Poland May Become Largest Net Contributor
ResearchZEW Expert Brief on the Merkel-Macron Model
The 500-billion-euro Recovery Fund proposed by Angela Merkel and Emmanuel Macron would provide Italy with a net financial aid of 26 billion euros at most. Germany’s net burden could fall between 23 billion and 38 billion euros, while Poland would become the largest net payer relative to its own economic output, with a contribution of 10.4 billion euros. These are the results of a simulation by ZEW Mannheim.
“Ultimately, the Recovery Fund will not be able to solve the severe financial problems Italy and Greece are facing,” says author of the study Professor Friedrich Heinemann, who also heads a research department at ZEW. “It’s economically justifiable that the money would flow from Eastern to Southern Europe, where the recession is particularly deep. But this will be met with considerable political resistance. And if the stimulus package is going to help boost economic recovery, the money has to flow quickly and be used efficiently, even though we don’t fully know the long-term benefit of it.”
The expert brief from Professor Friedrich Heinemann simulates an allocation of the funds based on the economic impact the crisis has on a Member State. In concrete terms, the simulation assumes that the distribution of the money will either be proportional to the country’s loss of growth in 2020, or take into account the rise in unemployment as well. In terms of financing, the Recovery Fund will be debt financed, with repayment through the EU budget taking place only after 2027. Member States will then have to pay higher national contributions to the budget, which will be based on their share in gross national income. The calculations thus consider the fact that, in the future, the faster-growing Eastern European states will also be making a higher financial contribution to the budget than they have been used to in the past.
Macroeconomic magnitude of the fund is very limited
If payments were to only be based on the slowdown in growth, all Southern European Member States and France (with the exception of Malta) would become net beneficiaries, and Greece and Italy would benefit the most, relative to their economic weight. “The Fund aims to stabilise the economy in the short term, so allocating the most funds to countries facing the worst recession makes sense,” says Heinemann. The macroeconomic magnitude of this advantage is very limited, however; the advantage only translates to 2.2 per cent of Greece’s GDP, and 1.4 per cent of Italy’s.
If the allocation of funds were to be based not only on the decline in growth but also the rise in unemployment, though, Central and Eastern European countries would receive higher shares from the Recovery Fund, given that Eastern European states are expecting a comparatively sharp rise in unemployment this year. At the same time, such a move would somewhat reduce the benefit for Southern European countries.
Regardless of the scenario, Germany remains a net contributor, with the maximum burden amounting to 38 billion euros (1.1 per cent of its economic output in 2019), according to the simulations.
