Next Generation EU - What will our future look like?
Updated: Jun 2, 2020
Saying that the coronavirus badly shook European economies is quite the euphemism. Indeed, most countries suffered severely from the closed border, the lockdown and restrictions. The countries that already had problems before the Crisis, namely Italy and Spain, are in dire conditions at the end of it. Overall the EU's Economy is expected to shrink by 7% in 2020! Although we cannot stress enough that even though most countries are reopening, we cannot be sure if we are indeed close to the end of the Crisis in Europe. To remediate this dreadful economic situation, the EU put forward a Recovery Fund giving EU countries the assets they need, based on their current economic status, how badly the Crisis affected them, on their estimated needs and the countries' proposal.
The new EU Recovery Plan christened 'Next Generation EU' presented on the 27th of May by the European Commission is quite inventive and sets the path forward to a greener future. It is scraping the plan to mutualise Member States debts off the table, very much aware that this would never have been accepted by the Council and proposes here a €750Bil joint loan to invest in the future, green and new technologies. This very ambitious plan aims at supporting innovation and encouraging investment in sustainable technologies to make the EU a leader in the sustainable transition. Doing so could assert EU's standards as international standards and give a significant competitive edge to European economies. While this elaborated plan sounds a bit too "perfect" for the European future, it will only be possible if economies are stabilised to minimum standards in the first place. The transition to more sustainable industries can only be done gradually and most companies suffered too much in the crisis to think about investing in greener policy. The plan intends to have a slow recovery at first with an exponential curve to the top, but it might not be possible if we do not manage to start it properly. So what exactly is the 'Next Generation EU' saying?
How will the 'Next Generation EU' be financed?
The European Commission will borrow €750Bil on the financial markets by using its very advantageous credit score. The money invested in EU regions will have to be repaid in the period between 2028 and 2058, thus allowing the national economies a minimum of roughly seven years to stabilise. To help for a stable and fair recovery, the Commission proposes some new owned resources based on Emissions Trading Scheme or Carbon Border Adjustment Mechanism which will significantly encourage both investment in green technologies as well as domestic productions. In other words, the plan is to green up the economy and add taxes on pollution products, making the domestic production more attractive and thus allowing the repayment of the initial investment.
What will the money be used for?
The plan emphasises that every single Euro raised through the 'Next Generation EU' will be used in EU programmes. The money will primarily be channelled through programmes to "accelerate the twin green and digital transitions and build a fairer and more resilient society." This might be a point of confrontation for the Council of the EU as some countries prefer national programmes and investment to EU programmes. Although, by doing so, it will avoid an extra layer of corruption risk and simplify audits and monitoring. Additionally, it takes away the states' responsibility and puts all the accountability, positive and negative on the back of the Parliament and the Council. Of this € 750Bil, 500 will be awarded as grants and 250 as loans.
The main instrument benefiting from 'Next Generation EU's investment, roughly 75%, will be the Recovery and Resilience Facility. It will primarily work as an investment consulting scheme, advising the Member States on reforms and investment for a sustainable recovery. Although it is important to stress that the Member States are designing their National Recovery Plans based on their needs, the Recovery and Resilience Facility will mostly support.
The second important instrument is the Recovery Assistance for Cohesion and the Territories of Europe or REACT-EU, a €55Bil additional funds made available through the regional development funds. It is an extension to the existing funds to react, hence the name, rapidly to the COVID19 Crisis and not wait for the 'Next Generation EU' to start functioning independently. Again, this will be centred to green, digital and sustainable recovery investments.
The Solvency Support Instrument will benefit from a €31Bil budget (although it aims at unlocking an extra €300Bil) and will be given to companies in regions most affected by the Crisis. This policy aims to make sure that otherwise healthy companies do not suffer from the Crisis and can support the functioning of the economy from the get-go when we will be out of the sanitary Crisis and create a levelled playing field with those less affected. Guidelines on investment will be established to support EU and nationally identified priority sectors.
The InvestEU programme is meant to be doubled and allow to unlock €150Bil generated by the €15Bil invested through the 'Next Generation EU'. "This will invest in strengthening our resilience and strategic autonomy across key technologies and value chains." As stated previously, this is meant to support the EU's economic system and support the private sector, making it more attractive for investors. Additionally, by supporting domestic production, it allows for the previously mentioned taxes to support domestic consumption instead of merely augmenting production costs for European Companies by giving them access to resources and material.
