From what is filtering, the European Commission is preparing an EU-wide Recovery Programme anchored in her revised MFF (2021-2027 budget) proposal.

A word of caution: this paper elaborates on what we know so far, and changes might be introduced on the final Commission proposal.

What we understand

The Commission is planning to propose a revised MFF  by mid-May. The main drive of the revised proposal is to generate an EU-wide Recovery Programme that would help the EU to recover from the dramatic Covid-19 crisis.

To that effect the EU would create a new Fund of 320 billion euros, by raising that money in the financial markets against guarantees provided by the Member States. That money would then be used by beneficiaries to raise more money from the markets, the expected total in the Commission estimates could reach 1.5 trillion euros.

The Commission is also planning to propose to front-loading part of the 2021-2027 budget.  

It is not clear which part of the new Recovery Programme will consist of loans, and which part of grants, although the realistic expectation is that most of it will consist on loans. Loans and grants would be made conditional on the implementation of reforms and investment measures to bolster potential growth.

The Recovery Programme will focus on relaunching investments. A small part could be used to restoring capital of viable companies.

The other elements of the MFF proposal will not be changed, as considered “fit for purpose”. This seems to include the CAP budget and the related commission’s proposals.

Our assessment

1) The new MFF proposal might thus leave the CAP budget cuts unchanged. That would be unacceptable, as the 12% cuts currently on the table would not be reversed in spite of the fact that agriculture is already facing a deepening crisis in many sectors. 

The CAP budget should stay at today’s level, and a crisis reserve be financed outside today’s CAP budget to cope with the all but certain market crisis as a result of the pandemic, as we proposed and as Comagri asks for this week (voted amendment on financing the 2021 crisis reserve outside the CAP budget – negociating position on CAP transition regulation).

2) The Recovery Programme has been touted as a “Marshall Plan”, but in reality it would be very different. The actual post World War II Marshall Plan consisted overwhelmingly of grants (90%), whilst the proposed Recovery Programme seems to be the opposite, consisting mainly of loans.

The Recovery Programme resembles more the “Juncker Plan”, which provided beneficial loans for investments. However, the “Juncker Plan”, according to the EU Court of Auditors, mainly financed investment projects that would anyhow be implemented, and reached only a total 315 billion euros in a much more favourable economic environment.

The Covid-19 crisis completely changes the economic and investment landscape. The productive capital has not been destroyed, it has been forced to idleness. At the same time the demand in the EU has collapsed, as shops closed and consumers got wary of spending. 

In this new environment it is questionable whether providing better loan terms will induce investment. With demanding falling, and economic recovery lagging at least 2 years, why investing now? By the same token, financial markets will be wary of lending to investors to supplement the EU Programme, as many firms will be in worse shape and future returns more doubtful. Investment will eventually pick-up again, but it will take some time.

Therefore the announced 1.5 trillion euros investment package might be more aspirational than real. Loans with lower interest rates, longer maturities, and some grant component are certainly welcome, but they might fall short of expectations, and the macroeconomic impact be rather limited.

The other factors that might hamper the recovery are the priorities and conditions that might come attached to the Programme. 

In particular the Commission insistence in privileging green investments might divert resources to unproductive investments when green investments don’t generate at the same time more growth and wealth. Building isolation or electric cars are arguably beneficial to mitigating climate change, but with low oil prices and less money in the pockets of consumers their attractiveness falls, and their economic rationale might evaporate.

In addition our main competitors are not introducing green restrictions to their recovery efforts. 

In the agriculture sector, restricting by law the use of inputs instead of helping farmers invest to reduce the environmental footprint, or imposing setting aside land for biodiversity sake, will reduce production, food security, and farmers’ incomes. That would hamper the recovery and further weaken the agriculture sector.

Previous regulatory investments to comply with environmental and animal welfare standards in the sector were unproductive. That might be one of the key explanatory factors why capital productivity decreased in EU’s agriculture.

Green investments are not only welcome but needed, in particular in agriculture, but on the condition that they make economic sense, boosting wealth creation and improving farmers’ livelihood.