CECE: The road to economic recovery

The Covid-19 pandemic has transformed rapidly into an unforeseen and unprecedented shock to the global and European economy. According to the official EU Spring Economic Forecast, the EU economy will contract by 7.5% in 2020, while the euro area economy will shrink by a record 7.75% in the current year.

The impact is also significant for international trade, as outlined by the analysis of the European Commission – DG Trade, who are estimating a reduction in global trade of between 10 % and 16 % in 2020.

For the EU27, the forecast reduction is expected to be between 9% and 15% for exports outside of the EU27, and 11% and 14% for imports from outside of the EU 27 (goods and services combined). Against this background, transport equipment and exports of electrical machinery are expected to be the sectors most affected.

The hard recession in the European and world economy in recent months has been building pressure on European institutions for a significant economic response.

The EU recovery plan

After intense rounds of negotiations, on 21 July, EU leaders finally agreed on the Covid recovery plan, the so called Next Generation EU. It will consist of €390 billion in grants and €360 billion in loans to member states, totalling €750 billion that the EU will borrow from financial markets – for this first time in its history.

Compared with the initial Commission proposal, the final deal reduces the amount of grants from €440 to €390 billion, whereas the amount of loans is considerably raised from €250 to €360 billion. Nevertheless, the agreement was hailed as a success for the EU and will open unprecedented channels of funding.

Two specific instruments within the EU recovery fund are worth highlighting:

• The bulk of the EU money will be channelled via the new Recovery and Resilience Facility to member states and used for long-term investments and growth projects for recovery and economic resilience. This will be focused on green and digital transitions.
• To help individual companies hit by the crisis, the Commission proposed a new Solvency Support Instrument aimed at mobilising private investment by providing guarantees against company losses.

It is also worth highlighting that the EU Recovery and Resilience Facility does not target any specific sectors. Member states can allocate these EU funds to a range of economic sectors, as long as they contribute to the green and digital recovery. This gives room for manoeuvre for member states in identifying sectors and projects eligible for funding, as long as they contribute to the green and digital transitions. Construction and infrastructure will be sectors that are part of the focus.

The European Parliament welcomed EU leaders’ acceptance of the recovery fund as a “historic move”. Nevertheless, as for the long-term EU budget, they disapprove of the cuts made to future-oriented programmes and consider that they will “undermine the foundations of a sustainable and resilient recovery.”

Ambitious and vital goals such as the European Green Deal 2050, or programmes for digital transition, health, youth, culture, research or border management could be in danger.

Parliament demands that a legally binding Multiannual Financial Framework mid-term revision enters into force by the end of 2024 at the latest and stresses that this revision must include the ceilings for the 2025-2027 period, the introduction of additional own resources and the implementation of the climate and biodiversity targets.

Focus on construction and infrastructure

The construction sector will be eligible for funding both at state level through the Recovery and Resilience Facility, and at company level through the Solvency Support Instrument,

or the following reasons:

• Construction needs investment for the green and digital transition, in order to achieve the target of “at least doubling the annual renovation rate of existing building stock”.
• There is a high percentage of equity losses among construction companies due to the economic impact of Covid (lockdown, slowdown of the economy, social distancing on work sites).
• There are clear references to the energy efficiency of buildings, renovation and social and transport infrastructure in the different programmes of the EU recovery plan.
• Infrastructure will also be eligible for funding where there is a contribution to lowering emissions within the transport sector, for instance when moving transport from roads to railways.

The application to obtain the funds from the Recovery and Resilience Facility will be made by member states through national recovery plans. As a result, the national recovery plan for each member state will play a significant role in identifying the key economic sectors to receive funding and support.