1 2021 January Vol. 22
RESEARCH REPORT FOCUS European Banking Reform Should Embrace a Unitary Approach to Failed Banks The EU’s Anna Gelpern and Nicolas Véron Big Pandemic Deal: How Difficult Is It for Managers to Predict Their Future Business Development? Will It Be a Success? A New Measure of Perceived Clemens Fuest, Iain Begg, Torben M. Andersen, Business Uncertainty Karsten Staehr and Katri Urke, Stefan Lautenbacher, Jérémie Cohen-Setton and Shahin Vallée Stefan Sauer and Klaus Wohlrabe
REFORM MODEL The Post-2015 Institutional Shock in Poland: Some Empirical Findings Tadeusz Kowalski
DICE DATA ANALYSIS Deforestation and Migration Britta Rude, Bennet Niederhöfer and Fabio Ferrara € MACRO DATA INSIGHTS Statistics Update CESifo Forum ISSN 1615-245X (print version) ISSN 2190-717X (electronic version)
A bi-monthly journal on European economic issues Publisher and distributor: ifo Institute, Poschingerstr. 5, 81679 Munich, Germany Telephone +49 89 9224-0, telefax +49 89 9224-98 53 69, email [email protected] Annual subscription rate: €50.00 Single subscription rate: €15.00 Shipping not included Editors: Yvonne Giesing, Christa Hainz, Chang Woon Nam Editor of this issue: Chang Woon Nam Copy editing: Clara Albrecht and Tanja Stitteneder Indexed in EconLit Reproduction permitted only if source is stated and copy is sent to the ifo Institute. www.cesifo.org 1/2021 FORUM
In the face of an unprecedented economic recession caused by the Covid-19 pandemic, the EU has set up the biggest stim- ulus in its history – a 750-billion-euro fund called “Next Gen- eration EU” – to support economic recovery. This initiative is ground-breaking as it includes grants and loan facilities for member countries, financed by EU borrowing. It stresses the importance of maintaining economic stability and strength- ening social cohesion within the EU, while critics argue that it will undermine financial discipline in the EU and create the conditions for a “transfer union” in which some member states live at the expense of others. This program is designed as a one-time, temporary intervention, but if successful, it will signal a new direction for EU fiscal cooperation. FOCUS
The EU’s Big Pandemic Deal: Will It Be a Success?
The NGEU Economic Recovery Fund 3 Clemens Fuest
One Instrument, Many Goals: Some Delicate Challenges Facing the EU’s Recovery Fund 9 Iain Begg
Economic Policy Responses to the Coronavirus Crisis — Stabilization and Insurance 14 Torben M. Andersen
The Coronavirus Pandemic and Next Generation EU in the Baltic States 20 Karsten Staehr and Katri Urke
Measuring the European Fiscal Stance After Covid-19 from National and European Budget Plans 26 Jérémie Cohen-Setton and Shahin Vallée
RESEARCH REPORT
European Banking Reform Should Embrace a Unitary Approach to Failed Banks 37 Anna Gelpern and Nicolas Véron
How Difficult Is It for Managers to Predict Their Future Business Development? A New Measure of Perceived Business Uncertainty 40 Stefan Lautenbacher, Stefan Sauer and Klaus Wohlrabe
REFORM MODEL
The Post-2015 Institutional Shock in Poland: Some Empirical Findings 43 Tadeusz Kowalski
DICE DATA ANALYSIS
Deforestation and Migration 49 Britta Rude, Bennet Niederhöfer and Fabio Ferrara
MACRO DATA INSIGHTS
Statistics Update 58 FOCUS
The EU’s Big Pandemic Deal: Will It Be a Success?
In the face of an unprecedented economic recession caused by the Covid-19 pandemic, the EU has set up the biggest stimulus in its history - a 750-billion-euro fund called “Next Generation EU” - to support economic recovery. This initiative is ground-breaking as it includes grants and loan facilities for member countries, financed by EU borrow- ing. It stresses the importance of maintaining economic stability and strengthening social cohesion within the EU, while critics argue that it will undermine financial disci- pline in the EU and create the conditions for a “transfer union” in which some member states live at the expense of others. This program is designed as a one-time, temporary intervention, but if successful, it will signal a new direction for EU fiscal cooperation.
