ECB: NGEU to Make Significant Positive Contribution to Eurozone Economic Recovery

15 February 2022

By David Barwick – FRANKFURT (Econostream) – The Next Generation EU (NGEU) investment and reform programme is likely to make a significant positive contribution to the euro area’s rebound from the crisis, the European Central Bank said on Tuesday.

In a pre-release from the first economic bulletin of 2022, due out Thursday, the ECB said that ‘macroeconomic simulations by ECB staff point to a significant positive contribution of NGEU to the recovery in the euro area.’

Additional spending stemming from the Recovery and Resilience Facility (RRF), the NGEU programme representing the vast bulk of total funding, would boost euro area GDP by about 0.5% next year, ‘an effect that will largely persist in the subsequent years’, according to the ECB.

The impact will be felt most in those economies making heaviest use of the programme, but via trade spillovers generated by increased demand would also benefit the entire area, the ECB said.

‘The realised medium-term macroeconomic impact of NGEU may turn out to be higher than currently estimated on account of confidence effects and structural reforms’, the ECB said, noting the boost to confidence from the announcement of the NGEU agreement.

Moreover, the potentially substantial positive impact of structural reforms is not yet part of ECB simulations, the ECB said.

There are however various risks to the downside, the ECB said. ‘These include the possibility of lower absorption rates than expected and a reduction of non-RRF investment, with the funding re-allocated to less productive expenditure categories’, it said. ‘Hence, it is key to achieve the agreed milestones and targets in the implementation phase of the RRPs [Recovery and Resilience Plans].’

Still, the RRPs could mitigate the divergences fostered by the crisis across the area and reduce fragmentation, the ECB said. The projected NGEU-associated boost to 2026 GDP is inversely related to pre-pandemic per capita GDP, the ECB said.

‘In this way, NGEU funding also loosens the budget constraint of vulnerable countries and helps forestall a potentially strong fiscal contraction, such as the one observed in some countries in the context of the global financial crisis’, the ECB said.

Down the road, the NGEU could prompt higher investment where it has traditionally lagged, the ECB said.

‘RRF-funded public expenditure as a percentage of GDP is indeed particularly high in the countries with a relatively low net capital stock per capita’, the ECB said. ‘Furthermore, higher growth prospects and lower cost of financing may improve debt sustainability in the vulnerable countries. This may also provide more fiscal space for national economic stabilisation in the future.’

The ECB said that short-term adverse side effects would probably be inconsequential and outweighed by the RRF’s ‘positive fiscal impulse.’