Date 2021.03.11

The Corona-Recovery Fund means that the EU member states will jointly be held liable for debt amounting to hundreds of billions. This poses high risks to the federal budget.

As a response to the COVID-19 pandemic, the member states of the European Union (EU) have decided to implement a Recovery Fund (Next Generation EU). For the first time in its history, the European Union will be authorised to issue EU bonds to borrow funds of €750 billion on the capital market and pass most of these on as grants to its member states.

The Recovery Fund implements debt-financed transfers

The Recovery Fund will result in debt-financed transfers among the member states. The reason is that the funds made available as grants are not to be repaid by the recipient countries but via the Union budget. Loan recipients do not coincide with the states in charge of redemption. Germany will likely be the largest net contributor with a net contribution of €65 billion.

Member states commit to joint debt liability

The Recovery Fund is a turning point for the European financial architecture: For the first time, the member states can jointly be held liable with their future contributions to the EU budget for the Fund debt incurred. In case, member states will not be able to meet their repayment obligations, the other member states must step in to cover any pending repayments from their contributions to the EU budget.

The Recovery Fund paves the way for circumventing fiscal rules

The fiscal rules serve to limit debt in the member states. However, the rules do not apply to debt incurred by the Union. The Recovery Fund makes it possible for member states to circumvent the fiscal rules by borrowing at Union level and assigning the funds received to themselves by way of grants.

Strong member states for a strong Europe

The Recovery Fund is designed to support the member states to cushion the adverse economic impact of the coronavirus pandemic. Another purpose is to strengthen economic and social resilience and create new jobs. Also, the Fund serves to contribute to further greening and digital transformation.

However, our findings illustrate that the Recovery Fund might in fact weaken the European Union. Overall, the Recovery Fund may weaken the Union as a community based on the rule of law and solidarity and may put at risk the stability of the Economic and Monetary Union. Member states may face considerable liability risks associated with community debt. In addition, the Recovery Fund might be taken as a precedent to transfer costs of future crises to the Union level. Such a liability mechanism would set the wrong incentives. For this reason, the federal government should ensure that borrowing at Union level and a circumvention of the fiscal rules do not become a permanent solution.