With the first tranches of the EU’s Covid recovery fund bonds having been issued (they were heavily oversubscribed) and first payments to member states having been made, this is a good moment to take stock of this landmark initiative, which has become the centrepiece of the EU’s economic response to the pandemic.

Background

The fund’s principal aim is to enable EU member states to finance projects to rebuild their economies post-Covid. It is a mixture of grants and loans, amounting to a sizeable €800 billion. National governments have had to submit plans to the European Commission on how they intend to use their funds, committing at least 20% of spending to digitisation projects and 37% to projects supporting the EU’s 2050 target for net-zero greenhouse gas emissions.

When the fund was being hashed out by leaders last summer, the most contentious aspect by far was the proposal to issue common EU debt. The traditional fault-lines were on display, with fiscal hawks in northern Europe arguing against the idea and even preferring one-off grants for which they would be principally liable, and the fiscal doves in southern Europe arguing in favour of common debt. While much of the debate played out along familiar lines, this time the doves won, largely due to strong French backing and to Germany softening its objections. The hawks had to satisfy themselves (or rather satisfy their generally hawkish domestic constituencies) that the common debt was a temporary measure, unique to the unprecedented circumstances. Others hoped it could be the first step towards a fiscal union and something greater.

Credibility at stake

The fund is central to Commission President Ursula Von der Leyen’s agenda and she is hoping its success will help to repair the reputational damage done to the EU early in the pandemic, with a patchy initial response to the crisis marked by ugly rows about PPE exports within the bloc, followed by a slow start on the vaccine rollout (which, it should be said, has since speeded up considerably). With the passing of the recovery fund, Von der Leyen’s reputation is on the line and there is much at stake for the Commission and the EU project more generally.

Unhelpfully for the Commission, the fund has received early criticism on several fronts. There have been rumblings about the misuse of funds: some national governments are accused of trying to use the money to finance pet projects (one small central European country which shall not be named wanted to establish a new national flag carrier!). Others are accused of lining up projects solely in areas where the governing party receives its electoral support (looking at you Hungary…). The director-general of the EU’s anti-fraud office recently voiced his concerns about shortcomings in the oversight of funds.

There is also the issue of rule of law conditionality, with Hungary and Poland the main targets. There has recently been ugly wrangling between the European Parliament, which tends to be more outspoken on rule of law matters, and the Commission, which tries to keep its head beneath the parapet: Hungary’s plan is expected to be approved by the Commission on 12 July and parliamentarians are pushing for this to be delayed. There are also worries among environmentalists about ‘greenwashing’: Green MEPs have raised concerns that a number of spending priorities in the national plans were only superficially in line with the fund’s environmental priorities.

Horses for courses

It is worth keeping in mind that the fund will inevitably mean different things to different countries. There is little in common, for example, between Denmark, which has ridden the economic hit relatively well, and Spain, whose economy contracted 10.8% in 2020. France and Germany, for their part, have taken a rather haughty attitude to Commission scrutiny of their national plans, believing (correctly, it must be said) that the initiative would not have happened without their support. The Portuguese and Greek governments are thought to have been among the most proactive and professional in their dealings with the Commission. Some countries are in greater need of hand-holding than others: Bulgaria, for example, lacks relevant know-how in its administration yet is in line to receive a sum equivalent to a whopping 10% of GDP.

Italy is a particularly interesting case and it will be closely watched. It was the hardest hit by the initial health crisis and will be the fund’s biggest beneficiary. Under new Prime Minister Mario Draghi the country has come to be seen in Brussels as something of a star pupil, and much is expected of its national plan. Netherlands, by contrast, has not even got around to submitting its plan, and with government coalition talks still ongoing no one is expecting one any time soon.

Hamiltonian moment?

In Brussels the prevailing view is that the fund, if properly administered, could well prove to be a ‘Hamiltonian moment’ for the EU, an allusion to when Alexander Hamilton, the first secretary of the US Treasury, brought about the first issuance of common debt between US states in 1791, cementing the inexorable path towards statehood. Comparisons are clearly premature, but it is not inconceivable that the fund comes to be seen as a crucial step towards longer-term fiscal integration. The danger for the EU, however, is that even if the fund founders because of problems at national government level, it will be the Commission – and potentially the EU project as a whole – that takes the hit.