EU’s €723bn Covid recovery fund saw growth, but doubts remain

“The RRF has achieved its initial goal of aiding member states in recovering more quickly from the severe social and economic impacts of the Covid-19 pandemic,” stated trade commissioner Valdis Dombrovskis.

Although the additional spending has accelerated growth when examining growth figures, it has not been as effective as originally projected.

When the plan was initiated in 2020, forecasts predicted GDP growth of 1.9 percent two years post-launch.

Independent analysts have since estimated the actual figure to be closer to 0.4 percent. The commission utilized the Quest model, which indicates an average growth of 0.8 percent across the EU.

Reasons for the lower growth

However, economy commissioner Paolo Gentiloni argued on Wednesday that focusing solely on growth figures does not fully capture the plan’s impact.

“It is important to note that the European recovery in 2022 was remarkable,” Gentiloni stated. “Growth surpassed that of the US and China.”

Gentiloni has strongly supported the plan, which provided the commission with significant financial resources for the first time, and hopes it can be replicated in the future for other EU common objectives, such as defense, despite opposition from some member states.

The additional investment by the commission, combined with the European Central Bank’s €1,800bn bond-buying program, has contributed to economic stability during challenging crisis years.

Therefore, commission officials have emphasized that the lower-than-expected GDP effects are largely due to external economic and geopolitical shocks.

Inflation has reduced the fund’s actual value, and not all of the €385bn in loans, which make up the remainder of the package, will be utilized despite member states requesting all of the grant money (€338bn).

“We assumed full utilization, but since that is not the case, the actual size of the fund is smaller,” Gentiloni explained.

Another factor is the slower-than-expected implementation of the plan, partly due to the Russian invasion of Ukraine.

The resulting energy crisis prompted countries to revise existing plans to incorporate more energy investments under the EU energy security initiative (€40bn in loans and €20bn additional grants under RepowerEU), causing further delays.

Deadline of 2026

This has created another challenge as all funds must be utilized by the 2026 deadline as per the plan’s regulations.

After this date, no additional funds can be drawn from the plan—a restriction advocated for by some member countries, including Germany, to ensure the fund is temporary.

EU commission officials anticipate a doubling of fund utilization this year compared to last year.

According to commission estimates, if member states access most, if not all, of the funds, the RRF will result in an additional 1.4 percent GDP growth by the end of the program.

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Some countries are expected to benefit even more. The Italian economy is projected to grow an additional three percent, and the Croatian economy by four percent by 2026.

“I believe we will achieve it,” Gentiloni commented.

However, for instance, Bulgaria has only implemented two percent of their green initiatives, and Latvia has only achieved 2.3 percent at this halfway point, raising concerns about the feasibility of the endeavor.

According to the CEE Bankwatch Network, a global NGO, the commission has presented an “overly optimistic picture” of the fund’s spending.

The recovery fund was initially welcomed, but implementation has proven challenging. There is now a risk that not all objectives will be met,” stated Christophe Jost, a senior policy officer at CEE Bankwatch Network.

With pressure to spend rapidly, there is a real risk that governments may cut corners, exacerbated by limited monitoring that relies mostly on predetermined targets to assess on-the-ground impact. “Assessing the impact on the ground is extremely difficult,” noted CEE Bankwatch.

EU officials have acknowledged this. “Engagement with stakeholders and civil society could have been stronger,” a EU official stated anonymously, describing monitoring as “light touch.”

“We need more detailed and transparent monitoring of the measures and a discussion on the future of EU funding after 2026,” Jost emphasized.

According to commission president Ursula von der Leyen, the plan “is addressing national challenges and advancing our shared priorities for a green, inclusive, digital, resilient, and competitive EU.”

On a relatively positive note, the Zoe Institute for Future-Fit Economies, a non-profit based in Brussels, determined that most EU countries have enhanced their economic resilience since 2019 despite subsequent crises.

“The EU’s financial injection to reinforce economic resilience post-pandemic appears to be effective,” said Lydia Korinek, a policy consultant at ZOE Institute. “EU economies have performed well considering the challenges they have faced in recent years.”

However, promises of inclusivity, improved gender equality, and economic participation highlighted by commission officials as benefits of the fund appear exaggerated at best.

The emphasis on headline economic figures “masks” the lack of measures to address social cohesion, according to Korinek.

Gentiloni emphasized the need for another fund to assist member states in investing in common objectives such as defense in the future.

“The OECD, the ECB, and the IMF have all recommended its necessity,” he added.