The reconstruction fund is not a gamechanger

After tough wrangling, Poland and Hungary have given up their opposition to the EU reconstruction fund. If the EU Parliament also agrees, the fund can probably be launched in the first half of 2021, later than originally hoped. Southern Europe in particular is eagerly awaiting the billions in payments. Hopes are high that the funds will not only mitigate the economic damage caused by Corona, but also that there will now be financial leeway for creative economic policy. Rightly so?

The EU funds will certainly help selectively, but they are probably not a „gamechanger“ for the core problem of growing economic divergence within the EU. A look at where the funds will mainly go and where the problems lie makes this clear. In order to ensure that the funds are used as efficiently as possible, the states cannot dispose of the funds as they wish; they must submit plans for this purpose to the EU. A large part of the funding is likely to be spent on investments, for example in the areas of transport, health, digitization and sustainability. If obstacles to growth can be removed in this way, the approach sounds quite promising at first. However, it is questionable whether the projects proposed to Brussels will in practice be selected primarily according to economic or political criteria. In fact, the Italian government is currently arguing about this. While Prime Minister Conte would like to bring in external experts for project selection, the cabinet insists on having a say. But if political and regional proportionality considerations play a major role, economic efficiency quickly takes a back seat. And Brussels will hardly be willing or able to intervene in national policy as a corrective.

Another problem is that the main obstacles to growth in Italy and Greece do not necessarily lie (only) in infrastructural deficiencies. Companies repeatedly report that too much bureaucracy, long procedural durations and legal uncertainties sometimes weigh even more heavily. In comparative studies such as the World Bank’s „Ease of Doing Business Index,“ some southern European countries rank at the bottom of the field of industrialized nations. But money alone is not enough to increase competitiveness. It takes a lot of time and, above all, the political will to tackle and reform encrusted structures. Knowing that the reconstruction fund is not a game changer, the Italian prime minister only this week called for permanent payments from the EU. However, the experience of national financial equalization mechanisms such as the German Länderfinanzausgleich also shows that money can reduce social inequalities, but can only promote economic convergence to a limited extent.

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