What Will the EU’s COVID-19 Recovery Fund Look Like?

As EU leaders continue to grapple with the economic effects of COVID-19, the issues surrounding what measures should be included in its recovery fund remain. The questions about exactly what will trigger growth in the eurozone countries are still being asked, but progress is being made toward ensuring that the fund has a “green” focus.

Last Thursday EU leaders provided the European Commission (EC) with the opportunity to resolve this complex task. Any recovery fund would be linked to the EU budget, but European leaders failed to agree on how the recovery fund will support the green transition they claim they are committed to.

A ‘Green’ Recovery Fund

EC President Ursula von der Leyen urged her counterparts to remember that the bloc’s biggest challenge is to repair the “crisis damage” that the coronavirus has caused. EU leaders agreed that the precise amount of the recovery fund that will be used to fund the bloc’s economic recovery should be of an “unprecedented magnitude.”

One of the key questions that the EU has to answer is whether conditions⁠ — green or otherwise ⁠— should be imposed on state aid to struggling companies. For now, the EC has restricted leverage to enforce green conditions on state aid to businesses.

Euractiv reports that on Monday, the Netherlands floated their own ides to ensure that EU leaders could trigger a green recovery from the coronavirus pandemic. The Dutch suggested an “exclusion list” for economic activities like nuclear power, which they believe should be banned from receiving state aid.

Fierce Debate Raging Over Whether Fund Should Include Nuclear Power

Apparently decisions on how to spend EU recovery funds should be guided by an EU-wide green finance taxonomy which rewards investments in clean technology. To qualify for the green investment label, an economic activity must provide a significant contribution to at least one of the six pre-defined environmental objectives, which includes migration and climate change. It immediately disqualifies activities that purportedly do “significant harm” to the other five objectives.

For example, it excludes coal and gas power from being classified as green unless industrial plants are provided with carbon capture and storage technology which allows them to curb their emissions below a specific threshold.

One of the issues that this proposal faces is that it has already triggered intense debate over whether the “do no harm” principle should exclude nuclear power. However this matter will be debated at a technical level later this year.

The EU Faces Many Other Challenges

However, many challenges remain for EU leaders. As Iain Begg from the London School of Economics suggests, the EU needs to prevent itself from being tangled up in a situation where it does too little, too late. In the weeks leading up to May’s meeting on the recovery fund, they need to focus on resolving the following issues.

EU leaders need to decide how the recovery fund should function. One possible model is the European Fund for Strategic Investment, with guarantees from the EU budget that would allow investors to borrow more than they would be able to raise themselves.

Then there is the matter of whether more of the recovery effort should be in the form of grants to nations as opposed to loans, as the latter would severely harm the ability of heavily indebted nations like Italy from being able to repay their debts.

Von der Leyen has suggested that the permitted ceiling for EU spending should rise to 2 percent of GDP, up from a current maximum of 1.2 percent. She wants the time period for this proposal to be two to three years, but it will cause alarm in several capital cities. That is why EU leaders must decide whether the EU budget should be temporary or permanent.

Although EU leaders face many obstacles in the weeks building up to May’s crucial meeting that will determine what the bloc’s COVID-19 recovery fund will look like, it is clear that the emphasis will be on green initiatives.