Missed opportunities: Europe’s post-Covid recovery fund enters the final straight

The pressure of a deadline can be a perilous thing. That seems to be what’s happening to the EU’s post-Covid stimulus plan (or Recovery and Resilience Fund, RRF, a part of the NextGenerationEU package), whose money must be spent before the end of 2026. The deadline seemed a long way off when the plan was set up in 2020. Unfortunately, EU countries took their time in the early days to draw up and negotiate their plans with Brussels, to the detriment of actual implementation. In the final rush, some countries may have made questionable choices.

Spain, for example, allocated a quarter of its funds to construction and public works, estimates the EsadeEcPol research centre. In particular, this involved specialised projects such as universities and hospitals.

“In this field we have major needs in the regions of Valencia and Andalusia, where construction funds have been directed the most”, explains Jorge Galindo, an economist and vice-director of EsadeEcPol. “We also have significant needs in terms of training and early childhood, which deserve to receive more. But those are big projects and we would need more time to put them in place, for example to build up the childcare system.” He sees this trade-off as a result of the need to spend money quickly.

This tendency to favour investments that are easy to implement, sometimes at the expense of their quality or added value compared with more complex ones, is likely to intensify during the final sprint to 2026.

The most striking example is Italy. Along with Dublin, Rome is the capital that has made the most changes to its recovery plan.

The Italian think tank Openpolis, a partner in this survey, found that the Italian government has pushed back many of its targets and spending to the end of the period (with the necessary approval from the Commission and the European Council). In this way, it has increased the height of the last hurdle it must jump.

Italy has also entirely scrapped a number of projects. These included ones to improve the energy efficiency of local authorities, to better manage water-related risks, and to develop property confiscated from the Mafia. “The Italian government has given assurances that this work will be carried out using other sources of funding. But that choice poses a number of problems, including longer deadlines”, notes Luca Dal Poggetto, a data journalist at Openpolis.

Raffaele Fitto, the EU Commission’s Vice-President for Cohesion and Reform, offers reassurance: “The objective is and remains to achieve full implementation of the commitments made under the RRF. If this is not the case […] I will work with the states concerned to adapt their plans to ensure that the funds are used to finance alternative but equally ambitious investment projects.”

Equally ambitious, really? In truth, to play such a game of catch-up is to risk undermining the original ambition of the national plans. There are already several examples of this. In Spain, the target for rolling out ICT training and tools to 171,000 small and medium-sized businesses has been lowered to 169,000. “It’s possible to claim that the initial ambition has been maintained, but it’s not clear how this lower figure is a better alternative, and it’s questionable why such a revision was made” complains the European Parliament.

Such developments are likely to reduce the long-term impact of the recovery plan. On the macroeconomic front, the European Central Bank has already lowered its estimate of the extra eurozone growth generated by the plan. The figure is now 0.4-0.9 percentage points by 2026, instead of the 1.5% initially envisaged.

Added to this is the fact that the RRF’s impact might be reduced by the dilution of other budgets. What is the point of injecting money into the European economy if other programmes are cut back? This is likely to be the case for the cohesion funds, which were set up in 1994 to reduce development disparities within the EU. “In many countries, administrative capacity was not strengthened when the RRF was set up. Yet it is often the same teams that manage these new funds and the traditional cohesion funds”, explains Eulalia Rubio, a researcher at the Institut Jacques Delors. “As a result, only 5% of the cohesion funds that are supposed to be spent before 2030 have actually been spent. This money is often behind schedule, but never by this much.”

This case illustrates the danger of focusing on the disbursement of RRF funds, which the European institutions clearly need to present in a favourable light.

“The sheer size of the recovery plan was widely lauded in 2020, but when you compare it with the amounts put on the table by the United States in particular, Europe pales into insignificance”, says economist Jérôme Creel, research director at OFCE, a Paris think tank. “€700 billion sounds like a lot. But given the six years of implementation and the number of countries involved, it’s not that much. That said, considering the delay, it was perhaps too much in relation to what Europe is capable of investing.”

Any knock-on effects could also be undermined by the return of austerity policies in the coming years. In 2024 the EU adopted a new version of the Stability Pact. Since the late 1990s this agreement has set limits for eurozone member states concerning their debt (60% of GDP) and annual budget deficit (3% of GDP).

Forced to reduce their spending deficits, the capitals will be even less able to extend measures put in place with the RRF’s money. “Some of the gains will be lasting, including those linked to new infrastructure. But some of the expenditure needed to implement reforms is likely to come to an end before it has borne fruit”, laments Eulalia Rubio, citing as an example the additional recruitment made possible by the RRF to improve the efficiency of the Italian judicial system. In France, a cabinet meeting on 13 February focused on the importance of maximising the benefits of all European funds “in the current context of very tight public finances”. The upcoming end of the RRF will only further weaken this lifeline from Brussels.

In France, a flagship energy-renovation scheme for private individuals, MaPrimeRenov, partly financed by RRF money, is under threat. “Between 2024 and 2025, its budget has been almost halved, from €4.2 billion to €2.3 billion. This is linked to the French budget crisis, but also to the gradual reduction in the RRF funding, which governments are talking about less”, observes Etienne Charbit, European project manager at the Cler Network. On the research side too, the outlook is less rosy. “RRF funds have enabled the French National Research Agency (ANR) to finance projects that would not otherwise have been funded”, notes this major French beneficiary (receiving €594 million).

It is still too early to assess the impact of the EU’s post-Covid stimulus, and in particular its responsibility for the good economic performance of countries such as Spain. But that exercise is expected in the coming years and it will be crucial. Before embarking on any major investments financed by European debt, “let’s be sure to [first] assess the €750 billion mobilised under the NextGenerationEU plan to see how much it is optimising European competitiveness and innovation”, warns the governor of the Bank of France, François Villeroy de Galhau.

That assessment should yield lessons for the future of EU spending. Will Europe ever again have an instrument like NextGenerationEU? Andrew Watt, general director of the European Trade Union Institute (ETUI), points out that “the EU needs more public investment in the long term, as recently stressed by the Draghi report. It therefore needs to equip itself with some capacity to do this that is sustainable, rather than time-limited like the RRF. There is also a need to finance projects that straddle multiple countries, most particularly energy networks.”

In the face of these recommendations, will the EU instead choose to embrace its old austerity demons, which plagued it in the 2010s? No doubt the answer is to be found in the East. To build a common defence, the EU-27 will have no choice but to borrow.

Translated by Voxeurop

Original source: https://www.alternatives-economiques.fr/lurgence-ennemie-ambitions-plan-de-relance-europeen/00114294