Recovery fund of 750 billion euros? That’s what the Americans do more radically

October 17, 2021 by No Comments

The EUR 750 billion pot with which the European Union wants to boost economic recovery is fraught with political expectations. The EU recovery fund should help green the economy, it should accelerate digitalisation. For the future of the European currency, the euro, the most pressing question is: will the recovery fund be able to reverse the economic imbalance between northern and southern member states? The growing economic divide between North and South has been causing tensions within the monetary union for years. During the pandemic, the gap has only deepened.

In the last few months, another gap has opened up: one between the EU and the United States. America is recovering economically from the corona crisis faster than Europe. Because of faster vaccinations, but also because of the unprecedented amounts with which President Biden stimulates the economy. Biden announced USD 1,900 billion (about 1,600 billion euros) of emergency aid, plus investments in infrastructure, among other things, of 2,250 billion dollars (1,850 billion euros). With Biden’s ‘double bazooka’, the Brussels 750 billion is dwarfed. This begs the question: should Europe step up its game?

First of all, the internal European divide. Since the turn of the century, Northern and Southern Europe have been growing apart economically, partly because countries such as Germany and the Netherlands have more high-quality industry and because austerity measures after the financial crisis have hit the South extra hard. In 2019, inflation-adjusted GDP per capita in Italy was at the same level as in 1999, in Germany and the Netherlands 27 and 23 percent higher, respectively. ‘Corona’ put the South further behind. Because the pandemic hit earlier and harder last year, but also because the Mediterranean countries are particularly dependent on tourism. In addition, Southern Europe is less advanced with digitization, which makes adapting to lockdowns more difficult for companies and consumers.

For fear of getting too much into debt, governments in Southern Europe took the stock market for corona emergency aid less than those in the North. The results are there. The Italian economy shrank almost 9 percent in 2020, the Spanish almost 11, the German ‘only’ 5 percent and the Dutch by less than 4, according to the International Monetary Fund.


Bert Colijn, economist at ING, sees the risk that the “divergence” between North and South will increase further. “Italy, Spain, Portugal and Greece have more weakly capitalized companies that can still go bankrupt. A normal summer for tourism in 2021 seems unlikely. And the backlog in digitization will not help the recovery.”

The pandemic pushed the south of Europe further away

A positive point, says Colijn, is that the subsidies from the EU recovery fund should mainly go to Southern European (and Eastern European) member states. Italy will be entitled to subsidies amounting to 3 percent of its GDP in 2021-2022, Spain can receive 4 percent of its GDP in EU money, Portugal 5 percent and Greece 8 percent. By way of comparison: in Germany and the Netherlands this percentage is below 1. Southern European countries also want to continue to stimulate their own economies for longer from the national budget than Northern European countries. “Yet the total fiscal impulse is probably too weak to prevent further divergence between North and South,” Colijn thinks.

This week, economists at credit rating agency S&P released a study on the performance of the recovery fund that is more optimistic in tone. It will accelerate European growth “into high gear,” S&P believes. Southern European countries in particular can benefit greatly, the credit rating agency believes, although a lot will depend on the extent to which countries succeed in getting the money allocated first by the Commission and then investing effectively and in a timely manner. In a cautious scenario, Italy can count on 2 percent extra economic growth over the next five years thanks to the recovery fund, in an optimistic scenario it is more than 6 percent. For Spain, Portugal and Greece, which have historically been better at spending EU money than Italy, the expected growth is higher.

openly jealous

Nevertheless, doubts are growing whether the EU is turning on the money tap enough after the devastating corona crisis. France is openly jealous of the Americans. Europe must ‘match the US’, says Finance Minister Bruno Le Maire. Judging by the latest IMF data, the EU is lagging behind the US. The direct US fiscal stimulus to the economy has amounted to no less than 25 percent of GDP since January 2020. Of the large EU countries, Germany scores highest in this regard with 11 percent. Italy (8.5 percent) and Spain (7.6 percent) are below. Subsidies from the EU recovery fund amount to 3 percent of European GDP, according to the IMF. This is in addition to national efforts.

Martin Sandbu, columnist of the Financial Times, points out that the difference with the US has consequences. According to a forecast by the OECD, the club of rich countries, the US economy will be 1 percent larger by the end of next year than before the pandemic. In the eurozone, the economy will still be 2 percent smaller. “If the US can quickly repair the economic damage of the pandemic, surely Europe can too,” Sandbu wrote. Colin is more reserved. “Would more stimulus in Europe be helpful, to better address the internal divide between North and South and to accelerate the pace of growth across Europe? Probably. But whether that is politically feasible is another question.”