Tuesday, September 22, 2020
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CEE main beneficiary of the EU’s recovery fund

It is a historic day indeed when 27 EU leaders agree on a comprehensive package worth 1,8 trillion euros. President of the European Council Charles Michel welcomed the deal saying that EU Members State renewed their marriage vows for other 30 years. Other than the next seven-year budget plan (the multiannual financial framework – MFF), an additional 750 billion euros post-pandemic recovery fund (Next Generation EU) has been approved, 390 billion euros of which will be delivered to EU countries in the form of grants while the remaining 360 euros billion in loans.

“The goals of our recovery can be summarised in three words: first convergence, second resilience and transformation,” commented Mr Michel. “Concretely, this means: repairing the damage caused by COVID-19, reforming our economies, remodelling our societies.”

At the end of March, the European Commission had already proposed a recovery plan for Europe to tackle the crisis. 

“This fund shall be of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected and be dedicated to dealing with this unprecedented crisis,” highlighted the European Council President.

Green money

Thirty per cent of the total expenditure from the MFF and Next Generation EU will target climate-related projects. These expenses will comply with the EU’s objective of climate neutrality by 2050, the EU’s 2030 climate targets and the Paris Agreement.

Already at the end of June, the EU environment and climate ministers agreed that the European Green Deal should guide the recovery towards green growth and a more resilient EU.

“We want to build a modern, clean and healthy economy, which will help to secure the livelihoods of the next generations,” said Tomislav Ćorić, Minister of Environment and Energy of Croatia. “The recovery plan can help kick-start Europe’s economy after the COVID-19 crisis and it can at the same time boost Europe’s sustainability and climate action.”

However, according to European think tank Bruegel, this roughly represents a quarter of the investments required to reach a 50-55 per cent emissions reduction target for 2030 – estimated at 300 billion euros per year. Given this order of magnitude, it is clear that only the private sector is in the position to deliver the necessary investments for the green transition.

“It is indeed the private investment that is essential for the success of the sustainable finance concept,” Michał Motylewski, Managing Counsel at Dentons Warsaw, said in a recent interview with CEENERGYNEWS. “Many investors and financial institutions repeatedly express their major concern, which is stability and predictability of the investment conditions in particular in respect of the regulatory environment.”

According to him, it is now up to Member States to define how these funds should be redirected to leverage private investment.

How much goes to CEE?

Definitely, this recovery fund is a huge success for France and Germany, whose leaders were among the first advocates of this agreement. Nevertheless, contrary to the original proposal, the allocation key has shifted from favouring low-income countries towards those most affected by the coronavirus and based on their size.

What does this mean for Central and Eastern Europe? The region was hit to a lesser extent (compared to countries like Italy or Spain) but these funds could be crucial for the region. Given the comparatively high carbon intensity of CEE economies and therefore the high costs of complying with the climate objectives, these countries could benefit from money already imagined to target climate-related projects.

However, changing the allocation criteria, Zsolt Darvas, Bruegel’s Visiting Fellow, found that only Germany (by 13.4 billion euros) and France (by 7.4 billion euros) will get more grants from the overall recovery package compared to the Commission’s original proposal. Among the countries that well get less money, there is Poland, which is short of 11.4 billion euros.

Nevertheless, according to him, CEE countries, as well as some southern European countries, will be the main beneficiaries of the EU’s recovery instrument.

“Bulgaria, Croatia and Greece are expected to receive grants of about 10 per cent their annual Gross National Income (GNI), while most other central European countries would get about 5-6 per cent,” he tells CEENERGYNEWS. “Even the more developed Czechia, Estonia and Slovenia would get about 3-4 per cent of their annual GNI. These are gross figured, but since the share of these countries is rather low in EU GNI, they will contribute little to the future repayment of the debt that finances the EU spending.” 

Not without conditions 

And speaking of criteria, what does a country need to prove to get these funds? Each country must submit a national plan that needs to be consistent with the country-specific recommendations and contribute to green and digital transitions. In other words, such plans are required to boost growth and jobs and reinforce the “economic and social resilience” of EU countries. These plans will be then approved by the Council by a qualified majority vote on a proposal by the Commission. Meaning that countries can also block other countries. 

Here the situation in Central and Eastern Europe becomes quite delicate. Poland and Hungary which are facing Article 7 proceedings by the Commission over the alleged violation of democratic norms. According to Article 7, the Council may determine that there is a clear risk of a serious breach of EU values in the concerned countries. This could eventually lead, at a later stage, to sanctions, such as voting rights being suspended in the Council.

Mr Darvas believes that the above-mentioned large payments to CEE are perhaps an important reason why the prime ministers of these countries agreed to the package, despite the rule of law conditionality that representatives of some countries criticised beforehand. 

“The European Council conclusion on the rule of law conditionality is ambiguous,” Mr Darvas underlines. “On the one hand, it says that rule of law conditionality will be introduced and the Commission will propose measures in case of breaches for adoption by the Council by qualified majority. Hence, one or a few countries would not be able to block such a proposal.”

However, he also reminds that conclusion also says that The European Council will revert rapidly to the matter, signalling that further discussions and negotiations are needed. 

“The current European Council conclusion is not an EU legislation and the detailed legislation also has to be approved,” he adds. “I expect continued heavy fights between member states the next time the European Council discusses rule of law conditionality. Due to the completely opposing views on this issue, I’m afraid the finally approved procedure will be toothless.” 

Certainly, Polish Prime Minister Mateusz Morawiecki was relieved to hear that there was no link between the rule of law and funds in the proposed deal.

“I’m happy to say we overcame the crises that threatened the EU,” he said at a press conference. “These [the rule of law and the funds] are two separate issues and we kept that in the conclusions.”

Payback

Finally, when it comes to the loans, there is the question of repayment. The approved pack allows the European Commission to borrow funds on behalf of the Union on the capital markets up to the amount of 750 billion euros and the repayment will be scheduled until 31 December 2058. 

“The EU can borrow very cheap, almost interests-free,” explains Mr Darvas. “Therefore it can bring big benefits to countries that currently borrow at a higher rate.”

He mentions Hungary, for example, for which it would make sense, being its interest rate at 1.8 per cent. 

“Germany borrows at even a lower rate so Southern and Eastern European countries will be the main beneficiaries,” he adds. “At the end of the day, it would be a political decision as these countries do not like to take loans from the European Union and therefore I expect a low demand.”

The European Union made a historic step. Now it is up to each country to deliver green and fair national plans and to use these funds in a just way. 

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