European recovery fund: a steppingstone to a more stable union?

Economic opinion

The European summit in July 2020 was historic in that it took decisions that fundamentally increase the financial power of the European Union (EU). The summit agreed to increase the next multi-annual European budget by 750 billion euro under the buzzing name of Next Generation EU. The EU is allowed to borrow this money on capital markets and transfer it to the Member States through loans and transfers under certain conditions and criteria. It will be allowed to collect its own EU taxes to repay the borrowed money. In this way, the European Commission will have instruments to help stabilise and revive the economy after the coronavirus shock. The additional funds are temporary and Next Generation EU does not create automatic stabilisers in the budget, which would automatically cushion economic shocks. Thus, no final step has been taken towards a structural strengthening of the Union with the macroeconomic stabilisation function deemed necessary. The decision is still under discussion by the European Parliament, which has to agree to it. If this succeeds, perhaps a steppingstone will have been laid from which new steps can be taken at a later date. Then Monnet’s prophetic words that European integration progresses through crises would come true once again.

Progress through crises

“L’Europe se ferait dans les crises et elle sera la somme des solutions apportées à ces crises.” The prophetic words of the French civil servant Jean Monnet (1888-1979), universally recognised as one of the founding fathers of European integration, have become true over time. During the great euro crisis (2011), the creation of the banking union was a decisive step in strengthening the European currency union. The currency union was itself a by-product of German unification after the fall of the Berlin Wall (1989). At that time, the introduction of the euro was a flight forward to prevent the Deutschmark, after German unification, from dominating the European economy even more than before. 

But the eurozone was very shaky from the outset. Indeed, it is a currency union with a fully centralised monetary policy, while the vast majority of budgetary tasks are still carried out by the sovereign Member States. They themselves determine expenditure and revenue. That is a problem. After all, one of the specific budgetary functions, namely the stabilisation function which absorbs economic shocks, is most effectively performed in a currency union by means of a central budget1.  This means that it must be possible to run up temporary deficits. However, the EU budget cannot go into the red. This gap was not really filled during the euro crisis. The main remedy was an inadequate tightening of the framework for the national budgets2.   

The so-called Five-President Report on the completion of Economic and Monetary Union (2015) put the creation of a budgetary stabilisation function for the euro area on the agenda by 2025 at the latest. However, few believed in that deadline. In recent years, French President Macron in particular has been a fervent advocate of greater European budgetary solidarity. However, his plea has often fallen on deaf ears and has clashed with mainly German resistance. 

In its first (May 2018) proposal for a new multi-annual budget (2021-2027) for the EU, the European Commission (EC) took a cautious step, including a proposal for a ‘European Investment Stabilisation Function’. A regrouping of funds would provide 30 billion euro within the existing budget margin, which, through loans to Member States, would allow investments to be maintained during a crisis. Despite timid Franco-German support (Meseberg Declaration, June 2018), this proposal was never adopted. 

In the year of Brexit, it was to be feared that the irreversible post-war process of European integration had been reversed. The coronavirus crisis, however, taught us that this fear was unjustified. Monnet’s prophetic words came true once again. The French President convinced German Chancellor Merkel to strengthen the new EU multi-annual budget (around 1100 billion euro) with a temporary European fund of 500 billion euro. EU borrowed money would help economic recovery in the regions and sectors most affected by the pandemic and support the transition to a green and digital economy. Under the buzzing name Next Generation EU, the EC added a further 250 billion euro in an amended budget proposal.

Historic step

At their marathon summit from 17 to 21 July 2020, European heads of state and government agreed with the broad lines of the EC proposal. Admittedly, they reduced the amount of the ordinary multi-annual budget (by 2.3% to 1074.3 billion euro). But they accepted that the EU would temporarily borrow 750 billion euro and channel that money to Member States in the form of transfers (390 billion euro) and loans (360 billion euro). In order to repay the money lent, the EU will be able to collect its own taxes.

The agreement is historic. The original EC proposal for the multi-annual budget 2021-2027 from 2018 (1334.6 billion euro) was in line with the EU’s gross national income in relation to the previous multi-annual budget 2014-2020. But in the end, the new budget will be more than 60% larger.  A large part of the additional funds will be spent in 2021-2023. By repaying the loans (much) later, the EU budget can give a major boost to the economic recovery, especially in poorer and coronavirus-affected countries.  

It may seem odd to see the possibility of additional debt creation and taxation as a positive development. Nevertheless, the decision was generally welcomed because it can pave the way to the necessary but missing budgetary stabilisation function at the European level, which requires temporary budget deficits. 

The principle that the EU budget should not be in deficit has already been circumvented in previous crises, such as during the euro crisis with the creation of the European Financial Stability Mechanism (EFSM), later transformed into the ESM. At the beginning of the coronavirus crisis, the EU was already allowed to borrow and lend 100 billion euro to Member States to finance measures to safeguard jobs, such as temporary unemployment. But in each case, it was financing support to Member States that has to be repaid. The new fund will allow part of the funds to be disbursed to Member States as transfers within the framework of reform programmes aimed at strengthening their economies and making them greener and more digital. If spent wisely, the money will lead to stronger economies and convergence in the union.

However, Next Generation EU does not create the real budgetary stabilisation function, which would make the currency union structurally more stable from an institutional point of view. Indeed, it does not create automatic fiscal stabilisers that would cushion an economic shock through public spending (e.g. on unemployment) or reduced tax revenues. Moreover, the fund is limited in time. The step back is therefore included in the decision from the outset. However, with the concept of European loans paid off with European taxes, a step has been taken towards a budgetary union. The future will show whether a steppingstone has also been laid, from which further steps towards a more stable (currency) union will later be taken.

1 See KBC Economic Opinion of 21 February 2017.

See KBC Economic Opinion of 20 September 2018.


Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

Related publications

More relevant measure of public debt would reassure

More relevant measure of public debt would reassure

Fed’s new inflation strategy is not a good guide for the ECB

Fed’s new inflation strategy is not a good guide for the ECB

Higher money growth does not yet herald an imminent acceleration of euro area inflation

Higher money growth does not yet herald an imminent acceleration of euro area inflation

Bank credit supports the economy

Bank credit supports the economy
We use cookies and similar technologies to make our website work better for you and ensure your online experience with us is more enjoyable and rewarding. We may also adapt our website to your needs and preferences. By continuing to use this website, you consent to our use of cookies. Learn more or reject cookies.