EU reconstruction fund: A lot of money helps a lot

Summit on July 20, 2020 in Brussels

The European heads of government agreed on the “European Recovery Fund” (ERF) on July 20th after one of the longest summits.

(Photo: AP)

Berlin The € 750 billion European reconstruction fund will give the poorer EU countries a boost in growth. This is the result of a study by the union-related Institute for Macroeconomics and Business Cycle Research (IMK).

If the funds are used for additional investments as intended, they can help the southern and eastern European EU states in particular to make up for some of the growth losses caused by the corona pandemic, write IMK economists Sebastian Dullien and Andrew Watt. The study is available to the Handelsblatt in advance.

The European heads of government agreed on the “European Recovery Fund” (ERF) on July 20th after one of the longest summits. It stipulates that the EU Commission will take out loans worth 750 billion euros. It is to distribute 360 ​​billion euros of this in the form of loans and 390 billion euros as direct grants to the member states. The EU Parliament still has to agree.

According to the distribution key, the southern and eastern European countries – based on the size of their economies – receive more grants from the European Corona aid package than the north-western European core countries, including Germany.

In the study, Dullien and Watt used the NIGEM standard economic model to calculate how the fund affects investments and growth in the individual EU countries. For Croatia, Bulgaria and Greece, the direct grants correspond to nine to eleven percent of the respective gross domestic product (GDP) for 2019.

Most of the other Eastern European countries receive grants of five to six percent of their GDP, Spain 4.5 percent and Italy 3.7 percent. All of these are sums with which these states can significantly increase their public capital stock – such as roads, railways, schools – and significantly boost their economic growth, according to the study.

In rich countries such as Germany, the Netherlands, Denmark, Ireland and Luxembourg, the effect of the fund will therefore be small because they will only receive around half a percent of GDP as a grant.

The hope: poorer EU countries can catch up

However, Dullien and Watt expressly praise the fact that the poorer EU countries get much more money from the fund: They could finally catch up economically with the richer countries. This will reduce the economic imbalance between the EU states.

In their model, the scientists assume that the funds will be paid out in equal tranches in the 24 quarters of 2021 to 2026. It will not go any faster because investment projects require preparation time.

In all EU countries, the share of investments in GDP will increase through the fund in the period 2020 to 2026 compared to 2010 to 2019: In Greece from three to four percent, in the Czech Republic from four to six percent, in Hungary even from 4.5 to seven percent, and also in Germany by half a percentage point of GDP.

As a result, compared to a scenario without the fund, GDP will rise noticeably in the years 2021 to 2023: in Greece by 1.2 percent, in Poland by 0.9 percent, in Italy by 0.5 percent and also by in Germany 0.2 percent.

The bottom line, according to the authors, is that the ERF will work as it should. Without him, it would be very difficult, especially in southern Europe, to cope with the corona recession. And countries like Germany, which receive little money from the fund, would also benefit indirectly from more growth in southern Europe: If the poorer EU countries stabilize, Germany, for example, could export more goods there again.

More: Why loans help less than grants

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