The European Renewal: Making the most of pandemic recovery

COVID-19 remains dangerous, but if Europe can continue its unprecedented fiscal co-operation the crisis could give way to a new era of prosperity. Banner image: Shutterstock/Melinda Nagy
The European Renewal: Making the most of pandemic recovery
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The COVID-19 pandemic upended the world in early 2020 and changed everything, while leaving the world's pre-existing conditions firmly in place. Inequality, climate change and political conflict stayed with us, even when indoor dining and international travel were mostly out of reach.

For the most part, the European Union rose to the challenge. The bloc's 27 member states came together quickly and decisively to backstop the economy, develop a vaccine and set the stage for recovery. Two years later, the pandemic is no longer the unmediated threat it once was. But COVID remains dangerous, and both the economy and public health will require ongoing support.

If Europe can continue its unprecedented fiscal co-operation, the crisis could give way to a new era of European prosperity. This would not make up for the death and devastation that COVID-19 wrought­—no silver lining can bring those lives back. We can, however, rebuild in a way that makes the most of our collective strengths without replicating all our prior shortcomings.

The EU must gird itself to retain its joint financing capability and accelerate spending on the energy transition.

The EUR 800 billion Next Generation EU programme represents the best of the EU's crisis-fighting prowess and offers a model for where to go from here. In creating the fund, the EU set aside its past battles over public finance. For the first time, the member states agreed to borrow jointly, and at scale, within the governance framework of the community institutions. If this temporary solidarity can give way to a permanent fiscal framework, the EU will be better positioned than ever before reduce inequalities among member states, as well as take the steps needed to fight global warming and develop energy independence.

The war in Ukraine underscores the need for ongoing collective effort. Just as the pandemic was moving from an acute crisis to a long-term challenge, the military conflict on the EU's borders brought new upheaval that also threatens lives and will require permanent changes. The EU must not only find a way to cut carbon emissions and slow global warming, but it must do so in a way that reduces its reliance on Russian gas as quickly as possible.

All this requires money. The EU must gird itself to retain its joint financing capability and accelerate spending on the energy transition. If the union can overcome its longstanding resistance to open-ended collective borrowing, it can protect its economy, strengthen the euro and find the resources necessary to keep warm next winter and beyond.

The Dream of Europe: Creative efforts to reimagine the EU, by Erika Widegren, Chief Executive, Reimagine Europa

Common tragedy, diverging severity

Because of the COVID-19 pandemic, more than 18 million people lost their lives globally, according to a March 2022 study of excess mortality published in The Lancet. The EU's experience included some of the best—and the worst—of the world's outcomes. Central and Eastern Europe were some of the hardest-hit regions in the world, alongside parts of Latin America and southern sub-Saharan Africa. Several regions in Italy, which was one of the first European countries affected, also posted some of the highest pandemic losses. But other countries, including island nations Ireland and Cyprus, had some of the lowest rates anywhere.

This disparity in health impact also reflects disparities in economic fortunes, during the pandemic and before. As the global financial crisis and subsequent euro crisis made clear, monetary union has not equalised economic success. From 2008 to 2019, countries in Southern Europe saw their fortunes fall in comparison to the EU's stronger performers, even as Central and Eastern Europe began to close the gap between its regional economy and that of the EU as a whole. Different parts of the economy grew at different speeds as well—heading into the pandemic, manufacturing slumped across the board while other sectors proved more resilient. Then once the virus arrived, inequality surged along with it.

Inequality's harms go beyond local communities to threaten the social cohesion of Europe as a whole.

According to Bruegel's Zsolt Darvas, the COVID-19 crisis had a disproportionate impact on low-income workers, who were less able to telework and more dependent on service sector jobs that had to be shut down, even in countries like Ireland that did not sustain as many deaths. The EU's most vulnerable populations were likewise most in line to be harmed by both the disease and the accompanying economic recession, and women were more likely to be slammed with increased caregiving responsibilities.

