Next Generation EU: risks and opportunities

The Recovery & Resilience Facility (RRF) is a fiscal instrument established by the EU for the period 2021-2027, the centerpiece of the Next Generation EU (NGEU). Specifically, the RRF provides financing consisting of €312.5 billion in grants and €390 billion in loans directly to Member States, as part of the total €750 billion NGEU package. (The difference is covered by funds that shore up traditional Community Structural Funds.)

For Italy, the RRF allocates around €82 billion in grants, and makes available up to €120 billion in loans for a total of €209 billion. In exchange, Italy – like all EU countries - pledges to make additional contributions to the EU budget proportional to its GDP, to be paid in from 2028 to 2058. This amount will be capped at approximately €50 billion. (The sums in question may be reduced relative in proportion to new Community resources up for approval in the coming months to finance the EU budget.) All in all, this operation corresponds to a net transfer of €30 billion to Italy, equal to 2% of this country’s GDP, with the total amount receivable over the next few years. By means of comparison, Germany, Holland and Austria, which are net contributors to the NGEU, will have a net payout of approximately 2% of their GDP; for France this figure is 1%.

The economic and political justification of this massive transfer of resources among member States, undertaken for the first time by means of a community-based debt instrument, is based on the two key concepts in the acronym RRF. First, “facility”: this line of credit is not a fund to cover expenses, but instead an instrument providing financing to facilitate countries in achieving a goal. This goal, in turn, is spelled out clearly by the two remaining letters: “recovery” and “resilience,” that is, the economic recovery of Member States after the shock of Covid 19, and the consolidation of this recovery (resilience).

The draft of the RRF rules, approved at year’s end 2020, offers a detailed template for National Recovery and Resilience Plans (NRRP) which serve to operationalize this financing. In detail, the program must be structured along three axes. The first involves identifying initiatives that are coherent with but not limited to the guidelines of Europe’s future development model (green and digital). The second is guaranteeing that said initiatives are implemented according to schedule. In other words, disbursement of funds will be contingent on progress on the projects in question, as laid out in a clear roadmap complete with milestones and timelines. Third, slotting spending allotments into a development model for relaunching productivity in individual countries, tying funding measures into a complementary framework of reforms, which have already been identified over the years through periodic EU monitoring.

Here is the economic rationale of the underlying development model: supporting investments made in times of economic stability guarantees rapid recovery of the economy, while the link between investments and reforms serves to multiply overall productivity in the medium term (resilience). This is why the line of credit dedicated to each Member State is called a “facility,” differentiating it from a simple fund for covering costs.

NRRPs must follow three lines of action at the same time. First and foremost, the plan must ensure that each spending initiative is consistent with the development guidelines set down by Community institutions, as this guarantees the possibility to activate transnational plans across Europe that can realize economies of scale at a continental level, which helps drive growth. Second, each spending item must fit in to a context of horizontal reforms, or specific sector-based reforms. The aim here is to magnify the economic effect of the public intervention by attracting private capital. Lastly, governance tools need to be adopted in order to ensure rapid rollout of planned investments using public funds.

A national plan that does not at once address the three objectives of coherence in spending, actionability, and linking investments and reforms would have little chance of being approved by the Commission and the Council (according to the procedures set down in the draft of the rules). And if the National Plan is not approved, all grants and loans to that country would be blocked.

With respect to these conditions, Italy’s NRRP addresses EU recommendations to concentrate interventions in the sectors of environment and digital, integrating them with other key areas relating to reskilling/upskilling and promoting our country’s historical, artistic and cultural heritage. However, today a clear strategy has yet to be defined in terms of how the plan will be rolled out, and who will be tasked with this responsibility. Equally critical to clarify is what if any special procedures will be put into place to avoid the delays that have always dogged Italy’s public administration, both at a central level and more importantly, with regard to the necessary steps in the authorization process at a local level.

Moreover, the link between investments and reforms is still too vague. Italy’s NRRP indicates two flagship areas of reform – the justice system and the digitalization of the public administration. But as far as the relationship between these horizontal interventions and the timeline on planned investments, ambiguity remains.

Details are also scant on critical areas of reform specifically linked to planned interventions in the green and digital contexts. As one example, there is still no plan to restructure the national energy strategy by integrating hydrogen into the value chain, one of the intervention cornerstones of the Italian NRRP. And this initiative needs to be coordinated with, among other things, an overhaul of local public transportation. Or another example: along with investments in fiber, our plan does not present the digital “reset” of national operators, specifically the range of activity of the new company TIM-Open Fiber. And the list goes on.

To sum up, the most serious risk is that Italy runs today in drawing up its National Recovery and Resilience Plan is to treat the RRF like the umpteenth structural fund. In other words, it’s just “more money from Brussels” doled out to central or local governments to finance projects that more or less support development, and do so more or less rapidly, depending on administrative capability. It’s no coincidence that in the national conversation we continue to hear people misusing the term “Recovery Fund” to define this process. This is evidence of a distorted stance – even semantically speaking - with respect to the aims of the RRF as outlined above.

But even though Italy’s National Plan is based on a carefully crafted list of spending items from a technical standpoint, it must provide guarantees as to the actual capacity of execution, and demonstrate complementarity between actions and related reforms. If it fails to do so, the NRRP would risk running up against an inexorable EU wall.