Next Generation EU (NGEU) is a European Commission economic recovery package to support the EU member states to recover from the COVID-19 pandemic, in particular those that have been particularly hard hit. It is sometimes styled NextGenerationEU and Next Gen EU, and also called the European Union Recovery Instrument. Agreed in principle by the European Council on 21 July 2020 and adopted on 14 December 2020, the instrument is worth €750 billion roughly equally split between grants and loans. NGEU will operate from 2021 to 2026, and will be tied to the regular 2021–2027 budget of the EU's Multiannual Financial Framework (MFF). Money borrowed by the EU to fund the grants will be repaid using EU's own resources until 2058. The comprehensive NGEU and MFF packages are projected to reach €1824.3 billion, so NGEU effectively doubles the EU budget while operational. It is a revolutionary EU instrument in many aspects: size (the largest EU fund so far), leverage of the grants for reforms, and novel methods of financing and grant allocation.
The program is very large (just the grant portion of NGEU is twice the amount the Marshall Plan aid) and redistributive (NGEU favors the south of the block: Italy and Spain get the largest shares, while Greece is the leader in per-capita allocations, at almost 20% of its GDP). The grant portion of NGEU is approximately 3% of EU's GDP. Similar to the Marshall plan, NGEU is conditional, however it targets investment and public services, not stabilizing the budgets and promoting trade. 37% of the funds are intended for the green transition and additional 20% for digital economy.
Background
Europe was struck by its initial wave of the COVID-19 pandemic in March 2020. The first-hit and the hardest-hit country in the EU was Italy, which promptly placed its contaminated zones in lockdown, putting health concerns over financial ones. Gradually, the other member states encountered the first wave of the pandemic; and by 17 March 2020, all member states had reported cases of COVID-19. The rapidity of response depended on the country: most member states were initially hesitant, not wanting to close everything or impose a nationwide lockdown, fearing that that would cripple the economy; but two weeks after the first confirmed cases, most countries had secured their borders and imposed travel restrictions. The propagation of the COVID-19 virus across Europe plunged the continent into a deep economic crisis, and national economies were struggling due to the widespread lockdowns. From mid-March 2020, all member states saw their national debt and public spending rise, mainly due to increasing expenditures on healthcare and measures to cope with the economic crisis. In general, most member states adopted similar measures to address the economic crisis, by providing substantial aid packages to businesses and enterprises.
Gradually, EU institutions agreed to adopt further measures to tackle the economic crisis and help the member states. In mid-March, Christine Lagarde, President of the European Central Bank (ECB), adopted the Pandemic Emergency Purchase Program (PEPP), a temporary purchase program of €750 billion to deal with the pandemic emergency. The ECB's Governing Council established that the purchases were to be made to the extent they were "necessary and proportionate" to achieve the "objectives of the mandate". On 4 June 2020, the ECB decided to extend this program and added €600 billion to it, for a total of €1350 billion. On 19 March 2020, the European Commission adopted a temporary framework that allowed member states flexibility to support their national economies with state recovery packages, followed two days later by the ECB's Governing Council's agreeing to more flexible fiscal rules "by initiating the general escape clause of the stability and growth pact". On 15 May, the European Stability Mechanism (ESM) also stepped in and created the "pandemic crisis support".
After a while, it became clear that the different measures implemented were not enough to fight the economic crisis caused by the pandemic; debates on how to deal with the situation led to a confrontation between northern and southern member states. Italian Prime Minister Giuseppe Conte, backed by Spanish Prime Minister Pedro Sanchez, proposed corona bonds as a measure to recover from the crisis, consisting of the creation of joint public debt at the union level, and thus establish a solidarity mechanism for the redistribution of debt between the states. This measure was endorsed by 7 other member states: France, Belgium, Greece, Portugal, Ireland, Slovenia, and Luxembourg. However, the Frugal Four (Austria, Sweden, the Netherlands, and Denmark) led by Germany refused this proposition, scared that they would have to repay the debt in case of default. The leap forward was made by the Franco-German axis, when on 18 May 2020 they came up with a proposed aid package of €500 billion in grants, which would give liquidity to the member states affected by the crisis. This "Recovery Fund" package would be established by the European Commission, which would borrow the money from financial markets, incorporate it into the EU budget, and distribute it to the member states. On 27 May 2020, the Commission presented the "Next Generation EU" plan, a proposal worth €750 billion, a middle ground between the €1000 billion asked by the most hit countries, such as Italy and Spain, and the €500 billion proposed by France and Germany. This huge recovery fund would be integrated into the EU budget which would total €1.85 trillion.
Regardless of the first failed attempt, at the European Council meeting on 17 July 2020, an agreement upon the recovery package and the MFF 2021–2027 was reached. Nevertheless, some issues, addressed in the upcoming Council meetings, were still present. In the first place, the Frugal Four wanted to reduce the amount of grants and asked for stronger conditionality for the expenditure of the funds. Furthermore, there were concerns about which programs to fund: the Frugal Four wanted more funds for R&D, Digital Economy, and green investments, while the Friends of Cohesion (Southern and Eastern European member states) wanted the allocation to Cohesion Funds to be the same. Lastly, there were problems linked to the "rule of law" conditionality. Finally, on 10 November 2020, the European Parliament and the Council reached a definitive agreement which integrates the 2021–27 MFF of €1074.3 billion and the temporary instrument for recovery of Next Generation EU of €750 billion. The deadline for the presentation of national plans was 30 April 2021. Even though proposals were already sent to the commission in mid-October 2020, those proposals will help the Commission understand in which direction the member states are going and eventually re-orient and assist the national governments with modifications.