The EU's Resistiré project found that pandemic policy too often took a "survival of the fittest" approach, which excluded the elderly, workers with less education, and populations with little access to the digital tools that allowed better-off segments of the economy to recover more quickly. Lockdowns put women at higher risk of domestic violence while also pushing them back into stereotypical cultural patterns of taking on ever more unpaid caregiving duties. For the economy to fully recover, pandemic support programmes will need to include funding for child care, old-age services and disability supports to give these groups the assistance they need. This will make it possible for more women to rejoin the workforce rather than be forced to choose between earning a living and taking care of their family members.

Inequality's harms go beyond local communities to threaten the social cohesion of Europe as a whole. University of Oxford researchers predicted that pandemic-driven increases in poverty would widen differences within and among regions, countries and parts of society, increasing political fragmentation and making it harder for policymakers to act.

Women at the Frontline of the Recovery: Towards common European action on care, by Milan Brglez, MEP, European Parliament


Crisis-fighting veterans

When COVID-19 hit, the European Union benefitted from having fresh memories of prior economic crises. As a result, policy makers began their pandemic planning with a pre-existing sense of what measures would work—and what strategies would not. In particular, it was clear the EU would need to avoid the "too little, too late" mentality that stretched the euro crisis out into a five-year ordeal that required five of the euro area's 19 members to seek international financial assistance, including three successive aid packages for Greece. The pandemic was coming for the whole continent, all at once. Doling out aid one euro at a time would clearly not have offered help on the scale required.

In general, the EU's policy machinery is designed to produce incremental, deliberate advances via a process of maximum consensus. This has allowed the EU institutions to grow and strengthen over time, but has also exposed their shortcomings when sudden change is required. For the purposes of the pandemic, the preceding decade of financial crisis provided the prior iterations necessary to allow immediate action. As a result, Europe was able to immediately deploy tools that it had developed and rejected earlier on. It also sidestepped the bitter fights over austerity, funding transfers and moral hazard that had dominated the euro crisis debate.

When COVID-19 hit, the EU knew it needed to spend money faster and more freely. 

Back in 2010, when it first became clear that the EU would need to provide support to countries that had lost market access, the European Commission proposed leveraging the EU budget to provide the necessary support. The idea was for the member states to increase their level of guarantees so that the EU could borrow large amounts on the public market. At the time, however, member states were nervous about joining forces on the scale required. So they decided to allow only limited borrowing by the European Commission, and to create alongside it an intergovernmental fund that was backed—and tightly controlled—by eurozone countries.

This political compromise was a big breakthrough at the time. It also did not come close to getting the job done. As the euro crisis intensified, the members of the currency union would need to successively link their fiscal fortunes tighter and tighter before financial markets truly began to believe that, as former European Central Bank chief Mario Draghi promised, the EU would do "whatever it takes" to keep the euro from breaking up.

The euro area initially created a private fund backed only by member-state guarantees, followed by a sturdier rescue facility that had its own paid-in capital and a more mature approach to financial-market borrowing. As recounted in Safeguarding the Euro in Times of Crisis—the official history of the European Stability Mechanism and its predecessor fund, the European Financial Stability Facility—this process was essential to keep the euro together and to preserve market access when global confidence was in short supply. But the intergovernmental nature of these funds meant that they did not come with the transparency or democratic oversight associated with the core European Union institutions. And the increased member-state control meant that using the rescue funds carried a stigma that would be hard to get around in future periods of turmoil.

When COVID-19 hit, the EU knew it needed to spend money faster and more freely. Joint borrowing had become more normalised, thanks to the European Stability Mechanism’s excellent rapport with global investors and to market feedback that an increase in high quality public debt could contribute to, rather than detract from, financial stability and the strength of the euro. Member countries had further learnt that the euro rescue fund's stigma and convoluted disbursement procedures would discourage anyone from using it again if they could possibly avoid it. Taken together, these factors were enough to convince previously skeptical member states that the EU could, in fact, safely increase its joint budget guarantees and head to financial markets at scale.

As a result, the Next Generation EU programme's Recovery and Resilience Facility was deployed swiftly with the ability to borrow up to EUR 500 billion in marketable securities. Financial markets responded enthusiastically, and the EU Commission was able to get its debt operation scaled up in record time. Investor demand has been strong, borrowing costs have been low and the EU will become the world's biggest issuer of green bonds and thus a global leader in sustainable finance.

