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What is the EU Corona recovery fund and will it be effective?

The summit of EU leaders from 17-21 July was the first gathering of heads of state and government since several European countries went into lockdown. Important decisions were made regarding the EU recovery fund that is meant to help countries recover from the effects of the coronavirus. While agreement was reached about a huge budget, it is questionable whether it will be used effectively and productively to the benefit of current and future generations.

The summit of EU leaders from 17-21 July was the first in-person gathering of heads of state and government since European countries imposed lockdown measures in March. Health precautions meant that the leaders arrived with substantially smaller delegations and had to comply with social distancing rules.

More important than the practical difficulties is the content and size of the Corona recovery fund that was discussed during the 90 hour negotiations. The backdrop to these discussions was that the EU is expected to face a deep recession, with the EU Commission expecting a contraction of the economy of 8.7% this year.

The EU leaders took advantage of the Covid-19 momentum to forge a closer political union. Thus, Politico notes that “while EU countries have borrowed jointly on financial markets at a small scale in the past, including in response to the Eurozone debt crisis in 2010, the new plan marks a potentially giant leap in fiscal integration”.

In addition to this important leap, the summit was characterized by some member states fighting fiercely to reduce the portion of grants in favour of loans. After lengthy discussions, it was decided that a recovery fund, to be composed of €390 billion in grants and €360 billion in loans, will be attached to the new €1.074 billion seven-year EU budget. The reduction of the initial proposal of €500 billion in grants to €390 billion combined with an “emergency brake” procedure which could be invoked if beneficiaries of grants do not fulfill their reform promises, apparently sufficed to convince the more hesitant members.

However, with the ink of the agreement not yet dry, there is already discussion about the interpretation of the emergency brake. The conclusions of the summit note that “no Commission decision concerning the satisfactory fulfilment of the milestones and targets and on the approval of payments will be taken until the next European Council has exhaustively discussed the matter”. As this process shall not take longer than three months and with the EU Commission reserving the right to make the final decision, it is unclear how much influence member states will have on the emergency brake procedure. The fact that an earlier draft spoke of “decisively” instead of “exhaustively” hints at a defeat for the leaders who preferred stricter rules and targets regarding reforms in non-performing member states.

Looking at the original EU proposal for recovery from corona - called the Recovery and Resilience Facility - we see that initially an amount of €250 billion was allocated for loans. During the summit this was increased to €360 billion, but the extra €110 billion was transferred from existing programmes dedicated to research, innovation and sustainability. The combination of a weak emergency brake procedure and a continuation of old subsidy policies for areas such as agriculture at the expense of more innovative areas make it questionable that the funds will be used effectively and productively to the benefit of current and future generations.

Author: Olivier Vonk

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