Democracy & Justice

EU Recovery Fund: How Does it Operate? How Much Money is Available?

The COVID-19 pandemic has ravaged economies around the world. To tackle the damages caused by the pandemic, in late 2020 the European Union created an unprecedented stimulus package to support the recovery and investment efforts of member countries.

by Liberties.EU

What is the EU recovery fund?

The EU recovery fund, named NextGenerationEU, is a fund created by the EU as a means to support reforms, recovery and investments in all member states, in response to the economic damages of the COVID-19 pandemic. The aim is to make member statesmore resilient, more digital and greener. EU leaders agreeing to create such a package was groundbreaking, as this was the first time that the European Union agreed to take on common debt for the EU budget and at such a large scale.

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How does it operate?

In order to access the EU Recovery Fund member states first have to submit their National Plan for Recovery and Resilience, explaining how the money will be used to reach national and European goals. The Commission assesses it, and it then has to be approved by the Council of the EU. Once this process is over, the grants and loans agreements can be signed and the money can be allocated. As of today, the Council of the EU has approved the national plans of 25 EU countries out of 27. Most countries have already received money, as a payment or as a pre-financement.

As said, the recovery plan is to support investments that make Europe stronger, but also greener, as well as fostering a more digital EU. As a consequence, each member state must make sure 37% of projects are related to combating climate change, and 20% linked to digital spending. As a whole, the member states have allocated almost 40% of the spending to climate measures and 26% to the digital transition so far, exceeding set goals.

As a way to convince the “frugal five” (The Netherlands, Finland, Austria, Denmark, Sweden) which opposed multiple aspects of the agreement, rebates were planned to cap their overall contributions to the EU budget.

How much money is available to EU countries?

The economic recovery package NextGenerationEU amounts to €806.9 billion in current prices, with the Recovery and Resilience Facility being the centerpiece of this fund totalling €723.8 billion. The Recovery and Resilience Facility is divided into grants (€385.8 billion) and loans (€338 billion). Grants are resources that member states will not have to repay to the EU, whereas loans are resources lent by the EU to member states. It is a notable first that much of the money raised by collective bonds will be handed out this way as grants to the countries most affected by the crisis.

With the agreement of EU member states, the European Commission will borrow on the financial markets and benefit from the high rates of the Commission’s bonds. This way of proceeding set the path for the development of more EU own resources for the European budget.

How is the money divided?

The allocation key changed from favoring low-income countries to favoring countries hit harder by the GDP decline. The funds are divided among countries by a formula based on each country’s population, unemployment rate and the damages its economy sustained.

Regarding grants, each country asks for a certain amount of money, which has to be approved by the qualified majority of the Council of the EU, i.e. 15 of the 27 member states representing 65% of the total European Union population. Countries can challenge other member states’ requests if they do not meet certain criterias (breach of EU rules, democratic values etc.) but not unilaterally veto.

The largest beneficiaries in terms of amount of money received will be France, Germany, Greece, Spain, Italy and Poland. Out of all member states, Italy is the one set to receive the most money, with more than €191 billion, almost a quarter of the total fund.

EU recovery fund and EU budget: what is the relationship?

The EU’s long term budget, or Multiannual Financial Framework, amounts to €1.211 trillion for 2021-2027. It was increased compared to the previous one; together with the NextGenerationEU fund, it amounts to €2,018 trillion of stimulus package. The budget will accompany and support the investment and development efforts in the years to come with the goal of countering the effects of the pandemic. The European Union describes it as a modernized budget, aimed at increasing flexibility to address today’s and tomorrow’s uncertainties and needs. Over 50% of this amount will support the modernisation of the EU, 30% will help fight climate change, and 20% of the NGEU will be invested in digital transformation

How will the EU recovery fund money be repaid?

A deadline has been set for 2058 for the reimbursement of this fund. It will start in 2028 and will spread over 30 years.

The question of how the EU will be able to finance and eventually repay the fund is at the center of attention. The EU has 3 main sources of revenue for its budget : custom duties, the value added tax and national contributions. As of 1 January 2021, it added a new source of revenue in the form of a tax on non-recycled plastic packaging waste

Multiple ideas and possibilities were put forward to complement the existing resources., among others, a digital tax for large companies. The USA is notably opposed to taxing the digital giants as they wish to implement an equivalent taxation on the international level, which would subject American companies to double taxation.

On December 21, 2021, the Commission proposed three new own resources for the EU budget. It wants to direct to the EU budget 25% of the revenues from the Emissions Trading system, 75% of what countries collect under the Carbon Border Adjustment Mechanism, and 15% of reallocated profits of very large multinational companies in the member states. The Commission will likely propose additional revenue sources by 2023.

Future plans for the EU recovery fund

In 2021, the Commission started raising the first NextGenerationEU transaction and committing the funds under the new EU long-term budget. Now that most national plans have been approved, countries have been given part of their requested funding, and must achieve targeted goals in order to receive additional funding. As mentioned previously, repayment of the fund should begin in 2028, and should stretch until 2058.

As of the writing of this article, 2 member states have not yet seen their national recovery and resilience plans accepted by the European Union Commission: the Netherlands, submitted on July 8th 2022 and Hungary, submitted on May 12th 2021. As a result, both countries have not yet received any pre-financing. The initial response time is 2 months, but this can be extended if further study is needed, as happened with the Hungarian plan.

The Commission feels that Hungary is not doing enough for the proper allocation of European funds and for the fight against corruption. On July 22th, the Commission gave Hungary a month to address issues regarding the rule of law in the country, before asking EU governments to suspend some of the funds given to Hungary as part of the 2021-2027 budget.

As the geopolitical situation in Europe has evolved since the moment the agreement was signed, some national recovery plans may be subjected to some changes. In Italy, the resignation of Mario Draghi, which led to early elections on 25 September, casts doubt on the ability of the country to achieve reforms conditioning the receipt of an additional payment of €19bn. The conservative alliance, in pole-position, feels that the plan should be revised to tackle the energy crisis. However, at this point the future is uncertain, it remains to be seen whether and what kinds of changes will be agreed on.

Further reading:

What is Crisis Response Mechanism and How Does it Work?

Rights Checklist: Liberties’ Advocacy Priorities for the Czech EU Presidency

What Is the European Commission: Functions, Powers, Operation, Leaders

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