Five lessons from the Recovery and Resilience Facility for future crisis response instruments
By Zsolt Darvas, Bruegel and Corvinus University, Budapest
As NextGenerationEU (NGEU) and particularly its key instrument, the Recovery and Resilience Facility (RRF), are different from most previous EU instruments, EU actions in response to the COVID-19 crisis have attracted a lot of attention, especially from scholars and think tanks. Not least of these is Bruegel, a European think tank focusing on economic policy developments. Zsolt Darvas, a Senior Research Fellow at Bruegel and Corvinus University in Budapest, is one of the think tank’s principal researchers into the new EU instrument, and has published various articles on the NGEU/RRF. He explains below which key lessons can be drawn for designing future crisis response tools as regards their purpose, timeliness, redistribution, conditionality, and evaluation.
Learning curve for a new EU instrument?
The COVID-19 pandemic, an extraordinary external shock that claimed millions of lives and led to the deepest economic contraction in decades, gave birth to NextGenerationEU (NGEU), the European Union’s landmark financial instrument. The Franco-German recovery fund proposal of 18 May 2020, and the subsequent European Commission proposal for NGEU, were rightly hailed as a defining moment in the European Union’s history. For the first time, the EU is borrowing from capital markets to finance expenditure throughout the Union. The boldness of the recovery facility proposal and its subsequent implementation has boosted confidence, and had a positive impact on the economy.
The largest component of the €750 billion (in 2018 prices) Next GenerationEU is the €672.5 billion Recovery and Resilience Facility (RRF), which is composed of €312.5 billion in grants and €360 billion in loans. At current prices, RRF grants amount to €338 billion. To request funding from the RRF, EU countries had to submit national recovery and resilience plans (NRRPs), explaining the investment and reforms they wish to implement and how these fit with the priorities and criteria set out in the RRF Regulation. An important new feature compared to other EU programmes is that the RRF is performance-based: payments are conditional on meeting milestones and targets rather than on submitting invoices. The actual cost of implementation does not matter.
While the current energy crisis resulting from Russia’s invasion of Ukraine differs from the pandemic crisis in many respects, both events represent external shocks with an asymmetric effect across EU countries. There would be a case for an EU fund to address certain aspects of the energy crisis, in particular to ensure that public support results in energy savings and increased energy supplies (such as expanding local gas production or extending the life of nuclear plants) and not just lower energy prices, which would otherwise boost energy demand to the detriment of other countries.
New crises might emerge which could be different again. Whether there will be justification for a new EU fund will depend on the specific circumstances of any new crisis. Nevertheless, in this article, I draw five specific lessons from the RRF for the design of future instruments.
Lesson 1 — A clear purpose is needed
The conclusions of the 17–21 July 2020 special meeting of the European Council stated about NGEU that:
- The plan for European recovery will need massive public and private investment at European level to set the Union firmly on the path to a sustainable and resilient recovery, creating jobs and repairing the immediate damage caused by the COVID-19 pandemic whilst supporting the Union’s green and digital priorities (point A2); and
- The Union shall use the funds borrowed on the capital markets for the sole purpose of addressing the consequences of the COVID-19 crisis (point A5).
These statements suggest that the primary purpose of NGEU was to support the immediate recovery from the pandemic.
However, the cross-country distribution of grants from the RRF is hardly associated with the size of the economic shock, measured either as growth from 2019–2021 or the revision of this growth rate from the pre-pandemic forecast (panels A and B of Figure 1). It is primarily and strongly associated with GNI per capita (panel C of Figure 1). For example, Austrian GDP fell more than Greek GDP, yet Greece receives almost 10% of its annual GDP from RRF grants, while Austria gets only 1%. In this respect, the RRF is similar to the EU’s standard multiannual financial framework (MFF), which involves redistribution from richer to poorer Member States to foster their structural transformation. Including an unspecified element (strong redistribution to poorer countries) in a crisis response tool could make the instrument less efficient and blur its purpose.
Any new EU crisis response tool should allocate funds to reach the stated purpose.
