Can Europe deliver a greener economic recovery?

12 August 2021

5 minute read

An €800bn European recovery fund plans to revive the Eurozone’s economy in the shadow of the pandemic. Can the plan boost long-term growth while creating a greener industrial base?

Key points:

  • The European Commission’s €800bn European recovery plan aims to lift growth while targeting a greener future
  • At least 37% of the funds given to countries should focus on climate challenges and 20% to foster the digital transition
  • Countries submitting plans were encouraged to focus on key areas for investment and reform, including clean energy, sustainable transport, digitalisation of public administration and data cloud capabilities
  • Italy will be the chief beneficiary of EU recovery funds in absolute terms, obtaining €205bn (12.4% of 2020 GDP) from the Next Generation EU facility
  • We expect the national plans to contribute around 1.2 percentage points to real growth by 2023, Italian and Spanish growth particularly benefiting.

Can the pandemic help promote a European economic revival while transitioning to a more sustainable world? 

In response to the effects of coronavirus on the economy and society, the European Commission (EC) has unveiled an €800bn European recovery plan known as Next Generation EU (NGEU). The plan aims to repair the initial economic damage caused by the coronavirus, while creating a greener and more digital and resilient Europe.

The EC is now ready to start issuing bonds. The Commission plans to issue €80bn in long-term funding by the end of this year. The aim is to distribute 13% of the funds upfront.

The NGEU’s main component is the funding of the six-year Recovery and Resilience Facility (RRF), funds being distributed in grants and loans. In looking to aid the least developed nations, 70% of grants depend on a country’s population, the inverse of gross domestic product (GDP) per capita and average unemployment rate over 2015-2019. The remaining 30% is linked to the rate of gross domestic product (GDP) decline since 2020. 

The objectives

Countries submitted National Recovery and Resilience Plans (NRRP) to the EC in order to receive funds. They were encouraged to focus on key areas for investment and reform, including clean energy, sustainable transport, digitalisation of public administration, data cloud capabilities and reskilling/upskilling. At least 37% of the funds should be directed to climate challenges and 20% to foster the digital transition.

Where to direct the money

Italy will be the main winner from the EU recovery funds in absolute terms, with €205bn (12.4% of 2020 GDP) from the NGEU facility. Italian policymakers aim to target tax credits to companies transitioning to high-productivity technologies and are planning a high-speed railway and to toughen labour market policies.

The German government wants to employ the funds to “future-proof” hospitals, digitalise administration and provide support for replacing private vehicle fleets and funding for more energy-efficient buildings plus upgrading supply chains.

In France, authorities want to modernise the railway network and improve public transport. Better energy intensity of public buildings and supporting research in industrialising electrolysis and fuel cells technologies is also on the agenda.

In Spain, the focus will be on reducing traffic levels and developing sustainable-mobility alternatives, modernising public administration and closing the country’s regional digital divide.

Boosting growth and productivity

The RRF is likely to help stimulate Eurozone demand from the middle of this year. Indeed, we expect that the national plans to add around 1.2 percentage points (pp) to the bloc’s real growth by 2023, growth being particularly pronounced in Italy and Spain. Over the 10-year horizon, the EC estimates that projected growth will be boosted by 0.5pp.

These estimates exclude the likely beneficial effect of structural reform on potential growth. As ever, execution will be vital to earning the best possible return on investment.

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