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The EU’s recovery fund proposals: crisis relief with massive redistribution | |
admin | |
2020-06-17 | |
发布年 | 2020 |
语种 | 英语 |
国家 | 欧洲 |
领域 | 资源环境 |
正文(英文) | When European leaders convene this Friday (19 June), each will mainly look at how much her or his country can expect to receive from the European Commission’s recovery proposals. However, the Commission has so far shied away from publishing an estimate of national shares. Limited guidelines were provided however on the estimated overall cross-country allocation in the Commission’s two recent proposals: the €750 billion ‘Next Generation EU’ plan and the additional €11.2 billion amendment to the 2020 annual budget. Cross-countries allocation proposals have been published for only three out of the twelve different instruments that make up the package: the Recovery and Resilience Facility, the Just Transition Fund and agricultural subsidies. Guidance is vague for the other nine, which account for about a third of the grant and guarantee components. The Commission either provided the detailed methodology behind cross-country allocations without any estimate (REACT-EU); indicated broad principles for cross-country allocations (Solvency Support Instrument and Invest EU); or provided no guidelines for cross-country allocation – for good reasons that I discuss. A Commission staff working document (page 52) uses an “illustrative allocation key” assumed to be the same for all grant, loan and guarantee components of the package. But the regulation proposals, on the contrary, explain that each instrument will be allocated differently, and that there may even be no cross-country allocation key at all. Moreover, three out of the 12 instruments operate in non-EU countries: Neighbourhood, Development and International Cooperation; Humanitarian Aid; the European Fund for Sustainable Development. Therefore, contrary to what some allocation estimates circulated in the media and on Twitter wrongly assume, no EU country will directly benefit from those instruments but all will contribute to their financing. This post estimates the overall cross-country allocation of the recovery package’s grants and guarantees. Some countries would obtain 15% of their GNI in grants and guarantees; others less than 1%. The Commission’s proposal contains strong redistributive elements that will mainly benefit those countries hardest hit by the COVID-19 crisis, and those with the lowest GNI per capita. However, while some might try to identify winners and losers in the Commission’s proposal by focusing on each country’s ‘net contribution’, even a minor positive economic impact over the long term would be sufficient for the proposal to benefit all EU countries, even those that receive relatively small amounts. Finally I find that some countries would benefit from the proposed EU loan facility by more than one percent of their GNI in present value terms. Grants and guarantees working for both insurance and redistribution The overall package is composed of €438 billion in grants (including €5 billion for non-EU countries); €73 billion in guarantees (of which €11.5 billion is for non-EU countries); and €250 billion in loans. All figures here are measured at 2018 prices unless otherwise specified. Methodology In the annex, I summarise the cross-country allocation methodologies proposed by the Commission, so let me only highlight here a few key conceptual issues and my main assumptions.
Estimated cross-country allocation of grants and guarantees Grants: Italy and Spain would be the largest beneficiaries of grants in terms of euro values, while Bulgaria, Greece and Croatia would receive the highest shares of their GNIs, around 15%. Most other central and southern European countries would obtain about 6-10% of their GNIs while most high-income countries would get below 2% of GNI. Guarantees: Italy and France would be the largest beneficiaries in raw euros numbers, while Greece would top the list in terms of GNI share. Central European countries would obtain less in guarantees as a share of their GNIs because their economic contraction is forecast to be less severe and they have lower public debts. Cross-country allocations show both an insurance element (countries hit harder get more EU funds) and a redistribution element (countries with lower GNI per capita get more EU funds) (Figure 1). Figure 1: Pandemic economic shock and support from the proposed EU recovery tools The Commission’s downward revision of GDP growth forecasts between autumn 2019 and spring 2020 is a good proxy for measuring the severity of the pandemic’s economic shock. The amounts of grants and guarantees proposed for each country bear a noticeable association with the severity of the crisis’ impact at national level, suggesting that the package acts as insurance (Figure 1). But the package also provides redistribution from richer to poorer countries: for a similar shock, countries with lower GNI per capita get much more. For example, the economic shock is almost the same in France, Slovenia, Hungary, Romania and Latvia. Yet France, which has a higher per capita income level, is estimated to get grants and guarantees amounting only about 2% of its GNI, while Latvia and Romania, which have lower per capita income levels, would get about 10%. This suggests that the proposed redistribution component of the recovery tool is very large. The European Council will have to provide a political guideline on this issue. The massive redistribution component results from various adjustments to the allocation keys of the RRF, REACT-EU and JTF which favour countries with lower GNI per capita (see the annex). Net contributions: impossible criteria The EU is a deal-making machine. Each country tends to focus on what it perceives as its net contribution: how much more will it have to pay compared to how much it will receive. However in the particular case of the recovery package, estimating countries’ net contributions is impossible. First, we cannot currently calculate net contributions. Funds from the recovery tools, financed by EU borrowing from capital markets for rather long maturities, will mainly be spent in 2021-2026. The Commission also proposed that EU debt would be repaid between 2028-2058. Net-contribution estimates thus need to take into account GNI forecasts for each EU country up to 2058, for which no reliable assumption can be made. A crucial question is whether nominal GNI growth will be faster than the nominal interest rate at which the EU can borrow, which is around -0.15% per year for 10 years and 0.3% per year for 30 years. If GNI growth is faster, the burden of debt repayment in the future would take a lower share of GNI than the share of current spending in current GNI. Second, any calculation of net contributions today would fail to account for the fact that the recovery package is not a zero-sum game. The recovery package will likely have a positive impact on the economies of all EU countries. Increased public sector and EU spending during the recession implies more demand. This in turn can stimulate investment, economic activity and increased productive capacity – the very reason for the deployment of the EU recovery tool, which can also lead to long-term gains. A shallower recession due to EU spending could reduce the long-term negative impacts of the crisis, such as the number of unemployed people whose skills are gradually eroded due to inactivity. Cross-country spillovers also exert positive impacts, as exporting companies benefit from larger markets in other EU countries. In short, the recovery package leads to increased economic activity everywhere, at least over the short and medium terms, but possibly in the long term too. Third, when we consider future benefits, even a minor long-term gain would make all countries into net beneficiaries of the recovery package. Since interest rates are so low, almost no discount is needed to calculate the present value of future excess income resulting from the recovery package. Suppose that the package increases German GDP by just 0.1% over the long term (that is, in each future year). This would imply that cumulatively over the next 100 years, German GDP would be 10% higher (=0.1%*100). A 10% of GDP net present value gain for Germany is several factors higher than the present value of the German contribution to the repayment of EU debt. And finally, many EU countries found it difficult to absorb the ‘standard’ seven-year EU budget in the past. The proposed recovery package is additional to the seven-year budget and hence member states would need to absorb very large amounts in a short time, which could be challenging. Absorption rates below 100% would mean lower net contributions, but would also mean lower GDP and employment impacts. An advantageous borrowing facility for some countries Unlike grants and guarantees, the €250 billion in loans for EU countries does not involve redistribution between member states (unless, of course, borrower countries default and do not repay and the borrowing costs of guarantor countries do not increase due to the risk they run by guaranteeing the loans to other member states). Most of the grants and all of the loans aim to finance investment and reform, as spelled out in the recovery and resilience plans in the context of the European Semester process. This comes with two limitations. First, as the loans can only be used for this purpose, the maximum loan volume for each member state cannot exceed the total cost of the agreed investment and reforms, minus the amount of grants received for the same purpose. Second, loans should remain below 4.7% of GNI of each country, though under exceptional circumstances this value could be exceeded. At current prices, 4.7% of forecast 2021 EU GNI is €658 billion. However, the Commission’s proposed total loan volume is €250 billion at 2018 prices or €268 billion at current prices, suggesting the Commission does not expect all EU countries to apply for loans. Indeed, only countries that borrow at a higher rate than the EU borrowing rate would benefit from a loan from the EU. Table 2 reports government bond yields for 10, 20 and 30 years of maturity, as well as similar yields of the European Stability Mechanism (ESM) and the European Investment Bank (EIB), on 12 June 2020. Such benchmark yields are not available for EU borrowing in Bloomberg, yet an investor presentation shows that the yields on EU bonds are rather similar to yields on ESM bonds (see slide 16 here). The loan programme would represent non-negligible savings for some countries. Italy would benefit from the largest net present value gain (1.32% of its GNI) under the assumptions I discuss below, followed by Cyprus, Malta, Portugal and Slovenia. Lacking information on 30-years yields for Greece and 20-year yields of Spain, I could not do the calculations for these two countries, but I estimate that net present value gain for Greece would be between the values of Italy and Malta, while that of Spain would be similar to Portugal. Countries that could borrow cheaper from the markets are indeed unlikely to borrow from the EU considering that the interest savings would be either small or even negative.
Loan calculations methodology: Estimates of the net present value gain from borrowing from the EU are based on the following assumptions:
An annex is downloadable here. It describes the proposed allocation criteria in more detail, specifies my methodology and specific assumptions underlying the calculation, and highlights that the measurement of some indicators in the Commission proposals are not defined. Recommended citation Republishing and referencingBruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post. |
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来源平台 | Bruegel |
文献类型 | 新闻 |
条目标识符 | http://119.78.100.173/C666/handle/2XK7JSWQ/277010 |
专题 | 资源环境科学 |
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