The Recovery Fund is below expectations… but why?

On Wednesday 21 February, Economy Commissioner Paolo Gentiloni enthused that “the European recovery in 2022 was impressive”, with Euro-growth “stronger than in the US and China”. But is the picture that bright?

These statements were made on the occasion of the favorable evaluation by Commission officials of the recovery and resilience mechanism (MAA) of the mammoth 723 billion euro fund for economic reconstruction after the pandemic.

It is a temporary tool at the heart of the EU’s (NextGenerationEU) plan to emerge more resilient from the current crisis. Through the mechanism, the Commission raises funds by borrowing from the capital markets (issuing bonds on behalf of the EU). It then makes it available to member states to implement ambitious reforms and investments.

Gentiloni has been a staunch defender of the plan, which gave the Commission significant financial power for the first time, and hopes it can be repeated in the future for other common EU targets, such as the defense fund, despite opposition from some states.

However, as reported by Euobserver, the net figures of growth were considerably lower than expected, while experts say that we should keep a “small basket” in the drumbeats of Brussels.

Many promises touted by Commission officials as one of the benefits of the fund seem exaggerated at best.

In 2020, when the Recovery and Resilience Fund was launched, computer modeling experts predicted that GDP would grow by 1.9% after two years.

According to estimates by other independent analysts, the actual number fell to 0.4%.

Looking at these not-so-pleasant indicators, Gentiloni says that “focusing solely on the models misses the real impact of the plan.”

But again, the model used by the Commission itself – Quest – drops growth levels to 0.8% for 2022.

It’s Putin’s fault

But what are the reasons for this deviation from the ambitious goals?

According to European officials, external factors and geopolitical conditions are to blame.

First, inflation reduced the real value of the fund.

A second reason is that not all the money, about €91 billion of the total €385 billion in loans, that remains will be spent. It is something that the member states have requested.

“We assumed it would all be used, but since that’s not the case, the actual size of the fund is less,” Gentiloni said.

A third reason is the slow implementation of the plan, due to the Russian invasion of Ukraine, Commission officials said.

The energy crisis that followed forced countries to revise existing plans to combine more energy investment under the EU’s energy security agency (€40 billion in loans and €20 billion in additional grants under RepowerEU), which which caused further delays.

The countdown has begun

Regardless of the reasons, the delay can put a bomb in the implementation of this great plan.

The window of time is very narrow for the Europeans, as the funds must have been absorbed by 2026. It is recalled that the Recovery Fund was not created indefinitely, while countries such as Germany have made it clear that beyond the specific period of time not a single minute will be given .

At the same time, Commission officials expect that the absorption from the fund will double this year compared to last year.

According to Commission estimates, the MAA will translate into an additional GDP increase of 1.4% by the end of the program if member states shoulder most, if not all, of the money.

However, there are countries that absorb money at a dramatically low rate. For example, Bulgaria has implemented only 2% of its green plans, while Latvia is at 2.3%, which is starting to raise doubts about the feasibility of the venture, according to Euobserver.

According to the NGO CEE Bankwatch Network, the Commission created an “overly positive picture” of how public money was spent.

The Recovery Fund “initially was a breath of fresh air,” said Christoph Yost, head of the CEE Bankwatch Network. “But the implementation turned out to be complicated. Now, there is a real risk that not all targets will be met.”

Under great pressure to accelerate, many governments are faced with serious risk, while at the same time the control mechanism based almost exclusively on pre-set targets for impact is weak.

“It is incredibly difficult to assess the impact on the ground,” CEE Bankwatch noted.

EU officials have admitted this. “The union of stakeholders and civil society could have been better,” said an EU official who spoke on condition of anonymity and described the monitoring as “superficial”.

“We need to see more detailed and transparent monitoring of measures and discuss the future of EU funding after 2026,” Jost said.

Also, there is the social parameter.

The injection of EU cash to boost economic resilience may have paid off, according to ZOE Institute policy advisor Lydia Korinek, but the promises of social inclusion, improved gender equality and financial inclusion often touted by Commission officials as one of the benefits of the fund seem exaggerated at best.

The focus on economic fundamentals “hides” that there is still a “lack of measures to address social cohesion”, Korinek said.