to COVID-19. Can the plan lift long-term growth prospects while prompting closer fiscal integration?
- The European Commission’s €800bn European recovery plan aims to repair the initial economic damage caused by the coronavirus
- A minimum of 37% of the funds given to states should focus on climate challenges and 20% on fostering digital transition
- The European Commission will start issuing bonds and by the end of the year plans to issue €80bn in long-term funding
- Italy will be the chief beneficiary of EU recovery funds in absolute terms, obtaining €205bn (12.4% of 2020 GDP) from the Next Generation EU facility
- We forecast that the national plans will contribute around 1.2 percentage points to the bloc’s real growth by 2023, growth being particularly pronounced in Italy and Spain.
Can the pandemic help put the European Union on the path to fiscal integration, following the recent financial framework that targets coordinating stimulus efforts?
The European Commission (EC) has devised the €800bn European recovery plan known as Next Generation EU (NGEU) that, when coupled with the EU’s financial framework, aims to repair the initial economic damage caused by the coronavirus, while creating a greener and more digital and resilient Europe.
The route to fiscal union
After a period of tense negotiations, an agreement was reached to embrace the idea of debt mutualisation. Ratification of May’s own resources decision paved the way for the EC to start issuing bonds. By the end of the year the Commission plans to issue €80bn in long-term funding.
The NGEU’s main component is the funding of the six-year Recovery and Resilience Facility (RRF), funds being distributed in grants and loans. In an effort to assist the least developed nations, 70% of grants depend on a member state’s population, the inverse of gross domestic product (GDP) per capita and average unemployment rate over 2015-2019. The remaining 30% is calculated by the rate of gross domestic product (GDP) decline since 2020.
Promoting European objectives
To receive funds, countries submitted their National Recovery and Resilience Plans (NRRP) to the EC. Each addresses the challenges around coordinating economic and fiscal policy. They were encouraged to focus on key areas for investment and reform, including clean energy, sustainable transport, digitalisation of public administration, data cloud capabilities and reskilling/upskilling. A minimum of 37% of the funds should focus on climate challenges and 20% to foster the digital transition.
Following the money
Italy will be the chief beneficiary of EU recovery funds in absolute terms, obtaining €205bn (12.4% of 2020 GDP) from the NGEU facility. The Italian government aims to target tax credits to groups moving to high-productivity technologies. A high-speed railway is also planned between the north and south along with tougher labour market policies.
German policymakers aim to “future-proof” hospitals, digitalise administration, support replacing private vehicle fleets, fund more energy-efficient buildings and upgrade supply chains with the funds.
Meanwhile, French authorities pledge to modernise the railway network and develop public transport. They aim to use the funds to invest in improving energy intensity of public buildings and to support research in industrialising electrolysis and fuel cells technologies.
In Spain, the focus will be on reducing traffic levels and developing sustainable-mobility alternatives.
The establishment of debt mutualisation may help reshape Europe. The issuing of joint debt can reduce the risk of fragmentation, lower borrowing costs for several states and improve policy coordination in the bloc. There are potential challenges, especially around enforcement of the fiscal rules, but this is a worthy goal.
Lifting productivity and growth
The RRF should provide a sizable fiscal stimulus to eurozone demand from the middle of this year. We forecast that the national plans will contribute around 1.2 percentage points (pp) to the bloc’s real growth by 2023, growth being particularly pronounced in Italy and Spain. The EC estimates that projected growth will be lifted by 0.5pp at the 10-year horizon.
Indeed, these estimates exclude the likely positive effect of structural reform on potential growth. However, execution will be the key to obtaining the best possible return on investment.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
- Has been prepared by Barclays Private Bank and is provided for information purposes only
- Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
- All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
- Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
- Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
- Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
- Has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.
You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.