Policy Briefs

C. Bastasin: A permanent Recovery Fund requires a European Government

On July 21, 2020, the European Council agreed on the Next Generation - EU (NG-EU). The new exceptional temporary recovery instrument was primarily meant to address the economic fallout from the pandemic through a debt based fiscal stimulus of around 1% of GDP on average in the euro area over the period from 2021 to 2024.

In this context, the European Commission is authorized to raise up to €750 billion on the capital markets on behalf of the European Union. The funds can be used to provide loans of up to €360 billion and grants of up to €390 billion.

Provided it is deployed for productive spending and accompanied by growth-enhancing reforms, the NG-EU would not only help to underpin the recovery but also increase the resilience and the growth potential of Member State economies. The dichotomy between the Recovery and the Resilience aims of the initiative has profound political implications: while the Recovery initiative has a clear one-off character linked to the pandemic crisis, there is no reason why the Resilience component should not be maintained in place after the crisis.

To receive financial support, EU Member States need to prepare national recovery and resilience plans setting out their reform and investment agenda for the 2021-23 period. These plans are expected to feature coherent packages of reforms and public investment projects and address the challenges identified in the context of the European Semester. In substance, they should strengthen the growth potential, job creation and economic and social resilience of the recipient Member State. The clear goal is to avoid an uneven recovery in the euro area and the deriving risk of economic fragmentation.

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