Vulcan Insight | EU Commission announces strategy for funding the EU Recovery Fund

A month after the US Congress approved a record $1.9 trillion COVID relief bill to stimulate the US economy, the EU is taking the next step towards making its own post-COVID-19 Recovery Fund a reality. Last week, the European Commissioner for Budget and Administration, Johannes Hahn, presented the Commission’s strategy to financing the recovery plan for Europe. The NextGenerationEU Recovery Fund will provide hundreds of billions of euros in grants and low-interest loans to EU countries. In total, the Commission plans to raise €806 billion on the capital markets. 

Hahn announced that the EU would start handing out these funds as early as this summer, depending on ratification by all Member States. It is set to run until 2026. On average, the EU would need to raise €150 billion a year. The Recovery and Resilience Facility (RRF), which amounts to €672.5 billion (€312.5 billion in grants and €360 billion in loans) is the backbone of the Recovery Fund, with the Commission expecting all these debts to be repaid by 2058 at the latest. Once approved, the Commission has promised between €60 to €100 billion in aid until the end of this year.

This Fund represents a “Hamiltonian” step in the EU’s history and its financial competencies. NextGenerationEU, together with the long-term EU budget, will be the most comprehensive economic stimulus package ever adopted by the EU. It is designed to kick-start the pandemic-ravaged EU economy, and it is part of an overall effort to make Europe greener and more digital. Overall, 30% of the EU bonds (€250 billion) will be issued in green bonds. The Commission will present a green bond standard at a later stage this year.

As the Commission wants to start distributing funds fast, Hahn urged all Member States to complete the ratification process as swiftly as possible. For Hahn, “the message is clear: as soon as the Commission has been legally enabled to borrow, we are ready to get going.” So far, ten countries have not ratified the Recovery Fund, with Austria, the Netherlands, Germany, Hungary, Poland, Romania, Lithuania, Estonia, Finland and Ireland still outstanding. Each Member State also has to provide recovery and resilience plan.

Southern countries, whose economies are badly hit by the pandemic, are awaiting the funds with increasing impatience. On Thursday, Portugal was the first EU country to submit its recovery and rehabilitation plan to the Commission, more than a week before the deadline. It includes 37 reforms and investments, worth €16.6 billion.  Portugal is entitled to €14 billion in grants and the same amount in loans from the Fund, but has decided to apply for only €2.7 billion in loans, with an option for €2.3 billion more from 2022. The Commission now has two months to validate the plan before it is submitted to the Council for approval.

Meanwhile, good news for the Recovery Fund came from Germany, where the German Federal Constitutional Court had paused the ratification in March after it was approved in the German Bundestag. The court in Karlsruhe examined an emergency appeal made by a group around former ex-AFD leader Bernd Lucke, which argued that the Fund was breaching the constitutional principle of Germany’s budgetary sovereignty. The court eventually rejected their request, paving the way for a German ratification. However, with its decision, the actual constitutional complaint has not yet been decided and could still change.

With one major hurdle out of the way, the Commission is one step closer to starting the Fund’s distribution. In any case, Commission President von der Leyen seems confident, writing on Twitter, “I welcome today’s decision by the German Constitutional Court. The EU stays on track with its economic recovery, following this unprecedented pandemic.”

Compliments of Vulcan Consulting – a member of the EACCNY.