Clemens Fuest The NGEU Economic Recovery Fund
As a response to the recession caused by the corona types of spending, to cut taxes or to reduce their debt. pandemic the EU has decided to create a large fund This is not necessarily a disadvantage because it is far called “Next Generation EU” (NGEU) with a volume of from clear whether the economic recovery works best EUR 750 bn to support the economic recovery. The if the net recipients use the support they receive via fund will be financed by debt issued by the EU but NGEU entirely for additional public spending. Fourth, backed by guarantees of the member states. the critique that NGEU will undermine fiscal disci- Views regarding the desirability of funds are di- pline in the EU budget is probably overblown because vided. Its supporters argue that it is necessary for NGEU does not give the EU the right to finance future maintaining Europe’s cohesion and the economic budgets with debt; repeating the debt financing op- stability. Critics object that it will undermine fiscal eration would require unanimous support among the discipline in the EU and set the stage for a “transfer member states. But it is true that a similar debt-fi- union,” where some member states live at the expense nanced initiative will be more easily repeated in the of others. next economic crisis. This paper discusses the financial flows implied The rest of the paper is structured as follows. The by NGEU and the economic rationale for introduc- next section explains how much money is made avail- ing it. The main results of the analysis are as follows. able through NGEU and how it will be spent, followed First, although spending financed through the fund by the third section which discusses whether NGEU will not start before the worst of the crisis is over, it can be justified on economic grounds. The fourth still contributes to fiscal stabilization today, mostly section turns to the issue of conditionality. The fifth through its effect on expectations. Second, the fund section discusses the implications does not operate as an insurance device that would for future debt financing of EU redistribute across countries according to their re- level public spending, and the spective economic losses incurred due to the crisis. In- final section concludes. stead, the fund redistributes from member states with high levels of GDP per capita to less affluent coun- HOW MUCH MONEY WILL BE tries. Third, attempts to steer national governments MADE AVAILABLE AND HOW Clemens Fuest toward political priorities defined at the European WILL IT BE SPENT? level such as the Green New Deal of the green and Clemens Fuest is President of digital transformation of the economy are unlikely to To understand the financial dimen- the ifo Institute, and Professor of Economics and Director of be successful because money is fungible. The mem- sion and relevance of NGEU, it is the Center for Economic Studies ber states may replace national spending with money helpful to consider it in the con- (CES) of the University of Munich. from NGEU and effectively use the funds for other text of the EU’s general budget. Ta-
CESifo Forum 1 / 2021 January Volume 22 3 FOCUS
Table 1 MFF 2021-2027 and NGEU (Billion Euros) MFF NGEU Total Single market, innovation and digital 132.8 10.6 143.4 Cohesion, resilience and values 377.8 721.9 1,099.7 Natural resources and environment 356.4 17.5 373.9 Migration and border management 22.7 - 22.7 Security and defense 13.2 - 13.2 Neighborhood and the world 98.4 - 98.4 European public administration 73.1 - 73.1 Total 1,074.4 750 1,824.4 Source: European Commission.