Resilient Trade Starts with Sustainable Supply Chains, by Didier Bergeret, Director of Sustainability, The Consumer Goods Forum

Recovery funds

The EU crafted a multi-layered approach to its pandemic support programmes. Each member state was invited to submit a Recovery and Resilience Plan showing their pandemic response proposals, as well as how those efforts would fit in with broader goals of improving their economic health. To access funding during the five-year window when the Recovery and Resilience Facility is available, countries need to show their plans for meeting climate milestones and improving technology access, as well as withstanding the pandemic itself. The EU set an explicit goal of facilitating the "twin transitions" of making the economy greener and more digital.

Making money available is only a first step: the funds must be spent, and they need to be used for worthy goals.

A third transformation is now also on the horizon: a set of societal objectives that can make life in the EU more equitable as well. The European Commission's High-Level Group on Post-Covid and Social Challenges put social transition on par with the green and digital transitions in its March 2022 report, urging the EU to move forward on all three fronts for the best possible outcomes. If the collective effort comes up short, the EU risks falling into a disjoined period of fragmentation and conflict, or at least a muddled period of continuing the status quo and continuing to fall behind. If the recovery effort succeeds, however, the EU may be able to reshape its economy faster than it would have without the pandemic. That would not bring back lost lives but at least would set the stage for a better future.

In the first year of the recovery programme, the EU's willingness to provide grants to member states—that is, funding that does not need to be repaid and does not affect national financial balance sheets beyond normal EU budgeting procedures—has been widely taken up. A Bruegel data analysis shows that with the exceptions of Latvia and Sweden, every country that has submitted a plan so far has requested the estimated full amount of grants or more; only seven countries have requested loans, which would need to be paid back to the EU over time. Greece, Italy and Romania requested the full amount of loans available to them, reflecting a view that the EU was offering better terms than they could get on global financial markets. Cyprus, Poland, Portugal and Slovenia requested only part of the available loans, suggesting policymakers there thought they could strike a better financial deal for their country by borrowing some money from the EU and financing other needs directly. That said, countries have until 31 August, 2023 to seek loans, so more requests may come in.

The EU recovery facility started in February 2021 and will run through the end of 2026. From the beginning, policymakers tried to make sure programmes were well-managed and followed clear guidelines. Making money available is only a first step: the funds must be spent, and they need to be used for worthy goals.

RRF funds allocation per country

RRF funds allocation per country. Source: EU Commission Recovery and Resilience Scoreboard

This map displays the funding allocated to each endorsed recovery and resilience plan (RRP) to this date and what this represents as a share of each Member State’s GDP (yellow pie charts). For those Member States whose RRPs have not yet been endorsed, the amount displayed is the maximum allocation in grants according to the RRF Regulation. Source: EU Commission Recovery and Resilience Scoreboard

Making sense of those goals requires a spreadsheet, several of which have been established. The EU Commission has created a Scoreboard for tracking disbursements, milestones and common indicators. Bruegel, the Brussels-based think tank with which I am affiliated, also offers a publicly available dataset for tracking the recovery effort. All countries except for the Netherlands have submitted recovery plans as of 1 April, 2022. Most of the Next Generation EU funds are channeled into the recovery facility, although there is also some extra support for innovation and technology via pre-existing EU programmes.

The green and digital transitions are at the top of the Commission's wish list, along with boosting productivity and competitiveness, improving social and territorial cohesion, building resilience and making policies that help future generations. The EU further set out seven flagship areas for recovery projects, with a particular focus on climate and digital initiatives. Some of this is aspirational corporate jargon: preferred projects should be "future-proof", "cutting edge" and include "up-skilling". That said, there is a core logic.

This focus on digital can bring a lot of productivity gains, but it also can cut off society's most vulnerable if it is not carefully managed.