Figure 1 — Allocation of RRF grants (% of 2021 GNI)
A) 2019–2021 growth
B) 2019–2021 growth surprise
C) GNI per capita
Lesson 2 — Timeliness should be aligned with purpose
Even though the NGEU’s stated purpose was to help economic recovery from the recession caused by the pandemic, disbursements from the RRF were made after most Member States had already recovered. The delayed disbursement is understandable, given that:
- EU leaders had to agree on the concept (July 2020);
- a new regulation had to be proposed, negotiated and legislated for (it entered into force in February 2021, a year after the pandemic hit Europe);
- countries had to prepare and submit recovery plans (the first plan was submitted in April 2021);
- the European Commission had to evaluate the plans and make proposals for Council decisions (the first recommendation was made in June 2021);
- the Council had to decide, based on the Commission’s proposal (the first decision was made in July 2021); and lastly
- the EU had to issue bonds and arrange the technicalities of the first disbursements (the first was made in August 2021).
Initially, Member States receive pre-payments amounting to 13% of the total amount. Subsequent disbursements depend on meeting certain milestones and targets. Between August and December 2021, €46 billion in grants (out of €338 billion) were disbursed, and an additional €36 billion between January and October 2022. Thus, three-quarters of RRF grants will be disbursed in 2023 and later, as I noted in June 2020.
To be fair, NGEU had an immediately positive impact when the proposal was made in May 2020. In all likelihood, along with European Central Bank supporting measures, such as the Pandemic Emergency Purchase Programme (PEPP), NGEU improved confidence in the government bonds of highly indebted Member States, leading to lower borrowing costs. This in turn allowed these countries to implement greater national fiscal support measures already in 2020. More generally, the NGEU proposal itself could have improved trust in the EU’s crisis response capacity, by demonstrating that EU Member States can act together and offer solidarity to each other when an exceptional crisis hits.
Nevertheless, given that the first RRF grant disbursements were made 1.5 years after the pandemic hit Europe and three-quarters of RRF grants are to be disbursed in 2023–2026, by which time all Member States will have recovered from the pandemic recession, the timeliness of RRF funding was not aligned with the purpose of immediate economic recovery.
Thus, my first two lessons suggest that NGEU fosters the medium-term structural transformation of EU countries and is essentially an add-on to the MFF. Any new EU crisis response facility should stand ready to react much faster. This will not be achieved if the facility has to be established after a shock first hits.
Lesson 3 — Clear principles for redistribution are needed
In my view, fiscal policies and cross-country redistribution of fiscal resources within the EU rest on four main principles:
- sound national fiscal policies controlling about 98% of public spending (the remaining 2% comes from the EU budget), allowing Member States — among other things — to stabilise their own economies in a crisis;
- supporting the convergence of poorer regions (although for political reasons, even the richest regions get some EU funding);
- financing pan-European projects and exploiting synergies, such as research funding, which leads to cross-country research cooperation and hence the diffusion of knowledge, and more intense research competition which boosts research efforts and outcomes; and
- acknowledging the inertia in agricultural subsidies, which allows only a gradual reduction of such EU spending which once dominated the standard EU budget, and still accounts for about 30% of it.
The last three principles involve persistent redistribution across EU countries, while the first one supposedly eliminates the need for redistribution in times of crisis.
When countries have low public debt and a good track record of controlling budget deficits, such as Bulgaria, Germany and Sweden, they can support themselves in the event of an adverse economic shock. The no-bail-out principle underlying EU treaties aims to ensure sound national fiscal policies so that countries do not expect help from others after following irresponsible policies.
However, the current status quo is different: several countries, especially in southern Europe, have high public debt and limited fiscal space. Thus, it is a sensitive decision whether, to what extent, and under what conditions to help fiscally vulnerable countries during an economic downturn. The COVID-19 pandemic — an extraordinary external shock that claimed many lives — was a situation in which cross-country redistribution was justified. A lack of EU-wide solidarity would have risked more human suffering and a new euro-area financial crisis, with adverse economic spillovers throughout the Union.
