Europe’s capitals take aim at €750bn recovery plan

Brussels is under fire from EU governments for failing to target its planned €750bn recovery fund on economic damage caused by the coronavirus shutdown.

EU diplomats have raised concerns that the European Commission is proposing to use a series of “outdated” economic measures to determine how much member states will receive from a Recovery and Resilience Fund intended to heal Europe’s post-pandemic economy.

The complaints have emerged as EU governments pore over details of an unprecedented crisis-fighting tool which would give the commission the power to borrow €750bn from international capital markets. Known as Next Generation EU, the spending programme is divided into different pots, the biggest of which is a €560bn fund to support specified economic reforms in member states through a mixture of grants and loans.

The commission wants the Recovery and Resilience Fund to allocate money based on three main economic criteria: a country’s gross domestic product; its GDP per capita; and its average unemployment rate between 2015 and 2019.

It argues the criteria will ensure the funds are channelled to economies most damaged by the coronavirus and with limited fiscal capacity to fight the worst depression since the second world war.

Most governments will have to ratify the EU’s borrowing plans in their national parliaments. For some, the metrics have emerged as an early point of contention. One national diplomat questioned the use of pre-crisis measures of unemployment that bore no relation to the shutdown.

“We are not trying to help [countries] with decades of bad economic handling and lack of reforms,” said the diplomat. 

Commission officials have grappled with how best to design the fund given the stark variations in the economic impact from the virus. The pandemic has hit southern Europe particularly hard while poorer countries in the east — traditionally the biggest beneficiaries of EU aid — have done better at containing it and have reopened their economies more quickly.

Internal commission estimates show that Italy, Spain, Poland and Greece will be among the big winners from the fund. Yet Poland is expected to have the least severe recession in the EU this year.

Other countries with high death tolls such as Belgium, which has the worst per capita fatalities in the EU, will receive among the lowest amounts of aid under the proposed formula.

The commission’s methodology has now been challenged by countries including the Netherlands, Denmark, Austria, Belgium, Ireland, Lithuania, and Hungary for having no direct connection to the pandemic.

One senior diplomat suggested an alternative measure such as the change in GDP between the spring and autumn would be a better benchmark.

The commission defended the criteria, saying the recovery instrument “will be particularly beneficial to the countries with a lower per capita income and with a high unemployment rate to reflect the high economic and social challenges that these countries face”.

“The allocation key channels a very large share of the funds to countries which have been very severely affected by the crisis,” the commission said in a statement. “The allocation of funds to Greece, Italy and Spain represent almost 50 per cent of the available envelope for grants.”

Diplomats are gearing up for months of negotiations to finalise the terms of the fund and proposals for a new €1.1tn EU budget from 2020-27. EU leaders will discuss the proposals for the first time this month by video conference but are only expected to engage in detailed negotiations when they meet in person at a special summit expected in late July.

“There is a lot of will to get a deal before the summer recess [in August],” said an EU official.

Member states have also questioned the timetable for the repayment of the commission’s proposed borrowing, with the longest debt maturing in 2059. Governments are also concerned that Brussels will not be able to disburse hundreds of billions of euros to the economies most in need in the next two years.

The planned recovery fund is facing fierce resistance from the Frugal Four countries of the Netherlands, Denmark, Sweden and Austria. They say the borrowing will leave future generations saddled with debt.

Finland’s coalition government last week also demanded changes to the recovery instrument, pushing for it to be smaller, that the share of loans be increased over the share of grants, and that the borrowing be paid back over a shorter period than the scheduled 30-year maximum.

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