Next Generation EU

The Coronavirus has wreaked havoc on many European economies and put European solidarity to the test. This time around, the European answer has been unprecedented - with the European Commission presenting the Next Generation EU (NGEU) and paving the way to EU common debt.

After the 2008 world financial crisis, fiscal rigor and spending cuts were imposed to curb national debt, strengthen financial stability, and increase market trust. This came at the cost of European cohesion and resulted in strong EU-aversion, particularly in countries with suffering economies. In Italy, anti-EU sentiment grew particularly strong, peaking at the beginning of the Coronavirus pandemic when the EU institutions still seemed unwilling to make any concessions.

As the economic effects of the virus and its containment measures became increasingly visible, the call for a new approach grew louder. Some Member States (MS), like Germany, signaled their readiness to take a step back from fiscal rigor and to support solidary solutions. Consequently, the European Commission drafted the Next Generation EU, which was then approved by both the Council and the European Parliament.

The Next Generation EU is unprecedented under many aspects and is an act of great European solidarity. The fund totals 806.9 billion euros to current prices and is divided into the so-called recovery and resilience facility (RRF) with 723,8 billion euros and further resources for EU programs sustaining post-pandemic recovery. The RRF will be given to Member States in form of cheap loans to the equivalent of 385,8 billion euros and grants of 338 billion euros. The disbursement depends mainly on the extent of suffering that the pandemic caused to specific economies, making Italy the biggest beneficiary of the NGEU. In order to obtain the entitled funding, each Member State must present a plan for recovery and resiliency, which is subject to conditions and must be approved by both the Commission and the Council.

The two most general conditions are related to environmental sustainability and digitalization. At least 37% of the investments contained in each national plan must support environmental goals and at least 20% must further digitalization. Beside these two main conditions, which apply for all MS, there are more specific requirements applying to the single MS.

What makes the NGEU truly unprecedented is, however, the way it is financed. For the first time in its history, the EU will build common debt by selling European bonds on the market. Even if this option has been defined as unique and is not supposed to be repeated, it still represents a remarkable step towards more European integration. Moreover, despite the current categoric reluctance of some MS to repeat such experience, there is nothing speaking against it, provided that the MS will be able to benefit from NGEU, demonstrating that the program’s investments have contributed to a stronger European economy, which could profit all MS - even the most rigorous ones.

Getting back to the technicalities, the NGEU is made up of grants and loans. The grants represent the parts that MS do not need to pay back, whereas the loans must be settled. Nevertheless, the loans are still very appealing because of their low interest rates. The EU passes its borrowings to the MS with the very same interest rate it acquired them on the market, which is advantageous because the EU has a very good rating and can get cheaper loans than the majority of MS would. However, MS do not necessarily need to request the full or any amount of loans available to them and could draft their recovery plans focusing solely on the grants.

Italy is the country that will get the majority of NGEU funds. Besides its quote of grants, which is the second highest after Spain, Italy is also one of the few countries that has requested the entire amount of designated loans. In total, Italy will get 191,5 billion euros over the period 2020-2026: 68,9 billion euros in grants and 122,6 billion in loans.

The gamble is big both for the MS and the EU. MS like Italy are in line for a once-in-a-lifetime occasion to renew the national economy and make it stronger, whereas the EU has moved, after a long period of stalling, a step forward on the integration path whilst at the same time claiming, that common debt will only be temporary and will not be extended. The question arises whether the EU is able to develop only in times of crisis or if it can move forward in a more proactive way as well. Considering detrimental sovereigntist movements within the EU, the current world power relations with the US proving to be an unreliable partner and a possible Balkan enlargement, the current asset of the EU might not be well suited to face these challenges properly and the structures defined by the Treaty of Lisbon may have to be updated to strengthen cohesion among MS and democracy.