Ursula von der Leyen's Recovery Fund fails to deliver 'economic bonanza' to save EU

Ursula von der Leyen details Next Generation EU recovery plan

Writing for Brussels Report, Economist Dan Karl claimed von der Leyen’s flagship programme to combat the economic slump caused by the coronavirus pandemic depends on too many conditionalities to succeed. Pointing to the EU Commission’s own projections, Mr Kral wrote: “These cash injections are unlikely to unleash an economic bonanza, even according to the European Commission’s own estimates.

“The Commission is particularly bullish on Greece and Italy, which are among the largest recipients. Still, it expects that if they spend their full allocated shares, which are the equivalent of 20 percent and 13 percent of 2020 GDP, this will make their economy only 3.3 percent and 2.5 percent larger by 2026 compared to a no Recovery Fund baseline.

“The modelling does not include the impact of growth enhancing reforms, which are a key component of the plans but are much harder to implement. In any case, this does not look like the best value for money.”

He continued: “There will be strong pressure by some governments to hand the funds over quickly and without being too strict. How the Commission has enforced the common fiscal rules over the last twenty years may be indicative – it has always bowed down to political pressure and never sanctioning a single government.

“The recent news that the Commission is holding up the green light for Polish and Hungarian national plans may indicate a step in the right direction, although the governments of these two countries don’t have many political allies on the EU level, especially after Hungary’s ruling Fidesz has left the largest pan-European political group, the EPP, which has been shielding it for a decade.

ursula von der leyen eu recovery fund

Ursula von der Leyen’s recovery fund will not deliver ‘economic bonanza’, says Karl (Image: GETTY)

“However, while Poland and Hungary have been allocated EUR 24 billion and EUR 7 billion from the EU Recovery Fund grants, respectively, they are set to receive three times more from the EU’s structural funds in the 2021-27 budget (EUR 72 billion and EUR 21.5 billion respectively + unused funds from 2014-20). There is much less fuss about what they will do with this money – probably business as usual.”

He concluded: “There is no question about the symbolic value of the Recovery Fund as a common European response to a large external shock and its potential to promote growth-enhancing reforms, given the formal conditionality and periodic reviews attached to the release of funds. However, as the Commission’s own modelling shows, one should not get carried away about the expected impact.”

It comes as the International Monetary Fund (IMF) on Tuesday maintained its 6 percent global growth forecast for 2021, upgrading its outlook for the United States and other wealthy economies but cutting estimates for developing countries struggling with surging COVID-19 infections.

The Fund gave its biggest upgrade to Britain, lifting its 2021 growth by 1.7 percentage points to 7.0 percent, reflecting better adaptation to COVID-19 restrictions than previously anticipated.

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The eurozone, on the other hand, saw a smaller 0.2 percentage point upgrade for 2021.

The divergence between wealthy economies and countries still struggling with coronavirus is based largely on better access to COVID-19 vaccines and continued fiscal support in advanced economies, while emerging markets face difficulties on both fronts, the IMF said in its update to its World Economic Outlook.

“Close to 40 percent of the population in advanced economies has been fully vaccinated, compared with 11 percent in emerging market economies, and a tiny fraction in low-income developing countries,” Gita Gopinath, the IMF’s chief economist, said during a news conference.

“Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of COVID-19 cases in some countries, notably India, have led to downgrades,” she said.

The IMF significantly raised its forecasts for the United States, which it now expects to grow at 7.0 percent in 2021 and 4.9 percent in 2022 – up 0.6 and 1.4 percentage points, respectively, from the forecasts in April.

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EU news: Recovery Fund coronavirus grants per country (Image: EXPRESS)

The projections assume the US Congress will approve President Joe Biden’s roughly $4 trillion in proposed infrastructure, education and family support spending largely as envisioned by the White House.

Positive spillovers from the US spending plans, along with expected progress in COVID-19 vaccination rates, are boosting the IMF’s 2022 global growth forecast to 4.9 percent, up 0.5 percentage point from April.

Japan saw a 0.5 percentage point cut, reflecting higher infections and tighter restrictions in the first half of the year.

India, which has struggled with a massive wave of coronavirus infections this year, saw the biggest cut in its growth forecast – three percentage points – to 9.5 percent for 2021.

The IMF also reduced its 2021 forecast for China by 0.3 percentage point, citing a scaling back of public investment and overall fiscal support.

The IMF also forecast lower prospects for Indonesia, Malaysia, the Philippines, Thailand and Vietnam where recent waves of COVID-19 infections are weighing on activity.

The Fund forecast that emerging Asia would grow 7.5 percent this year, down 1.1 percentage points from the April forecast.

Low-income countries saw a downgrade of 0.4 percentage point in their 2021 growth, with the Fund citing the slow rollout of vaccines as the main factor impeding their recovery.

Gopinath said the IMF views inflation pressures as transitory due to “supply-demand mismatches” as economies reopen, with high inflation readings this year, especially in the United States, returning to normal levels next year.

But she said that if supply bottlenecks proved long-lasting, they could cause inflation expectations to become unanchored next year, which would be a concern.

“While we are seeing wages going up for some sectors, we are not seeing that as a broad-based phenomenon and inflation expectations are anchored,” she said. “However, we still aren’t out of the woods yet.”

If the Federal Reserve reassesses its inflation outlook and takes pre-emptive action to tighten monetary policy, this would add a “double-hit” to emerging markets, adding capital outflows and higher borrowing costs to their growth challenges, the Fund said.

source: express.co.uk