Members' Research Service By / January 11, 2023

EU recovery instrument: Lessons for public investment in the EU [Ten issues to watch in 2023]

The swift execution of the Recovery and Resilience Facility (RRF) will remain vital in 2023, while the constant geopolitical and economic challenges will require new resources.

Written by Marin Mileusnic.

This is the seventh edition of an annual EPRS publication aimed at identifying and framing some of the key issues and policy areas that have the potential to feature prominently in public debate and on the political agenda of the European Union over the coming year.
The topics analysed encompass the 2024 European elections, budgeting in times of crises and war, lessons for public investment in the EU from the EU recovery instrument, the fiscal and monetary policy mix, climate
and socio-economic tipping points, the impact of increasing fuel prices on transport, cyber-resilience in the EU, protecting media freedom and journalists, the future of Russia, and geoeconomics in an age of empires

The swift execution of the Recovery and Resilience Facility (RRF) will remain vital in 2023, while the constant geopolitical and economic challenges will require new resources. These efforts will be supported by the revision of the EU fiscal framework, which is one of the major policy initiatives scheduled for 2023.

Lessons learned

With over 19 % of its resources disbursed, the implementation of the RRF is well under way, and the Member States are utilising the available funds to make their economies more resilient and future-proof by executing reforms and investments in key areas of European and national interest. The focus on the twin transitions has been particularly important, and the cumulative expenditure planning in all national recovery and resilience plans (NRRPs) exceeds the minimum thresholds for green and digital measures of 37 % and 20 % respectively. With regard to performance, 7 % of all milestones and targets embedded in the plans have been fulfilled thus far. Direct management of the facility by the European Commission in the implementation phase could reduce administrative burden and bureaucracy linked to the disbursement of funds, and thus improve overall effectiveness. Nevertheless, the audit of the only RRF payment in 2021 revealed weaknesses in the Commission’s assessment of milestones and targets linked to it. This was possibly due to the first-time application of the performance-based approach to such vast spending. The ongoing discharge procedure for the 2021 EU budget is examining the initial implementation of the RRF.

By combining the significant financial support with the implementation of measures established in the NRRPs, the RRF has the potential to effectively address key European as well as country-specific challenges and, as some analyses find, reduce the public investment gap. While a number of Member States had already witnessed under-investment trends even before 2008, the financial and economic crisis affected the EU as a whole and further amplified the investment lacuna. The average share of RRF grants in the overall investment by Member States is 14 %, which makes the significant additional growth projections realistic. Investments to address the challenges of the pandemic have been further facilitated through additional RRF loans, as well as the Stability and Growth Pact (SGP), namely the temporary departure from the usual budgetary requirements. Contrary to the low investment outcomes after the financial crisis, Member States managed to sustain public investment, without significant-pressures from breaching EU fiscal rules and having to endure the corrective procedures and market discipline.

Ongoing and new challenges

The RRF continues to be pertinent as there are outstanding structural challenges in the Member States that still need to be addressed, and substantial resources to be disbursed. Swift implementation of the planned measures enshrined in the individual NRRPs in the course of 2023 therefore remains vital. Notwithstanding the well-timed RRF funding to recover from the pandemic, a full economic recovery is already being hindered by new challenges, thus reaching a state of, what some analysts have dubbed as, ‘permacrisis‘. In particular, the energy crisis, caused by Russia’s war on Ukraine, exposed the EU’s considerable dependence on Russian fossil fuels. To differentiate the energy mix of the Member States, deal with high-energy prices and accelerate the green transition, the Commission proposed the REPowerEU plan under which part of the RRF is to be repurposed and its grant allocation increased by €20 billion. However, the energy challenges are expected to remain acute in the medium to long run and therefore surpass both the financing potential and the life span of the Facility, set to expire in 2026. The proposed grant envelope under REPowerEU, in addition to almost 18 % of the existing national allocations devoted to energy measures in all NRRPs, remains a relatively small source of funding compared to the private and public investment needs of the EU energy sector, which are estimated at €390 billion per year. The short horizon for investment and reform is also posing challenges both for the implementation of projects of strategic weight, which may need longer time, and for national authorities to run them properly.

Moreover, with the amassed €600 billion devoted to Green Deal actions, NGEU and the 2021-2027 multiannual financial framework (MFF) are an important source of funding, but still represent only a fraction of what is needed to fulfil all the climate goals for carbon neutrality of the EU by 2050. The RFF may also only partly deliver on the ambitious digital transformation set for 2030, due to the above-noted size and lifetime limitations. Besides this, there has been a relatively slow uptake of the RRF loans (around €165 billion out of €386 billion). One reason is that loan-based investment increases national public debt and can make countries non-compliant with the EU fiscal rules, especially after the deactivation of the general escape clause at the end of 2023. Another reason is reflected in better borrowing conditions for some countries compared to those linked to the RRF loans. Nonetheless, repayable RRF support can still be requested until the end of August 2023, while REPowerEU will put the allocations still available for loans at the disposal of those Member States that wish to pursue additional investment in energy measures.

Keeping investment in the EU alive

In the years to come, the investment needs in the EU will remain huge, predominantly in relation to the twin transitions, but also in the areas of common defence, security and other fields of interest for EU sovereignty and strategic autonomy. To address these long-term challenges, the EU economic governance framework will face revision in 2023. The revamped fiscal rules are to draw from the RRF model, particularly the positive interplay between investments and reforms and financing, to enable the Member States to stay on higher investment and growth paths while remaining fiscally prudent. The review should also support countercyclical fiscal policies for countries to build capital buffers during good times and utilise them during times of recession. In addition to this, a possible revision of the MFF will be discussed in 2023. In a December 2022 resolution, the European Parliament deemed the multiannual budget overstretched in financing various initiatives, and underlined that it should be made bigger and more flexible in order to ensure appropriate investment levels in the EU and to endure future crises. Such a budget should shy away from the juste retour principle. The Parliament is also advocating the introduction of new own resources needed to repay the recovery instrument and to finance common priorities.

Providing strategic sector-specific common public goods will require considerable resources and time for implementation. Some analyses stress that the RRF model, underpinned by common debt, could be continued to achieve these objectives. Still, the future instrument should be made larger and permanent, and continue to strengthen national ownership based on common EU priorities (as is the case with the current RRF). According to the International Monetary Fund, the size of such a fiscal capacity should range between 0.5 % and 1 % of EU gross domestic product (GDP) on a yearly basis. The investment capacity at EU level should be additional to national funding, as it would address challenges of a cross-border nature, thus being more effective and value adding. Any future fiscal instrument should also be fully integrated into the existing budget to provide a high level of public accountability and auditing. Further political debate is expected due to differing views on such an instrument.

Read the complete in-depth analysis on ‘Ten issues to watch in 2023‘ in the Think Tank pages of the European Parliament.

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