The COVID-19 pandemic has, undoubtedly, been one of the greatest challenges humanity has faced in the last century. To date, there have been over 14 million confirmed cases, over 3 million confirmed deaths, and 223 countries affected. In addition to this overwhelmingly tragic health crisis however, the pandemic – or better, the measures assumed by governments around the world to contain it – have a devastating social and economic crisis. For the European Union, this has been the second major socio-economic crisis within just a decade, the first being the Eurozone financial crisis that began in 2010 and eventually resulted in a change of its institutional modus operandi. Similar to the Eurozone crisis, the pandemic has arguably posed both an existential threat but also an opportunity for economic governance within the EU. This opportunity has become much clearer, considering the speed with which the EU has responded to this crisis as well as the arguably fundamental changes this response has led to, not just in the institutional structure of the EU, but it’s overall purpose. This post aims to overview the specific measures of the Union’s economic response to the pandemic and provide a preliminary analysis.
European Union Recovery Instrument and the Recovery and Resilience Facility
The EU responded to the pandemic crisis much quicker and with more resolve compared to the Eurozone financial crisis. The bulk of the measures were included in what was originally termed as the NextGenerationEU package. The package included measures totalling a staggering 750 billion euro, and was originally proposed by the European Commission in May 2020, following extensive talks in the Eurogroup of 7-9 April and the European Council of 23 April, and agreed by the European Council in July 2020. The Commission’s proposal and the July 2020 European Council agreement, recognizing the considerable monetary size of the package, included an amendment to the EU’s Own Resources Decision, to, inter alia, raise the ceiling of the resources from 1.2% to 2% of the EU’s member states’ Gross National Income. In a truly groundbreaking novelty in economic and monetary integration, the increase of resources was proposed to be covered through the issuance of bonds by the EU. The primary measure of the package was the Recovery and Resilience Facility (RRF), accounting for close to 90% of the 750 billion euro, which included two modalities: loans (proposed to be close to 335 billion euro) and grants (non-repayable support, proposed to be close to 268 billion euro). The rest of the measures were also of a non-repayable nature.
The entire package, and especially the balance between loans and grants in the RRF, were debated extensively, with several northern EU member states (Sweden, Denmark, Austria, and the Netherlands, also known as the ‘Frugal Four’) objecting to the size of the non-repayable support. An agreement was eventually reached in the European Council of July 2020. Specifically for the RRF, it was agreed that it would amount to a total of 672.2 billion euro: 360 billion in loans and 312.5 billion in grants. While the non-repayable portion of the RRF was augmented (as was its entirety), the total non-repayable support amount of the package was considerably reduced: for example, while the proposal called for 55 billion euro for Recovery Assistance for Cohesion and the Territories of Europe (ReactEU), this was reduced in the agreement reached to 47.5 billion. Likewise, the proposed 15 billion euro for (reinforcement of) InvestEU, was reduced to just 5.6 billion. The European Council also agreed that “in order to provide the Union with the necessary means to address the challenges posed by the COVID-19 pandemic, the Commission will be authorized to borrow funds on behalf of the Union on the capital markets.”
The entire package was eventually legislatively adopted as the European Union Recovery Instrument (EURI) Regulation on 14 December 2020. The measures included are: RRF, 672.5 billion euro (360 billion in loans, 312.5 billion in grants); Recovery Assistance for Cohesion and the Territories of Europe (ReactEU), 47.5 billion euro; Horizon Europe, 5 billion euro; InvestEU 5.6 billion euro; Rural Development, 7.5 billion euro; Just Transition Fund, 10 billion euro; RescEU 1.9 billion euro. From the above, only the RRF and ReactEU (the two measures including the most funds) are novel, while the rest existed and are reinforced and/or redirected (change of priorities, etc.).
On exactly the same day, the Own Resources Decision, which limited the resources of the EU only to duties, levies, tariffs, VAT, etc., precluding any possibility for borrowing from the markets, and also included a ceiling for the EU’s resources, was repealed and replaced. The new Decision provisioned that the Commission, on account of the COVID-19 pandemic, may “borrow funds on capital markets on behalf of the Union up to EUR 750 000 million in 2018 prices,” while any borrowed amounts are not permitted to be used for operational expenditures of the EU. Accordingly, the EURI Regulation, references the above provisions in relation to raising the 750 billion euro required. At the same time, there was an agreement reached between the European Parliament and the Council on the specifics of the RRF, which was eventually enacted on February 2021.