Having made all of this money available, the EU wants to invest it ways that will bring long-term benefits, as well as helping the economy bounce back in the short term. The Recovery and Resilience Facility seeks projects that accelerate the use of renewable energy and clean technology, that improve energy efficiency in public buildings, and that enhance public transportation and electric-vehicle infrastructure. It calls for the fast rollout of broadband network services to all regions, and for European industrial data infrastructure. Countries are encouraged to use their recovery funds to digitise public administration and services, including judicial and health care systems. And finally they are urged to improve digital education for all ages and make it easier to find vocational training.

This focus on digital can bring a lot of productivity gains, but it also can cut off society's most vulnerable if it is not carefully managed. When public health and public services require digital calling cards, what happens to citizens who do not have a smart phone or a computer? Older citizens, children who grow up in poverty and full-time caregivers risk falling between the cracks of the system.

Youth unemployment has so far received more policy attention than the caregiving crisis, at least by some measures. Initial EU data shows that only Estonia and Spain have put as much emphasis on gender equality initiatives as on those that target children and youth; some countries have dedicated barely 1% of their recovery programmes to initiatives that focus on gender equality. This tendency to look away from systemic trends that affect half a country's population is disappointing—limiting opportunities for women and gender minorities hurts the economy and holds back society as a whole.

Number of RRP* measures with a focus on gender equality and on children & youth

Number of RRP* measures with a focus on gender equality and on children & youth. Source: EU Commission Recovery and Resilience Scoreboard

Figures are illustrative, meant to be used for qualitative analysis, and do not constitute a comparative assessment of Member States’ RRPs. The number and structure of the measures in each national plan vary greatly, as well as the approach to reflect commitments to gender equality or contributions to children and the youth. For a more detailed analysis, please refer to the Staff Working Documents adopted by the European Commission for each endorsed plan. Source: EU Commission Recovery and Resilience Scoreboard
*By 31/05/2022, 24 recovery and resilience plans have been endorsed by the Commission and the Council. Data is therefore available for 24/27 Member States and will be updated as more plans are endorsed.

Financing the future

The EU's five-year pandemic recovery plan is a historic achievement. Member countries came together quickly and, most importantly, at scale. The only way to address a big challenge is with big money, and the EU came through.

The risk now is that caution returns as soon as the emergency measures recede. It will be a relief when schools, travel and entertainment can all resume without fear of crowds or masking. It will be a relief when COVID-19 vaccination becomes a routine and unremarkable part of universal preventative health care. But it will not be good if fiscal austerity comes back as soon as pandemic precautions fade away.

Public finance is needed in the long run, not just as a short-term stopgap, to keep the EU going. For the private sector economy to thrive, it needs a backbone made of public goods: energy, health, education and transit. Strong public institutions are essential to maintain the rule of law and preserve credibility locally and globally.

The EU needs to keep the faith when it comes to borrowing and spending together.

Russia's sudden invasion of Ukraine shows how quickly new challenges can arise. In addition to pre-existing long-term climate challenges, Europe now must work quickly to achieve energy independence as fast as possible. This probably means short-term spending on all alternatives to Russian gas, even coal-fired electrical plants, as well as staying the course on long-term efforts to reduce reliance on fossil fuels. The EU may further need to create a dedicated fund for refugees and other humanitarian costs of war.

The EU therefore needs to keep the faith when it comes to borrowing and spending together. It would be a mistake to turn off the EU's public financing powers just when they came into their own. Under current plans, the EU will shift its debt management operations into maintenance and paydown mode once the recovery programme ends. A better option would be to keep borrowing on the markets indefinitely, to make the most of global investor demand and investment opportunities.

To make this politically feasible, public debt needs to be reframed as public infrastructure, just like pipes and fiberoptic cables. When policymakers discuss the water grid and 5G networks, they consider them separately from which gardens to irrigate and which messages to send. Likewise, the euro area will benefit tremendously from a credible and permanent safe asset, regardless of whether the money raised is distributed equally or redistributed from wealthier to needier regions.

Spending debates are important and EU member countries are right to resist calls to write blank checks and spiraling debts. At the same time, global bond markets have shown that global investors are eager to work in the euro area in ways that will help everyone's bottom line. Market credibility is in place. Now the EU needs to believe in itself.

Note: A Spanish version of this piece was written for CIDOB, the Barcelona Centre for International Affairs, and is published on their website
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