Next Generation EU: Europe needs pan-European investments


The next generation EU should not be a missed opportunity to initiate and finance genuine pan-European infrastructure projects with a high impact on potential growth. Roel Beetsma, Lorenzo Codogno and Paul van den Noord argue that the principle of subsidiarity calls for such a pan-European initiative.

Epidemiologists advocate the use of a “circuit breaker” locking to fight the pandemic. The economic policy response should become the “circuit maker” to accelerate recovery once the pandemic is under control. European leaders are well aware of this need, but we fear that institutional inertia is a brake.

Next Generation EU, the unprecedented tax package adopted by the European Council this summer, is a laudable undertaking. Its objective is to stimulate public investment with a threefold objective: (i) stimulate aggregate demand; (ii) support the hardest hit countries in the pursuit of cohesion; and (iii) strengthen the economic growth potential of the Union (eg Verwey et al. 2020, European Commission 2020a, 2020b, European Council 2020).

Indeed, Next Generation EU is not limited to supplementing demand in the short and medium term. This is the EU’s ‘Roosevelt moment’ (Codogno, 2020), which aims not only to offset the short-term collapse in demand, but also to promote deep structural reforms and reallocate resources to increase demand. growth potential of the economy and achieve common policy goals such as climate control.1

Most of the funds are channeled through the Clawback and Resilience Mechanism. Each country has the right to claim a fraction of the total grant and loan pot, based on a previously agreed formula based on a set of objective indicators. Figure 1 illustrates the distribution of EU next generation funding among Member States, broken down into grants and loans. Figure 2 shows the estimated EU next generation cash flows over time, as well as the cash flows of the European Commission Support Program to Mitigate the Risks of Unemployment in Emergencies (SURE) and support for the European Stability Mechanism (ESM).

Figure 1 Next Generation EU: Estimation of global amounts as a percentage of national GNI

Figure 2 Next Generation EU: cash flow estimates in billions of euros

Projects must meet certain conditions and must be linked to reforms and investments, on the basis of the guidance provided by the Commission. As such, the projects should complement structural reform plans.

This approach has a strong macroeconomic rationale. Yet it is subject to a number of risks, common to most EU policy initiatives which rely on countries submitting their own plans (even when they are subject to coordination such as the European Semester), some of which are recognized as having long undermined the effectiveness of EU projects:

  1. The additionality of plans may be limited as countries use EU funds to finance existing projects or projects that would have been undertaken anyway. In this case, support financing can at most limit the increase in the debt of countries with limited fiscal space.
  2. Countries could avoid the use of conditional loans (Spain and Portugal have already suggested this), preferring grants and unconditional market loans. The latter are cheap even for the most affected countries due to the risk sharing via the ECB’s quantitative easing and the issuance of common bonds of the EU package itself.
  3. Countries have a limited administrative absorption capacity of projects: past experience shows that there is still money on the table, as countries are unable to initiate enough adequate proposals which, in any case, can enter. in conflict with the capacity constraints of private entrepreneurs or crowding out other viable activities.
  4. Countries may be tempted to channel EU funding towards social transfers or tax cuts or to launch pet infrastructure projects that are not financially viable or have a purely domestic political dimension. These should be left to national decision-making and budgets, or not undertaken at all.
  5. Spreading too much money on small projects without a common strategy could lead to misallocation of resources. With the widespread increase in debt-to-GDP ratios in European countries weighing down future income-producing generations, the last thing we need is garbage.

The EU urgently needs pan-European, ie pan-European, infrastructure projects involving two or more countries and producing spillovers from which the whole EU can benefit. Examples are high-speed railways, power grids with sufficient capacity to transport electricity produced by renewable energies, infrastructure for hydrogen (produced by renewable energies to replace carbon energy), digital investments, but also human capital and mobility.

The bottom-up nature of this European enterprise has a raison d’être: who else knows better the needs of a specific country or region than local administrators and technocrats? However, due to bottom-up planning and submission of projects, these are unlikely to give sufficient weight to the EU-wide spillover effects inherent in large infrastructure projects, which may therefore prove to be underweight.

In addition, the scale of these investments is too large for national administrations to manage on their own. Not only do individual countries fail to internalize the positive spillovers, but they also find it inherently complicated to work together on large cross-border projects. A prime example is the Dutch “Betuwe” railway line from Rotterdam to the German border, which has been waiting for years for the completion of the German part of the line, resulting in a huge waste of transport capacity. In a way, the principle of subsidiarity would argue in favor of a top-down rather than a bottom-up approach in the case of large infrastructure projects.

Therefore, the EU (the Commission and other European institutions), and not primarily national governments, should launch such genuine pan-European infrastructure projects that transcend national interests. Emphasis should be placed on projects with a high impact on sustainable growth (renewable energies, human capital, green mobility) which have wider impacts and a strong characteristic of “common good” and for which national governments are ill-equipped. .

The next generation EU should aim to provide funding and guidance for pan-European infrastructure projects. It must become the “circuit maker” that brings the EU economy together and better positions it in the post-Corona world economic order.

The references

Codogno, L (2020), “Has Europe just experienced its ‘Hamiltonian moment’? No, it’s probably more Roosevelt than Hamilton “, The international economy, summer 2020.

Codogno, L and PJ van den Noord (2020), “Going fiscal? A stylized model with fiscal capacity and a Eurobond in the Eurozone ”, Amsterdam Center for European Studies, SSRN Research Paper 2020/03.

European Commission (2020a), “Identifying Europe’s Recovery Needs” SWD (2020) 98 final / 2, May 27.

European Commission (2020b), “Guidance to Member States, Recovery and Resilience Plans”, Commission staff working document, SWD (2020) 205 final, September 17,

European Council (2020c), “Conclusions”, EUCO 10/20 CO EUR 8 CONCL 4, July 21,

European Fiscal Committee (2020), Annual report 2020, Brussels.

Van den Noord, PJ (2020), “Imitating a buffer fund for the euro area”, World Economy Journal 21 (2): 249-281.

Verwey, M, S Langedijk and R. Kuenzel (2020), “Next Generation EU: A recovery plan for Europe”,, June 9.

End Notes

1 These are essential changes at the national level. Ideally, these should be complemented by a further completion of EMU, for example with central fiscal capacity (Codogno and Van den Noord 2020, European Fiscal Board 2020, Van den Noord 2020).

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