The NGEU agreement
The objectives of the agreement
The Next Generation EU (NGEU) – €360 billion in loans and €390 billion in grants – is a break from the austerity policy adopted after the 2008 financial crisis as the EU's main response to economic crises. The NGEU, adopted in conjunction with the 2021–2027 Multiannual Financial Framework (MFF), demonstrates that the EU member states can collectively agree on policy, along with funding, to tackle large-scale crises.
The EU launched the COVID-19 recovery plan with several objectives. The primary objective is to help its member states repair the immediate economic and social damages caused by the coronavirus pandemic, and, additionally, to prepare a better future for the next European generation.
Secondly, alongside tackling the economic and social impacts of the COVID-19 pandemic, the plan has other objectives. It also aims to assist the green transition; digital transformation; smart, sustainable, and inclusive growth and jobs; social and territorial cohesion; health and resilience; and policies for the next generation, including enhancing education and skills.
The third objective is modernising the European economy. Therefore, more than 50 percent of the funds will be spent on modernization: such as research and innovation via Horizon Europe; fair climate and digital transitions via the Just Transition Fund; the Digital Europe Programme; preparedness, recovery, and resilience via the Recovery and Resilience Facility, rescEU; and a new health program, EU4Health.
In addition to the aforementioned objectives, the package also focuses on modernizing traditional policies, such as cohesion and the common agricultural policy, on maximizing their contribution to the Union's priorities, fighting climate change—with 30% of the EU funds, the highest share ever of the European budge—biodiversity protection, and gender equality. Thus, it plans to strengthen the EU's Single Market and invest in shared European priorities.
More broadly, the EU Next Generation agreement consists of the following objectives:
- To support the member states through investments and reforms:A new Recovery and Resilience Facility, worth €560 billion, will offer financial support for investments and reforms, including green and digital transitions, the resilience of national economies, and linking them to EU priorities. This facility will be endowed with a grant of up to €310 billion, and loans of up to €250 billion can be obtained. Support will be provided by all member states, but will be concentrated where needs are greatest.By 2022, under the new REACT-EU initiative, €55 billion will be allocated, in addition, to the cohesion policy program, based on the seriousness of the socio-economic impacts of the crisis and the relative well-being of the member states.In addition to the Just Transition Fund, up to €40 billion will be proposed to help member states accelerate their transition to climate neutrality.An additional budget of €15 billion will be provided for the European Rural Development Fund, to support rural areas in making the necessary structural changes in line with the European Green Deal and achieving ambitious targets in line with the new biodiversity and Farm to Fork strategies.
- To stimulate the EU economy by encouraging private investment:A new Solvency Support Instrument will mobilize private resources to urgently support sustainable European companies in the most affected areas. It can be operational from 2020 and will have a budget of €31 billion aimed at providing €300 billion in insolvency support for companies operating in all economic sectors and to prepare for a cleaner, digital, and flexible future.InvestEU, Europe's flagship investment program, will be raised to €15.3 billion to stimulate private investment in the projects of the Union.A new Strategic Investment Facility of up to €150 billion will be generated under InvestEU to increase the resilience of strategic sectors, especially those linked to the green and digital transition, and key-value chains in the domestic market, thanks to the €15 billion contribution from NGEU.
- Measures to prevent lessons learned from the crisis from happening again:With a budget of €9.4 billion, a new Health Program, EU4Health, will be organized to strengthen health security and prepare for future health crises. With an additional budget of €2 billion, the Union's Civil Protection Mechanism will be expanded and strengthened to equip the Union to prepare for and respond to future crises. A budget of €94.4 billion will be provided for Horizon Europe to support vital research in health, resilience, and green and digital transitions. Europe's global partners will receive €16.5 billion in support of additional external action, including humanitarian aid. Other EU programs will be strengthened to fully align the future financial framework with recovery needs and strategic priorities. Other tools will be strengthened to make the EU budget more flexible and responsive.Moreover, fighting climate change appeared to be one of the most crucial objectives of the NGEU. The EU Commission issued a rule that at least 37% of the Recovery and Resilience Plans proposed by member states must allocated to climate change-related projects.One of the aims of this agreement is to deepen the Economic and Monetary Union. After years of recovery, the European economy, employment, growth, and investment are all settling on a stable footing, returning to pre-crisis levels or better. Public finances continue to improve, and the banking system and the foundations of the Economic and Monetary Union are stronger. Therefore, the EU is prioritizing the further deepening of the Economic and Monetary Union by providing a Budgetary Instrument for Convergence and Competitiveness for the euro area, supporting member states' growth reforms and investment by taking full advantage of the flexibility allowed within the Stability and Growth Pact, focusing on completing the Banking Union, and strengthening the currency's international role.
EU revenue sources
To finance NextGenerationEU, the European Commission – on behalf of the European Union – is borrowing on the markets at more favourable rates than most Member States and redistributes the amounts.