ble 1 provides an overview of the EU budget spend- has been declining over the last decades. NGEU in ing structure in the coming years as laid out in the contrast focuses on the support of cohesion as well as Multiannual Financial Framework (MFF) for the period “resilience.” What does this mean? Figure 1 illustrates 2021-2027, as well as the spending planned for the the different spending programs that constitute NGEU. new NGEU fund. The Recovery and Resilience Facility is the core The overall volume of the budget and the recov- of NGEU. The money will be spent as follows. Each ery fund is significant, but the money will be spent member state is expected to submit national recov- over a period of seven years. Average yearly spending ery plans describing how it intends to support its re- in the general EU budget amounts to roughly 1 per- spective economic recovery and how it will make it cent of the EU’s GDP, and the new recovery fund adds more resilient. Particular emphasis will be given to another 0.7 percent of GDP. Roughly half of the lat- the objectives of the Green New Deal, in particular ter is dedicated to providing loans to member states. climate change, and to the digitization of the econ- NGEU thus brings a significant extension of EU spend- omy. The role of national recovery plans will be dis- ing relative to the level before the coronavirus crisis. cussed further below. REACT-EU stands for Recovery The overall level of public spending at the EU level is Assistance for Cohesion and the Territories of Europe. still limited if compared to budgets at the national Funds from this program will be made available to level, but since it is spending on top of the national support job maintenance and to create new jobs, in budgets, the question is warranted whether an ex- particular measures countering youth unemployment. tension of overall public spending in the EU, where The funds can also be used to support health care the public sector is already much larger than in most systems or to help finance investment in small- and countries outside Europe, is the right answer to the medium-sized enterprises. current crisis. What does NGEU mean for the level of The Just Transition Mechanism (JTM) is a tool public debt in Europe? In 2020, public debt in the EU mostly financed through the general EU budget but will be equal to roughly 95 percent of GDP. The ad- reinforced by NGEU. Its objective is to ensure that ditional debt incurred to finance NGEU will raise the distributional issues raised by the transition toward debt by 5.5 percentage points. a climate-neutral economy are addressed. This in-
How about the spending structure? The “normal” cludes the consequences of higher CO2 prices for the EU budget continues to devote a significant share of rural population, which depends more on road trans- its resources to agriculture, under the heading of nat- port than the population in cities does, or job losses ural resources and environment, although this share due to structural change away from carbon-intensive industries. Figure 1 C S F U U IS THERE AN ECONOMIC JUSTIFICATION
10 FOR NGEU? e o ery an e ilien e Fa ili y 20 loan It is evident that introducing the recovery fund is pri- e o ery an e ilien e Fa ili y marily a political move. Some see it as a signal for ran solidarity among EU countries in times of a severe ea E crisis, an investment in the EU’s cohesion and mutual 0 Ju ran i ion trust. Others take a more critical view and see the 12 er fund as a result of pressure exerted by a majority of EU member states on the rest of the club. Of course, this pressure would probably have remained without effect, if Germany had not decided to support the initiative and agreed to a joint Franco-German pro- Sour e Euro ean Commi ion ifo n i u e posal for the fund.
4 CESifo Forum 1 / 2021 January Volume 22 FOCUS
Irrespective of the political motives behind this clearer line between areas where public spending may step, is there an economic rationale for the recov- be justified or needed and areas where private inves- ery fund? To discuss this, it is helpful to consider the tors should act. For instance, if the program REACT NGEU fund in the light of the Musgravian public sector EU aims at preserving and creating jobs in sectors functions of stabilization, allocation and distribution affected by the crisis, such as tourism or travel, the (Musgrave 1973). According to the European Commis- question arises what exactly can be achieved through sion (2020a), it is the objective of NGEU to boost the public policies. Whether hotels or travel agents create recovery and to achieve a “greener, more digital and jobs is primarily an entrepreneurial decision. It is not more resilient EU.” clear how government intervention can improve these The objective of “boosting the recovery” empha- decisions. For instance, the view is widespread that sizes that the fund has a macroeconomic stabilization there will permanently be fewer business trips after function. While this is intuitive, given that the EU finds the coronavirus crisis because more meetings will take itself in the most severe recession of its history, the place online. Given this, it may be better to support role of the NGEU for macroeconomic stabilization in creating new jobs in other sectors. Using public funds the current crisis is probably limited. Spending from efficiently requires that they be employed in areas the recovery fund is unlikely to start before 2021. The where private markets do not work properly. peak of the crisis will hopefully be over by then. This A key feature of NGEU is that it has a strong redis- means that fiscal stabilization during the crisis needs tributive component. On the financing side, all mem- to come from other sources. Of course, funds made ber states will contribute to servicing the