Euro Area: Decoding Europe’s recovery plans
|-
‘Next Generation EU’ plays a crucial role in alleviating the risk of an asymmetric recovery and allows hard-hit countries in Southern Europe to support their economies while avoiding a significant rise in public debt levels.
-
The focus of Germany’s recovery plan lies on investments in digitalisation and climate protection, but the sums involved pale in comparison to the country’s substantial investment needs.
-
France’s recovery package represents a good mix of structural reforms and investments to future-proof the economy. Time will be of essence for President Macron in reaping the benefits of the economic revival plan, as his re-election chances in 2022 will crucially depend on it.
-
Italy’s recovery plan ticks all the right boxes and constitutes an ambitious overhaul of the economy. Especially untying the two Gordian knots of an inefficient public administration and opaque legal system will play a key role in whether EU funds can be absorbed and utilized effectively on the ground.
-
Spain’s recovery plan is among the best when it comes to the green transition and the clear focus on diversifying the economy away from (low productivity) services could raise potential growth.
Alleviating the risk of an asymmetric recovery
The ‘Next Generation EU’ (NGEU) post-coronavirus recovery fund of EUR 750bn represents not only an important milestone in European integration but also plays a crucial role in alleviating the risk of an asymmetric recovery between Northern and Southern Europe. For NGEU, the European Commission has been authorised to raise up to EUR750bn on the capital markets, which means the EU will become one of the largest issuers in Europe over the coming years in our view. To receive financial support from the fund, countries need to prepare national recovery and resilience plans, setting out their reform and investment agenda (with a minimum 37% of expenditures linked to green investments and 20% to digital investments). The Commission’s plans currently expect financial support to be fully committed by the end of 2023 and largely disbursed over the period from 2021 to 2024. The lastest EU Commission spring forecasts project an economic impact of approximately 1.2% of 2019 EU real GDP generated by the NGEU Recovery and Resilience Facility until 2022. Overall, we expect the largest boost from the NGEU funds to the euro area economy to materialize from 2022-2024 (see chart to the right).
The funds provided by NGEU lower the risk that fiscal support will be withdrawn prematurely at the national level, especially for countries that already face fiscal sustainability concerns. Although NGEU will not help the euro area recovery much in the short term, we see it as an important element of ‘bridge-financing’, supporting public investments at a time when some national fiscal initiatives might otherwise be scaled back. This is especially the case for hard-hit countries in Southern Europe, as the EU grant financing creates room for supporting their economies while avoiding a significant rise in public debt levels.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.