24 Jun 2021

Money allocation is not the key to recovery and resilience, reforms are

1

We are close to the end of the approval process of the national recovery and resilience plans (NRRPs) submitted by the member states. These are large plans drafted in a very short period of time and assessed under time pressure. Expectations regarding the impact of their implementation are high, and to a large extent unrealistic. The list of requirements on the national programmes from the Commission guidelines reflects the political pressure on the EU institutions to ensure that all Green Deal matters are addressed, while the Green Deal itself is overarching and often rather vague. As a result, the national plans are very diverse in the approaches taken, and difficult to compare and analyse. The core objectives may often be lost among the large number of other objectives that touch on numerous economic, social, and environmental problems. It is important to recall the key objectives that are essential for a short post-pandemic recovery programme that focuses on longer term resilience. Those need to be to be particularly well addressed in the NRRPs, and are the focus of this commentary.

One can summarise the core objectives of the RRF, as follows:

  1. To help the economies recover from the impact of COVID-19
  2. To ensure that the recovery aligns the economies with the EU objectives in the area of climate change, while also making them more resilient economically and socially.
  3. structural reforms that are essential to achieve a level of resilience to future economic shocks.

These three points require that a number of questions are addressed in depth in the NRRPs, and these are not necessarily the ones that catch public attention.

Recovery

The NRRPs need to address recovery while taking into account the specific nature of the COVID-19 impact. It is not a classical financial crisis caused by a demand shock, but a forced freezing of economic sectors due to the pandemic. What we are now facing and observing is a rapid and dynamic uneven ‘recovery’ even before starting the disbursement of the RRF. A K-shaped recovery is in place, with varied developments in the various economic sectors and sub-sectors. This has been well described in Gros et al. (2021) and De Vet et al. (2021), and has very important repercussions.

The RRF financial assistance has to be well targeted and flexible. It must avoid fuelling sectors which experience rapid recovery, and help those that will recover in the longer term and need to adapt or restructure. Of course, for those sectors that do not have a future, the support should be focused on the labour force, to reskill and foster sectoral reallocation.

Instead, what we observe is that public attention is focused on measuring whether countries are allocating 37% of funds to the climate and 20% to digital as prescribed. These allocations will by themselves ensure neither recovery nor resilience. There is at present an excessive attention to imposing a questionable and not yet officially approved taxonomy (Guéguen, 2020) for each category of expenditure. This is an unfortunate distraction, as the taxonomy has not yet been approved. For a short term recovery programme, a simpler and more agile solution should have been used.

Also, the focus on fixed shares of expenditure is nonsensical, as climate mitigation and digital coverage needs are very different across member states. While, on the positive side, it does compel the member states to focus on those objectives, more attention should be placed on the coherence of the investments in a transition phase.

Resilience

The resilience objective is probably the most complex, and it is central to the RRF. Resilience can also be translated into sustained economic stability despite rapid changes in financial markets, global trade flows, and security conditions. Resilience has very deep connotations and requires a solid understanding of the strengths and weaknesses of the economy so as to build the pre-emptive measures and capacity to react to rapidly changing circumstances. Resilience is at the core of the present discussions on the industrial, security, and trade debates of the EU (Renda and Schaus, 2021).

Building a resilient economy requires a well-functioning economy able to sustain itself in a stable framework. Green investments per se will be neither economically nor environmentally sustainable if the investments do not have a positive impact on the economy. The economy has to sustain a level of welfare that matches citizens’ expectations, even if the business models change substantially.

After the financial crisis, a number of EU economies seemed unable to adapt to today’s global economy. Those same member states find it difficult to undertake necessary reforms, partly because limited fiscal space means they are unable to design programmes to cushion the negative impact on their citizens.

Planning for resilience inevitably leads to reconsidering the functioning of the economy, and thus requires structural reforms. In fact, the use of the word ‘resilience’ avoids using the controversial and less pleasant word ‘reform’ – the RRF might as well be called the Recovery and Reform Facility.

