EU’s New Fiscal Weapon Is Operational, It’s a Lifeline for Italy

(Bloomberg) -- European Union governments banking on hundreds of billions of euros in recovery funds to revive their economies can start putting forward their plans from Thursday when the bloc’s newest economic weapon becomes operational.

The Recovery and Resilience Facility is designed to hand out 312.5 billion euros ($375 billion) of grants and 360 billion euros of low-interest loans over the next six years to help the EU’s 27 members recover from the Covid-19 pandemic and refit their economies for the challenges of what it sees as an increasingly hostile world.

The fund is part of last summer’s landmark agreement to fund stimulus spending with jointly backed debt -- a significant step toward tighter integration -- and the European Commission projects it will deliver a 2% boost to economic output by 2024.

“I don’t think we will have another opportunity as this one to rebuild our economies better after this crisis,” EU Economic Affairs Commissioner Paolo Gentiloni said in an interview with Bloomberg Television this week.

The recovery fund aims to kickstart EU plans to eliminate carbon emissions over the next 30 years and modernize its economy to properly take advantage of the digital revolution. It’s also meant to encourage countries like Poland and Hungary to honor their commitment to EU values on issues like rule of law and press freedom.

Italy’s incoming prime minister, Mario Draghi, compared the task to his country’s postwar rebuilding effort as he set out the agenda for his new government in the Senate in Rome on Wednesday. Italy is one of the biggest beneficiaries of the recovery package and arguably its most troubled economy. Draghi was clear that Europe’s fate will be shaped by Italy’s efforts to turn around its fortunes.

“Today we have the possibility or rather the responsibility to start a new reconstruction, as governments did after World War II,” the former head of the European Central Bank said. “Without Italy there is no Europe.”

The mechanism also risks deepening some of the existing fault lines in the union. If Hungary and Poland don’t respond to the incentives to halt the erosion of democratic standards the EU will have to decide whether to use its powers to block funding for those countries -- once they’ve been cleared by the European Court of Justice -- and that could worsen their rift with the rest of Europe.

Reform Milestones

EU governments face a deadline of end-April to submit their final recovery plans, though 20 of them have already shared drafts with the European Commission and several others have discussed elements of their programs.

The recovery fund isn’t just about pulling the bloc out of recession. At least 37% of the money has to be spent on green investments and another 20% on the digital transformation. The sorts of projects under consideration include high-speed broadband to electric-vehicle charging stations, boosting digital skills and financing building renovations.

The plans the commission has seen “are very coherent with the main goals that we decided to have,” Gentiloni said, adding that the commission is working with governments on strengthening their reform plans. Officials have said that several plans need to be more precise and include specific milestones they’ll hit to trigger later disbursements.

EU officials are aiming to start issuing tens of billions in jointly backed debt as soon as June so that funds could start flowing across the region by the end of the summer. But they still need to wait until all 27 parliaments have ratified the deal before they can issue debt.

Getting the money flowing is only the start of the challenge however. Some of the main beneficiaries have a poor record of absorbing EU funds thanks to administrative bottlenecks and they may struggle to hit their progress milestones.

Then there’s the bigger question of what comes next. The agreement on jointly backed EU debt broke a longstanding taboo and marked a major step toward closer economic ties. But the impact of the pandemic has mushroomed since it was agreed and the idea of further measures is already starting to creep into the public discourse.

“National states will remain the reference for citizen,” Draghi said this week. “But in some areas defined by their weakness they will have to concede national sovereignty to gain a shared sovereignty.”

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