How will it be beneficial for sustainable development and the tech industry?
Indeed, the central topics of this blog still are sustainable development, green economies and tech innovations. Now that we have seen where the money comes from and where will it go, it is essential to access if it will support the sustainable transition.
As we mentioned previously, these funds will be invested primarily in developing the sustainable and digital transition of Europe. "We must repair the short-term damage from the crisis in a way that also invests in our long-term future". Concretely this comes into a set of directives. Firstly, all investment from this package will respect the "do no harm". This one Is rather self-explanatory; all investment will support industries and programmes that do not hurt the environment.
In lines with the newly outlined EU Farm 2 Fork and EU Biodiversity strategies that we already analysed last week; the Commission is planning to unlock an additional €15Bil for the European Agricultural Fund for Rural Development. These funds will allow to develop digitalisation and attract more people to the countryside, thus creating much-needed jobs in the rural sectors. Under InvestEU a new natural capital and circular economy initiative will mobilise at least €10Bil in the next ten years allowing for the just development of circular economy mechanisms. Although we regret that the circular economy does not account for more, one billion a year is relatively low to support the creation and development of this new type of economy.
The Just Transition Fund will invest an additional €32.5 billion to lessen the socio-economic impacts of the transition, "supporting re-skilling, helping SMEs to create new economic opportunities, and investing in the clean energy transition". These funds will primarily support SME in their transition and give them the tools to be relevant in the competitive, sustainable economy.
This is a small revolution for the EU as the Commission plans to unlock investment in clean technologies and value chains through the Horizon 2020 programme. This might be the most precise embodiment of the green and tech twin economies. The Strategic Investment Facility will invest massively in developing clean and renewable energy production and energy storage. This is a piece of ground-breaking news for the Hydrogen sectors as the "Clean Hydrogen Strategy and Alliance will steer and coordinate the rapid upscaling of clean hydrogen production and use in Europe." Even though the technology is not yet ready for an up-scaled extensive use in European transport and is generally less known than its electric counterpart, hydrogen batteries production will surely see massive growth in the near future.
"To help create more jobs, there will also be a focus on accelerating the production and deployment of sustainable vehicles and vessels as well as alternative fuels." This as well is rather self-explanatory, do we need to tell you why fewer polluting cars will be beneficial for the environment? Although, when talking about the economic repercussions, it becomes trickier. Indeed, for the development of alternative fuel, we already mentioned hydrogen as a strong contender which would raise Europe as the leader, by far, in the development of this technology. Although other industries are yet to be correctly developed, this sounds like an exciting topic for a future article!
This package deal is imposing, and it has the potential to raise Europe as the leader of both digital and sustainable transitions. It is essential to mention that in addition to 'Next Generation EU', the Commission is proposing a revamped EU budget, amounting to some €1 100 billion between 2021-2027 further enabling EU's recovery. One might say that on the digital front we cruelly lack capacities, although the 'Next Generation EU' also strongly support the digital sector. We are planning to cover the digital package in a future article so if you are interested, stay tuned!
Much like the phoenix, Europe will rise from its ashes! The COVID19 Crisis gave a real opportunity to change the way we consume drastically, we produce, and we invest. It is time to allow Europe to be a real competitive, sustainable economy and become the leader of the transition. Although the transition will certainly be more complicated than planned and the recovery funds need to take into account the micro-economic issues and kickstart tourist once again in Europe. All in all the proposal will be more realistically applicable after we resolve the core of the issue and most European economies have stabilised. I will conclude this article on the last words of the 'Next Generation EU' paper as they symbolise perfectly the ambition and the philosophy behind the proposal:
"Europe is in a unique position to be able to invest in a collective recovery and a better future for the next generations. This is our defining generational task. Europe's recovery and building a better future for the next generation will not be easy, and it cannot be done alone. This will need political will and courage and buy-in from all of society. This is a common good for our shared future." This is Europe's moment!
Europe's moment: Repair and Prepare for the Next Generation. SWD(2020) 98 final.
Identifying Europe's recovery needs. COM(2020) 456 final