THE STATE OF THE EUROPEAN UNION REPORT. Europe in a period of transition

THE FISCAL EFFORT TO COMBAT COVID-19: EUROPE AND THE UNITED STATES 61 was created, permitting funding up to a total of 240 billion euros, in which each Member state can request an amount up to 2 per cent of its 2019 GDP to cover direct and indirect health costs related to the fight against the pandemic. The European fight against covid-19 culminated in the Recovery Plan and the introduction of the Next Generation EU instrument. The Recovery Plan for Europe is worth a total of 750 billion euros, consisting of 390 billion euros of transfers and 360 billion of loans, repre- senting around 5 per cent of the EU’s GDP in 2019 (EC, 2020). The 750 billion euros worth of Next Generation funds are funded by debt issues on the financial markets, backed by and charged to the EU budget, and to be repaid through the creation of new EU resources. The instrument is designed to stimulate recovery and is thus not an emergency budget. Its aim is to encourage public and private investment and the implementation of struc- tural reforms at national level, in line with the political priorities established by the EU, namely digitalisation and the fight against climate change. This plan, in addition to the EU’s long-term multian- nual budget, the Multiannual Financial Framework (MFF) 2021–2027, which is worth 1.1 trillion euros, will provide a total of 1.85 trillion euros, unprecedented amounts to deal with the economic crisis caused by the almost total shutdown of the European economy for a large part of 2020. According to IMF estimates, total European meas- ures approved between January 2020 and April 2021 represent 3.8 per cent of GDP in above the line measures with an immediate budgetary impact, and 6.8 per cent in below the line measures to support liquidity. The meas- ures with immediate budgetary impact include the Next Generation EU transfers, 390 billion euros in subsidies which will primarily be channelled through the Recovery and Resilience Facility (RRF) and will fund investments and reforms in Member states for a total of 312.5 billion euros, to be spent from 2021 to 2023 (70 per cent for 2021 and 2022, and 30 per cent for 2023). Addition- ally, Next Generation EU includes 47.5 billion euros to strengthen the cohesion funds (ReactEU); 10 billion euros to complete the Just Transition Fund; 5 billion euros for Innovation and Development; 5.6 billion euros to sup- port investment in the private sector, 7.5 billion euros allocated to rural development, and 1.9 billion euros for rescEU. Among the liquidity support measures in Next- GenerationEU, the IMF includes 360 billion euros worth of loans in its estimate. In 2020, fiscal support by Member states has been estimated by the Commission to represent around 8 per cent of GDP (CE, 2021), with half of this coming from measures with immediate budgetary impact and the other half deriving from the effect of automatic stabi- lisers. The majority of spending deriving from measures with an immediate budgetary impact are concentrated in compensation for loss of income in specific sectors and support for short-term working schemes. Member states are obliged to present their national budgets to the Commission. These show, according to the Commis- Table 1: European Union fiscal measures in response to the covid-19 pandemic, January 2020-April 2021 (% of GDP) Measures with immediate budgetary impact (“Above the line”) Liquidity support Additional spending or income not received Accelerated spending / deferred revenue Subtotal “Below the line” measures: equity injections, loans, asset purchase or debt assumptions Contingent liabilities: Guarantees Subtotal Health sector Others 3.8 0.0 3.8 6.8 6.2 0.6 Source: IMF, 2021.