EU Seeks Out Recovery With Next Generation Plan

The European Commission’s recent upgrade to its growth forecast is based on easing pandemic restrictions and fundraising from the Next Generation EU program, a plan some economists expect to bolster long-term potential output.

European Union leaders in July agreed to the program which enables the bloc to raise financing in capital markets of up to 750 billion euros, equivalent to $915 billion, for spending at a national level. The Recovery and Resilience Facility (RRF), with €672.5 billion in loans and grants, is the key instrument of Next Generation EU to cushion the economic impact of the pandemic.

The program is called Next Generation EU because it is designed to rebuild and transform economies hit by the coronavirus pandemic through investment and changes that support green and digital transitions.

Under the plan, each country needs to include a minimum of 37% of funding on climate investment and changes, and 20% to foster the digital transition. The plans will be assessed by the European Commission and might see allocations reduced in cases where criteria aren’t met.

Only 18 of the 27 EU countries have submitted their proposals so far, but they represent more than four-fifths of the available grants.

“About 84% of the available grants have been applied for because the countries that stand to gain the most from the fund have already applied,” Bert Colijn, senior economist for the eurozone at ING, said.

The Next Generation EU plan could increase eurozone gross domestic product by between 1.5% and 4.1%, according to a study by S&P Global Ratings. The final impact of the plan will depend on the timing of disbursements, the absorption of funds and the size of growth multipliers from public spending, Sylvain Broyer, chief economist for EMEA at S&P, told The Wall Street Journal.

Of the program, €312.5 billion will be made up of grants funded by temporary common debt. This common debt issuance could be somewhat of “a Hamiltonian moment for the EU,” Mr. Broyer said, referencing Alexander Hamilton, the first secretary of the U.S. Treasury, who engineered the deal to transform the debt of the colonies after the War of Independence into common debt.

Citi expects the fund will raise eurozone GDP by 1.5% by 2026 or 0.2% a year. Even if EU members took out the full amount of Next Generation EU over the next six years, it would represent no more than 1% of GDP in extra spending a year, Christian Schulz, European economist at Citi, said.

“That narrows the gap with the U.S., but certainly does not level trans-Atlantic fiscal ambition,” Mr. Schulz told The Wall Street Journal.

Mr. Schulz said the fund should have a real effect on convergence across member states, as the positive GDP impact will probably be more than double the average in countries such as Italy, but less than half in wealthy Germany.

To tackle the differences in wealth between member states, Next Generation EU will target countries that suffered the most during the pandemic. Among larger economies, Spain stands out as a benefactor. S&P projects Spanish GDP could rise up to 10.1% thanks to EU funds, while it would benefit Germany by 1.3%.

April 30 was the deadline for member states to submit their plans to the Commission for investment projects and supporting changes. Only 14 out of a possible 27 proposals came in by that deadline.

Member states can now submit their proposals until mid-2022. “Like you would do when hosting an unsuccessful party, you extend the deadline for applications a bit to make sure you fill the room. That’s what the Commission has done as it has made the deadline flexible,” Bert Colijn, senior economist for the eurozone at ING, said.

The European Commission will review the proposals within two months of receipt. If the Commission agrees to a proposal, the European Council has a further month to approve the plans. Once approved, countries will receive 13% as an early payout to get projects started, which should be the case in July, according to ING. Money should start flowing in the third quarter of this year, ING said.

There could be delays, but they aren’t an issue, according to Mr. Broyer from S&P.

“Postponement is not cancellation,” he told The Wall Street Journal. Downgrades to 2021 growth would lead to an upgrade in 2022’s economic growth, Mr. Broyer said.

Write to Maria Martinez at