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Recovering from the EU’s Recovery Fund

Amid the celebrations following European leaders' deal on a €750 billion recovery fund, many seem to have forgotten that both the European Union and the eurozone remain under constant threat of sovereign-debt crises. Until that fundamental weakness is addressed, the champagne corks should stay in their bottles.

NEW YORK – After arduous negotiations between member states’ governments last month, European Union leaders are celebrating their agreement on a €750 billion ($886 billion) rescue package for EU countries hit hard by the COVID-19 crisis. But it is too soon to pop open the champagne. The plan for the “Next Generation EU” recovery fund has two major weaknesses that will make it not only ineffective but also a threat to the eurozone’s very existence.

In addition to being too small, Next Generation EU lacks essential conditionalities for fiscal sustainability, including an orderly sovereign-debt restructuring mechanism (SDRM). The recovery fund’s €390 billion grant component is a mere 2.8% of the EU27’s 2019 GDP. And even if one counts the €360 billion loan component and the €100 billion in lending through the Support to mitigate Unemployment Risks in an Emergency (SURE) program, the total still reaches a mere 6.1% of GDP.

Worse, even though fiscally challenged national governments need financial support immediately, the recovery fund will not make funds available to member states until 2021, at which point the €750 billion allotment will be expected to last for three years. (The relatively insignificant SURE program is already operational.) Nor can European governments expect much help from the 2021-2027 EU budget, which amounts to no more than 1.1% of annual EU GDP, and is not meant to provide additional funding for the COVID-19 crisis.