NGEU involves significant redistribution from northern and western EU Member States to southern and eastern ones. Redistribution to the south was justified by the extraordinary characteristics of the pandemic and the vulnerable fiscal, economic and social situations in southern countries. Eastern EU countries have much sounder fiscal positions than their southern neighbours, and in some cases even than many western EU countries. Redistribution to the east was probably needed to reach an agreement on redistribution to the south, because most eastern countries have lower per capita income than southern countries.
In the current energy crisis, the best thing a common EU fund could do is to encourage a reduction in energy consumption, which would benefit all EU countries via lower energy prices and less rationing in the event of energy shortages. The main beneficiaries of such an energy fund would be countries with a structurally high ratio of gas consumption by energy-intensive exporters to GDP, including Belgium, Germany, Italy, the Netherlands and Poland. Thus, the rationale for redistribution would not (only) be the usual north-to-south subsidy flow.
A further reason for redistribution via a special EU fund is to flout EU fiscal rules. The liability that EU countries have for repaying the EU debt borrowed to finance RRF grants is blurred. Eurostat concluded that ‘In the case of the RRF funding, there is no match between the grants received from the RRF by the individual Member States and the amounts that potentially will have to be repaid by each individual Member State’. The financing of RRF grants does not appear in national debt and deficit statistics, and is thus exempt from EU fiscal rules. This ‘trick’ can also be useful in the future if EU fiscal rules cannot be reformed properly.
Any new EU crisis response tool should carefully define the guiding principles of cross-country redistribution.
Lesson 4 — Conditionality should be aligned with purpose
For an immediate crisis response tool, conditionality might not be needed: EU money could be channelled — based on certain criteria (e.g. a fall in GDP) — to countries that need financial support.
I consider RRF conditionality as ‘light’ because it resulted from a proposal by national governments, and there was no yardstick to assess whether the level of ambition is the same across countries. For a medium-term structural transformation instrument such as NGEU, light conditionally has useful features. National ownership increased because the initial plans were proposed by national authorities, but the Commission had a strong role in tailoring those plans, both before they were submitted and afterwards, thus facilitating some cross-country consistency.
Nevertheless, plans became very different across countries, including the cost of actions, as the ECA also reported in its special report 21/2022 on the Commission’s assessment of the NRRPs. The Commission concluded that it was not possible to make a proper comparison of cost efficiency across countries, so such an evaluation has not been made (or at least has not been published). This poses a risk to uniformly good value for EU money.
Strong conditionality could be another option. For example, climate funding could be disbursed only if certain emissions-reduction targets are met. Or in the current energy crisis, EU funding could be disbursed only if certain energy savings targets are met.
Any new EU crisis response tool should carefully align the type of conditionality (none, light, strong) with the stated purpose.
Lesson 5 — An independent impact evaluation would be beneficial
The European Commission has a crucial role in all stages of RRF governance: making proposals for priorities and criteria, negotiating the plans with national authorities, evaluating the plans before the EU Council approves them, and assessing the achievements of milestones and targets. Due to its intense involvement, the Commission has a strong interest in portraying the RRF as a success.
This raises questions about the objectivity of the Commission’s assessment. Of the 25 plans that have been assessed so far, 22 obtained exactly the same assessment (see Table 6 here): the best ‘A’ grade for all criteria except the cost justification criterion, which was graded ‘B’, implying ‘medium-quality’. The remaining three plans also obtained a ‘B’ grade for cost justification (and one or two more ‘B’s for other criteria). Identical Commission assessments that the cost justifications for EU countries’ recovery plans are ‘medium-quality’ undermine trust in the assessments, and raise questions about whether recovery money will be well spent.
Independent evaluation of RRF plans and their implementation is needed, as well as for any new EU crisis response tool.
Useful lessons to be drawn
NGEU, and its main instrument, the RRF, are historical achievements which benefit EU citizens, companies, and institutions in many ways. While still in its early stages, I think that some useful lessons can already be drawn from the RRF for the design of any future EU crisis response tool. In short, such tools should:
- allocate funds to reach the stated purpose;
- stand ready to react much faster;
- define the guiding principles of cross-country distribution;
- carefully align the type of conditionality with the stated purpose; and
- provide, from the outset, for an independent evaluation of the plan and its implementation.
This article was first published on the 2/2022 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.