What to look for: REFORMS

While investments should be targeted to support a fast recovery, in line with the objectives of the EU, money by itself is unlikely to provide lasting results. By contrast, structural reforms, if well designed, can lead to long-lasting improvements. For this reason, it is even more important that the RRF funding should be designed with the primary objective of supporting the adoption and implementation of the reforms. The RRF, together with the other elements of the Next Generation EU, such as the additional Just Transition Fund, as well as the Multiannual Financial Framework and national support schemes, offer a unique opportunity to get this essential piece of the puzzle right.

While structural reforms, by definition, are country specific and their design and implementation vary across countries, the NRRPs need to cover some key policy areas, which are key to fostering an economically sustainable and inclusive growth. These areas include: i) the labour market; ii) education and skills; iii) research and innovation; iv) justice; v) public administration; and vi) taxation.

To assess the reforms proposed in these policy areas, three main criteria should be looked at.

  1. Reforms have to address the needs and problems specific to a country, and should be in line with the objectives defined in the RRF. This requires more than just ensuring that the NRRPs take account of the country specific recommendations (CSRs) from the European Semester, some of which may not be even essential for the RRF.
  2. Reforms need to be credible. From the NRRPs we should expect solid analysis to understand the present situation, and the challenges to reach a more resilient economy, with reforms clearly linked to the findings. The credibility of the proposed reforms depends on whether they expect to have a lasting impact, namely a structural change in concerned policy areas. The arrangements proposed should also ensure the effective monitoring and implementation of the recovery and resilience plan, including the envisaged timeline and clear and realistic milestones.
  3. Reform proposals need to be coherent and appropriate for the objectives targeted. The estimated costs for their implementation should be reasonable and in line with the nature and type of intervention.

In order to achieve recovery and resilience, member states are expected to already be endowed with appropriate effective structures that provide the framework conditions to achieve the objective of resilience. If this is not the case, reforms need to be implemented. The following conditions in key areas of the economy can be summarised as follows:

  • For the labour market, member states should ensure that there is a well-functioning, active labour market helping citizens adapt to increasingly dynamic economies, for example through flexicurity and lifelong learning systems.
  • In the area of education and skills, the system should prepare students to face the realities of a changing society, school curricula and university education have to better reflect the challenges of the future of work. For those employed and unemployed, programmes to reskill and to offer career change support should be developed.
  • For research and innovation, governments need to provide the right environment for investment while reducing barriers to the adoption of innovations, for example by reforming procurement policy, expanding the public markets for innovative solutions (see Núñez Ferrer, 2020).
  • In the area of the judicial system, the legal and regulatory framework should offer a stable environment, to assist the economic and social actors to operate in a changing economy efficiently and effectively.
  • In the area of public administration, we expect it to perform a supportive task, offering efficient support and guidance for economic actors and citizens.
  • In the area of fiscal instruments, we expect those to be aligned with the EU and national objectives, from employment to sustainability objectives.

Where the framework conditions create barriers for achieving a resilient and functioning economy in line with the overarching objectives, reforms have to be undertaken. This means more than just ensuring that the NRRPs address the country specific recommendations.

The RRF is a unique instrument with the potential to spur essential reforms. Let’s not waste this opportunity in trying to seek to cover every possible wish at the risk of missing this historic turning point.

Gros D. and F. Shamsfakhr (2021), “Adjusting Support in a K-shaped Recovery”, In-Depth Analysis for the European Parliament’s ECON Committee.
De Vet J.M., D. Nigohosycan, J. Núñez Ferrer, A.-K. Gross, S. Kuehl and M. Flickenschield (2021) “Impacts of the COVID-19 pandemic on EU industries”, Report for the European Parliament’s ITRE Committee.
Guéguen D. (2020), “The EU’s green finance taxonomy: an Orwellian mechanism”, Euractive, 20 November.
Núñez Ferrer J. (2020), “The EU’s Public Procurement Framework – How is the EU’s Public Procurement Framework contributing to the achievement of the objectives of the Paris Agreement and the Circular Economy Strategy”, Briefing for the European Parliament IMCO Committee.
Renda, A. and M. Schaus (eds) (2021), “Towards a Resilient and Sustainable Post-Pandemic Recovery”, CEPS Task Force on the New Industrial Strategy for Europe, CEPS.