We all remember the photos from July 2020, when the EU leaders met with masks on their faces amidst the Covid-19 pandemic to discuss how the Union’s economy should be led from crisis to recovery. Then, after five consecutive days of negotiations, the European Council President Charles Michel declared triumphantly that a political agreement had been reached.
The agreement paved the way for the so-called Next Generation EU (NGEU), which is the EU’s recovery instrument in response to the Covid-19 crisis, amounting to a total of €750 billion (in 2018 prices). The purpose of the NGEU is to help the EU Member States heal from the economic and social damage caused by the pandemic, while at the same time supporting them in the transition toward a green and digital future.
The main element of the NGEU is the Recovery and Resilience Facility (RRF). The RRF will make available in total €672.5 billion (€312.5 billion in grants and €360 billion in loans) to the EU Member States to finance investment projects and reforms that aid the recovery from the crisis and enhance the resilience of their economies.
The RRF entered into force on 19 February 2021. It will finance reforms and investments in the Member States until the end of 2026.
National Recovery and Resilience Plans
To benefit from the financial boost provided by the RRF, every Member State must submit a national Recovery and Resilience Plan (RRP) to the European Commission. Each national plan needs to lay out the reforms and investments that the Member State in question intends to implement by the end of 2026. The national plans must be in line with the EU’s green and digital transition goals and geared toward strengthening economic and social resilience.
As of 23 December 2021, the Commission had received 26 national recovery plans out of 27, with the plan of the Netherlands still pending submission.
Finland’s national Recovery and Resilience Plan
Finland submitted its national RRP to the European Commission on 27 May 2021, requesting €2.1 billion in grants under the RRF. The Commission gave its green light to Finland’s plan on 4 October 2021 and the Council approved the plan on 29 October 2021, allowing for the disbursement of €271 million to Finland in pre-financing. This represents 13% of the total allocated amount for Finland.
The Finnish RRP is embedded in the so-called ‘Sustainable Growth Programme for Finland’, which is Finland’s own programme that seeks to support the government’s objectives of ecologically, socially and economically sustainable growth. The proposed RRP projects cover the entire lifespan of the RRF until 2026.
Finland’s RRP is built around four priorities:
Out of the four focus areas of the Finnish recovery plan, the ‘green transition’ is the largest one, covering nearly 40% (€822 million) of the overall plan. This is followed by investments in ‘employment and skills’ (30%; €636 million), ‘health and social services’ (19%; €400 million), and ‘digital transformation’ (10%; €217 million).
What happens next?
Once the Commission receives a Member State’s national recovery plan, it assesses its relevance, effectiveness, efficiency and coherence against the criteria set out in the RRF Regulation. In principle, the Commission has two months to assess each national recovery plan from the moment of its reception. If endorsed, the Commission translates the content of the plan into legally binding acts and makes a proposal for a Council implementing decision. So far, the Commission has endorsed all the national recovery plans that it has assessed.
After the Commission’s proposal, the Council has, as a rule, four weeks to approve the plan and adopt the implementing decision.Following the Council’s approval, the Commission can release up to 13% of the total size of the national RRP in pre-financing to the Member State in question.
In the years to come, until the closing of the RRF at the end of 2026, each Member State can request further disbursements upon achieving milestones as outlined in the national recovery plan. If the targets of the national plan are satisfactorily met, the Commission will authorise additional payments.
Will the RRF have the intended impact? Will the investments nudge the European economy toward recovery?
According to the European Commission’s experts, the answer is ‘yes’. In their Summer Interim Forecast, the Commission’s economists expect the total economic impact generated by the RRF to be ‘sizeable’, primarily thanks to higher public and private investment. Overall, the Commission forecasts the total EU GDP to grow by 4.8% in 2021 and 4.5% in 2022.
When it comes to Finland, the forecasted figures are also optimistic, albeit more cautious. According to the Bank of Finland, the Finnish economy will grow by 2.9% in 2021 and 3.0% in 2022. The growth will be aided by the RRF, which will support Finnish businesses and households through investment subsidies, public investment and other spending.
Yet, the rapid growth will remain temporary. The European Commission forecasts a 1.3% average potential GDP growth rate for the EU as a whole over the period 2019-2070. In a similar vein, according to the Bank of Finland, the Finnish GDP growth will slow down to 1.3% in 2023.
The low GDP growth rate in the long run reflects notably the weak long-term growth prospects of an aging economy. The Union’s population is getting older and the size of its labour force is projected to continue decreasing over the next decades. According to Eurostat, the EU’s working age population (aged between 20 and 64 years) is estimated to decrease by 0.4% every year between now and 2040 – a decline that has already begun in 2010. Consequently, the Union’s old-age dependency ratio (i.e. the ratio between people aged 65 years and over and those aged 20-64) is forecasted to increase in the coming decades. The diminishing workforce together with the growing dependency ratio entail negative implications for the Union’s economic growth potential.
Fortunately, the looming economic decline can be mitigated through appropriate investments and reforms. A smaller labour force might not be a problem if it is highly skilled, active and productive. Increasing labour force participation and worker productivity could allow economic growth to continue despite the demographic transformation.
Against the backdrop of the changing demographic structure, it is all the more important that the RRF financing is channelled into investments and reforms that have the potential to bring prosperity in the long run and to achieve durable and sustainable economic growth. It is therefore reassuring to see the EU Member States prioritising investments in green growth, digitalisation, higher employment rates and workforce skill levels in their national recovery plans.
Hopefully, the plans will materialise.
TEXT: Rosa Kotoaro
This text expresses the personal opinion of the author and not that of the Court of Auditors.