debt through available in the near future affect expectations today; the EU budget. Currently, the plan is to start paying this stabilizes the economy while the crisis is still here. down recently incurred debt in 2028 and to complete In principle, individual member states are re- the repayment no later than in 2058. Precisely how sponsible for countercyclical fiscal policies in the the burden of repaying the debt will be distributed EU. However, at least some of them may not be in across member states is an open question. The EU the position to do so. In particular, member states intends to create new own resources to service the with high levels of public debt may be reluctant to NGEU debt, but so far, nothing has been decided. If raise their debt levels further because they fear that the GNI-based own resources are considered the mar- investors in international capital markets may lose ginal source of financing, the burden of financing will confidence. Currently, interest rates on government be distributed according to GNI. bonds are very low, so that the EU member states The redistributive component is driven by the could finance stabilization policies themselves. To spending side. The EUR 390 billion that will be spent some extent, the low interest rates are certainly a as grants will be allocated quite unevenly across consequence of the existence of the recovery fund. member states, as illustrated by Figure 2. But even if financing conditions were a little more dif- While NGEU grants are less than one percent of ficult for some countries, the ESM would be available GDP in Ireland, Germany or the Netherlands, they to provide countries with credit, at least those who amount to between 10 and 12 percent of GDP in coun- are members of the Eurozone. Some countries seem tries such as Greece, Bulgaria and Croatia. In Spain to find ESM loans politically unacceptable because and Italy, it is close to 5 percent of GDP. the ESM is seen as an institution that is responsible What is the economic logic behind the redistribu- for enforcing fiscal austerity, which is unpopular. ESM tive side? If the EU is hit by an economic shock and if financial support to member states would indeed go different countries are affected differently, a common along with conditionality, but the conditions would fund may act as an insurance device. One obvious probably differ from what they were a decade ago. It objection is that insurance normally requires an insur- should be noted, however, that the funds distributed by NGEU will also be conditional. These conditions Figure 2 will be discussed further below. U S The objective of achieving a “greener, more dig- % of GDP ital and more resilient EU” suggests that the NGEU 1 fund has an allocative function insofar as environ- 12 mental protection and digitization are primarily about 10 internalizing externalities and providing public infra- structures. From an economic perspective, a case can be made for more public goods provision, not just in 2 environmental policy and digitization, but also in ar- 0 l y y e a a a a e a a a a a n n l a i i i i i i ia ia i r y r r m n e n n l n r i r i a n n n r u n a a a u u e n n a a a a a a i eas such as foreign policy and defense, research and a a a e u a o l l l e o a a e m e r r a y u n l u S l n o r r o r l i m r m r e n o o F e C u o C l l E e F o e e C
development or foreign aid (Fuest and Pisani-Ferry m S i u S S e e
2019). However, this is not the focus of NGEU. u In terms of its contribution to allocative ef- ficiency, it would be desirable for NGEU to draw a Sour e Euro ean Commi ion au or al ula ion ifo n i u e
CESifo Forum 1 / 2021 January Volume 22 5 FOCUS
ance contract, which is signed before the damage hap- place much emphasis on the insurance principle. In pens. Such a contract did not exist. Introducing the allocating spending to countries, the political deci- fund can therefore be seen as a form of solidarity or sion has been made that 30 percent of the funds are aid based on an implicit insurance contract. Another distributed according to the decline in GDP expected issue is that an insurance device should redistribute for 2020, whereas 70 percent of the funds follow other monies based on the damage inflicted on each coun- criteria, in particular, the level of per capita income. try, for instance, the decline in GDP caused by the There is no deeper economic justification behind crisis. This would lead to a situation where member this allocation other than the fact that a much larger states with lower per capita income might have to weight on the decline in GDP might have led to the make payments to richer countries if their GDP loss is problematic redistributive effects mentioned above. larger, which can easily happen. This is probably one Ultimately, the redistributive effects are best meas- of the reasons why distributing NGEU funds does not ured by the net balances of each country with respect to the grant component of the fund. Assuming that Figure 3 servicing the debt will be proportional to GNI, the net U balances would be as illustrated in Figure 3. Trans- of lating these net balances into euros per capita leads 12 10 to the result that the largest per capita transfer goes to Croatia, with just under EUR 1,300 per capita, fol- lowed by Greece at roughly EUR 1,250. The largest net contributors per capita are Luxembourg at EUR 2 0 1,290 and Ireland at EUR 1,090. Germany at EUR 800 2 per capita and France at EUR 370 are also significant l net contributors, while Italy at EUR 480 and Spain at y y e a a a a e a a a a a n n ia l a i i i i i i ia i r y r r m e n n n n l r i r i a n n n r u n a a a u u e n n a a a a a a i a a a e u a o l l l e o a a e EUR 810 receive transfers. m e r r a y u n l S l u o n r r o r l i m r m r e n o o F e C u o C l l E e F o C e e m S i u S S