With economy beginning to rebound, the EU starts disbursing recovery & resilience funds

In its Summer Interim Economic Forecast, issued in early July, the EU Commission estimated the European economy would rebound faster this year than it had anticipated in its Spring Forecast two months earlier. In May, it had predicted the EU GDP would increase by 4.2 percent this year and 4.4 percent next year after having dropped by 6 percent last year. And it had predicted the euro area GDP would increase by 4.3 percent this year and 4.4 percent next year after having dropped by 6.5 percent last year. But in the July forecast, the Commission predicted the GDP of both the EU and the euro area would increase by 4.8 percent this year and 4.5 percent next year.

The good news got even better on Friday, when the Commission issued its preliminary flash estimate for the second quarter. The data, although preliminary and based only on data for the states that have second quarter data, suggest the rebound of the European economy will be even greater than what it had predicted in the July forecast. While that forecast had estimated that the GDP of both the EU and the euro area would increase by 1.3 percent in the second quarter, Friday’s flash estimate indicates the GDP of the EU in fact increased by 1.9 percent and that of the euro area by 2 percent in the second quarter.

Especially noteworthy were the greater-than-anticipated increases in Italy and Spain. In Italy, whereas the July forecast had predicted GDP would increase by 0.8 percent in the second quarter, the flash estimate indicates it increased by 2.7 percent. And in Spain, whereas the July forecast had predicted GDP would increase by 2 percent in the second quarter, the flash estimate indicates it increased by 2.8 percent. Other states in which the flash estimate indicates GDP increased by more than had been predicted in the July forecast include Portugal (4.9 percent compared with 3.3 percent in the July forecast), Austria (4.3 percent compared with 3.5 percent in the July forecast), and Latvia (3.7 percent compared with 1 percent in the July forecast) There were, however, two notable laggards, relative to the overall rates of growth in the second quarter in the EU and the euro area: In Germany, GDP increased by 1.5 percent in the second quarter, compared with 1.7 percent predicted in the July forecast. And in France, GDP increased by only 0.9 percent in the second quarter, compared with 0.7 percent predicted in the July forecast.  

Notwithstanding those and other laggards, in the wake of the larger-than-expected overall increase in the GDP of the EU and the euro area, the rate of seasonally-adjusted unemployment in the EU and the euro area dropped slightly—from 7.4 percent in March to 7.1 percent in June in the EU and from 8.1 in March to 7.7 percent in June in the euro area. Only one country, Greece, experienced a decrease of more than 1 percent (1.4 percent) in the rate of unemployment between March and June, as a result of which it ended the second quarter tied with Spain in having the highest rate of unemployment in the EU (15.1 percent). On the other hand, the rate of unemployment for those in the EU labor market who were under 25, while substantially higher than the overall rate, decreased more in the second quarter than did the overall rate of unemployment. Thus, the rate of unemployment of those under 25 dropped from 18.2 percent in March to 17 percent in June in the EU, and from 18.4 percent in March to 17.3 percent in June in the euro area. Although those under 25 had, and still have, a substantially higher rate of unemployment than those over 25, the larger-than-predicted increase in the rate of growth in the second quarter had a substantially greater impact in reducing unemployment for those under 25 than for older persons.

Meanwhile, as the recovery picks up some speed, the EU continues its efforts to transform into reality the €750 billion recovery plan approved last summer by the European Council, the heads of state or government of the 27 member states. The plan, proposed by the Commission at the request of the leaders, involves the distribution of €750 billion in 2018 prices—€806.9 billion in current prices—in grants and loans to the member states to support the recovery of their economies and increase their resilience in the face of future crises. The plan, labeled Next Generation EU (NGEU), involves the Commission borrowing the funds on the capital markets over the next five years and distributing them to the member states through the EU’s Multiannual Fiscal Framework, its seven-year €1.074 trillion budget for 2021-27. Up to €390 in 2018 prices—€421.1 billion in current prices—will be distributed as grants and up to €360 billion in 2018 prices—€385.8 billion in current prices—will be distributed as loans.

