The EU Recovery Fund Should Be a Solidarity Instrument First and Foremost

Throughout Europe, the coronavirus crisis has had severe economic consequences, although they differ in type and scope between countries and regions. The EU Commission has responded to the crisis with an array of policy instruments. As the contours of a general strategy have begun to take shape, the Commission is in the process of planning an EU-wide recovery fund. 

In May, Chancellor Angela Merkel and French President Emmanuel Macron proposed the creation of a 500-billion-euro fund to help Europe recover from the economic effects of the coronavirus pandemic. The European Commission heard Merkel’s and Macron’s call, and submitted its own 750-billion-euro stimulus package. A successful response to the crisis necessitates problem-oriented policy solutions. In particular, policies that target three areas are needed to address the crisis. These areas are: stability (ensuring the solvency of companies and countries with high debt levels), solidarity (supporting those worst affected by the crisis), and recovery (enacting effective stimulus policies).

Stability instruments secure liquidity and funds for highly indebted businesses and countries so that they can survive the crisis. Most help for struggling companies has come from national programmes. There are three major exceptions, however. The first is the 25-billion-euro initiative established by the European Investment Bank to supply additional stability funding. The second is the European Central Bank’s massive pandemic bond buying programme, which was recently expanded to 1.35 trillion euros. The purpose of the programme is to mitigate risks to financial markets and help ensure that highly indebted countries are not cut off from capital markets. The third is the Pandemic Crisis Support established by the European Stability Mechanism, which makes available loans and credit lines totalling 240 billion euros.

The guiding principle of solidarity instruments is to make sure that the regions and sectors more affected by the crisis receive support from those regions and sectors less affected. In a recent study, ZEW modelled scenarios in which funds were directed to countries and regions with particularly pronounced economic fallout and unemployment levels. The study found that Greece, Italy and Spain would receive the most help relative to economic output. In the scenario where unemployment was weighted more strongly, Bulgaria and Croatia also figure among the recipients.

The purpose of economic stimulus programmes is to strengthen overall demand so as to ensure the utilisation of existing capacities. But the form of economic stimulus and level of spending must vary from case to case. A Europe-wide economic stimulus package makes sense when doing so generates European added value. The preservation of the European domestic market is certainly something that all Member States want. But EU countries are primarily interested in the recovery of their national economies, and the European Recovery Fund, in its current form, will not help them much in that regard. The reason is the enormous scope of its mission, which combines EU solidarity, the stabilization of highly indebted countries, and economic stimulus. On top of all that, it is meant to form the basis for the European Green Deal, all while following the country-specific recommendations of the EU Commission. Yet given wide ranging objectives, there is a risk that the EU Recovery Fund will do justice to none of them at all. As the EU Council continues to revise its proposal for the recovery fund, it would be well advised to focus on the original purpose of the programme: ensuring solidarity within Europe. Accordingly, it should concentrate on allocating funding to regions and sectors hardest hit by the crisis.