A preliminary analysis
There are several very interesting elements to highlight in relation to the above measures, the foremost of which is the revision of the Own Resources Decision to allow for the Commission to issue bonds on behalf of the entire EU and, simultaneously, for raising the EU’s resources ceiling. The former of the two is, arguably, one of the most groundbreaking reforms within the EU since its establishment. The common issuance of debt within the EU, and to such levels, is an unprecedented move towards fiscal integration, and answers relevant calls that have existed for more than two decades. The discussion has been ongoing since the late 1990s, but it intensified during the Eurozone crisis. The first report regarding common issuance of debt was in 2000 in the context of the Eurozone, by the Giovannini Group, which, at the time, advised the Commission on Euro-relevant market developments. The issue resurged from 2010 onwards, with several proposals being put forward, including for common EU bonds, for European Safe Bonds , for Blue Bonds (pooling of 60% GDP of national debt of EU member states), and for Stability Bonds. Staunch opposition from various member states, including Germany, as well as challenges regarding the – at the time (prior to the Court of Justice of the EU’s judgement on Pringle) – interpretation of Article 125 TFEU (the so-called ‘no-bailout clause’) meant that none of the proposals materialized. The main argument was always that fiscal discipline existent in the EU’s framework (Article 126 TFEU and Protocol No 12) precluded any common assumption of debt from all member states, as that would mean the EU would become liable for national debts of individual member states. Very simply, two decades after the original proposal and subsequent discussions, the EURI and the new Own Resources decision effectively introduced EU bonds.
The RRF also includes several interesting points. First, by itself, it amounts to approximately 170 billion euro more than the permanent financial assistance mechanism of the entire Eurozone, the European Stability Mechanism, by (it can provide up to 500 billion euro). More importantly, the RRF was created within the EU operating framework. During the Eurozone crisis, the two formidable financial assistance mechanisms (European Financial Stability Facility SA, and the Stability Mechanism) were created, and remain, outside the EU. The former is a Public Limited Company registered in Luxembourg, while the latter is an international organization. Conversely, the RRF is established within the EU legal framework, based on Article 175 TFEU, and is coordinated through the EU-based process of the European Semester, first established under a ‘Six-Pack’ Regulation. As such, issues relating to external actors interfering within the EU are – opposite to the case of the Eurozone crisis measures –avoided in this case.
The process of the RRF is similar to that for providing financial assistance under the Stability Mechanism. A member state must submit a National Recovery and Resilience Plan to the Commission (if there is a loan portion of the RRF, a loan agreement is also concluded), which includes reforms and investments to be implemented over the next four years (measures adopted from February 2020 onwards are eligible), always consistent with the Country Specific Recommendations and European Semester priorities, on six major policy areas: green transition; digital transformation; smart, sustainable and inclusive growth (economic cohesion, jobs, etc.); social and territorial cohesion; health, and economic, social and institutional resilience; policies for the next generation, children and youth. The Commission assesses the Plans based on weighted criteria included in four categories (relevance, effectiveness, efficiency, coherence) in cooperation with the member states, and submits a proposal to the Council, which then decides on approval or rejection. Monitoring is done through bi-annual reporting by the beneficiary member state in the context of the European Semester.
Several conclusions can be drawn in terms of the EU’s economic response to the pandemic, especially in relation to the integration process. The European Semester has expanded to encompass even more processes, compared to its original, mostly economic, nature. While basing the entire EURI/RRF framework within the EU is indicative of increased EU integration, the fact that the Council remains responsible for approval or rejection of the member states’ RRF Plans, as opposed to the original Commissions proposal that the itself was to be responsible, as well as the broader reduction on the non-repayable support portion of the EURI, point to a strong intergovernmental element. However, it is the case that the Commission’s proposals on the Plans are decided in the Council under reverse Qualified Majority Voting (deemed approved, unless a majority opposes) which somewhat mitigates the ability for intergovernmental bargaining.
Interestingly, the RRF is connected with the financial assistance framework, with the Council being able to suspend any or all payments to member states who fail to comply with any procedure related to the Six-Pack, Two-Pack, etc. The financial assistance/policy conditionality framework, as well as the broad decision-making procedures introduced during the Eurozone crisis, are not, as it first may have seemed, only limited to financial assistance, but are becoming a permanent operational element horizontally across EU financial governance and policy-making.
Has the response been successful? It is perhaps too early to tell, and the 750 billion euro provisioned by the EURI are, despite appearances, a somewhat conservative amount considering the truly enormous economic damage sustained by all member states. For example, the government of the United States of America has, as of 31 March 2021, already spent nearly 4 times as much (more than 2.5 trillion US dollars) in response to the pandemic. However, and also considering the limitations of the EU’s mode of governance it seems to have responded both quicker and more effectively to address the socio-economic impact of the COVID-19 pandemic, taking much more ambitious (both economically but also in terms of fiscal governance) measures as opposed to the Eurozone crisis. This is most likely owed to the fact that , even if not completely symmetrical, the shock from the pandemic was more symmetrical compared to the Eurozone crisis, and that the response was, at the very least partially, facilitated precisely because of the framework that was first created during the Eurozone crisis (e.g., the European Semester).