The NGEU consists of seven programs, all of which aim to support the recovery of the economies of the member states and increase their resilience in the face of future crises. The largest program by far is a new Recovery and Resilience Facility (RRF) through which the member states may receive up to €338 billion in grants and €385.8 billion in loans. The other six programs involve a total of €83.1 in grants. 70 percent of the RRF funds are to be committed this year and next year with the remaining 30 percent committed in 2023. The regulation establishing the RRF identifies six broad areas of policy for which RRF funds can be used to support investments and reforms: those involving the green transition; digital transformation; smart, sustainable and inclusive growth including economic cohesion and employment; social and territorial cohesion; health and economic, social and institutional resilience; and policies for the next generation, such as education and training in skills for children and youth.

The RRF funds will be distributed on the basis of recovery and resilience plans submitted to the Commission and, if approved by Commission, approved by the Council. As of today, 25 of the 27 member states—all but Bulgaria and the Netherlands—have submitted recovery and resilience plans to the Commission. Taken together, the 25 states have requested a total of €331.5 billion in grants and €166 billion in loans. The largest requests for grants came from Spain (€69.5 billion), Italy (€68.9 billion), France (€40.9 billion), Germany (€27.9 billion), Poland (€23.9 billion), Greece (€17.8 billion), Romania (€14.3 billion), and Portugal (€13.9 billion). The largest requests for loans came from Italy (€122.6 billion), Romania (€15 billion), Greece (€12.7 billion), and Portugal (€2.7 billion). As of today, the Commission has approved and submitted proposals to the Council for implementing decisions for 18 of the 25 plans, and the Council has adopted implementing decisions for 16 of the 18—those submitted by Austria, Belgium, Croatia, Cyprus, Denmark, France, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Portugal, Slovakia, Slovenia and Spain.

In June, the Commission announced it planned to raise €800 billion in the financial markets through 2026 and planned to sell €80 billion of long-term bonds and several tens of billions of short-term bills by the end of the year to cover initial payments of grants and loans to the member states. On June 15, it sold €20 billion of 10-year bonds. On June 29, it sold €9 billion in 5-year bonds and €6 billion in 30-year bonds. And on July 13, it sold €10 billion in 20-year bonds. Not surprisingly, the sales were heavily oversubscribed. Today, the Commission started disbursing RRF funds, with “pre-financing” disbursements equivalent to 13 percent of the member state’s allocation going to Belgium, Luxembourg and Portugal. In its July forecast, the Commission estimated that, once distributed to the member states and deployed by them, the RRF funds will generate additional growth equivalent to 1.2 percent of the EU’s 2019 GDP.

When fully disbursed and deployed over the next five years, the RRF funds will undoubtedly have a significant and enduing impact on the ability of the EU economy to not only recover from the effects of the pandemic but to be more resilient in the face of future economic crises. But it’s nevertheless important to note that the strengthening recovery now underway is attributable to other factors than the EU’s €750 billion recovery plan. One important factor was the activation in March 2020 of the “general escape clause” from the EU’s fiscal rules pertaining to the size of the government deficit, relative to GDP, when there is a “generalized crisis” caused by a “severe economic downturn” in the euro area or, more broadly, the EU. The clause, the result of a 2011 reform of the Stability and Growth Pact, allowed the states to substantially increase their deficits as the crisis unfolded, and many of them did so – most notably, Spain, Italy, France and others, including Germany.

A second important contributing factor to the recovery that is now underway was the temporary return to lockdowns and subsequent reopenings in some of the states and the very significant improvement in the EU’s vaccination campaign in recent months after the extensive delays and shortfalls in deliveries of the AstraZeneca vaccine in the winter and early spring. A measure of the extent of progress in its vaccination campaign is the fact that the EU, which until now has lagged well behind the U.S. in terms of the proportion of the population that is fully vaccinated, has, according to Our World in Data, pulled slightly ahead of the U.S. And several EU states—most notably, Belgium, Denmark, Germany, Ireland, Italy, Luxembourg, the Netherlands and Spain—are now well ahead of the U.S. in terms of the proportion of the population that is fully vaccinated.

Nevertheless, that said, the recovery is still very much a work-in-progress and there is a good distance still to go to make up the economic ground lost over the last eighteen months. The RRF funds, which today started to flow to the member states, will no doubt provide an important and much-needed additional stimulus to the recovery now underway.

David R. Cameron is the former director of the MacMillan Center’s European Union Studies Program.