Recovering from the EU's Recovery Fund

AFTER arduous negotiations between member states' governments last month, European Union leaders are celebrating their agreement on a 750 billion euro (S$1.2 trillion) rescue package for EU countries hit hard by the Covid-19 crisis. But it is too soon to pop open the champagne. The plan for the "Next Generation EU" recovery fund has two major weaknesses that will make it not only ineffective but also a threat to the euro zone's very existence.

In addition to being too small, Next Generation EU lacks essential conditionalities for fiscal sustainability, including an orderly sovereign-debt restructuring mechanism (SDRM). The recovery fund's 390 billion euro grant component is a mere 2.8 per cent of the EU27's 2019 gross domestic product (GDP). And even if one counts the 360 billion euro loan component and the 100 billion euros in lending through the Support to mitigate Unemployment Risks in an Emergency (SURE) programme, the total still reaches a mere 6.1 per cent of GDP.

Worse, even though fiscally challenged national governments need financial support immediately, the recovery fund will not make funds available to member states until 2021, at which point the 750 billion euro allotment will be expected to last for three years. (The relatively insignificant SURE programme is already operational.) Nor can European governments expect much help from the 2021-2027 EU budget, which amounts to no more than 1.1 per cent of annual EU GDP, and is not meant to provide additional funding for the Covid-19 crisis.