Europe's $955 Billion Recovery Fund Faces Economic Transformation Challenges

Challenges in Implementing the Recovery Fund

By Victoria Waldersee, Giuseppe Fonte and Gavin Jones

MADRID/ROME, Feb 2 (Reuters) - In olive groves and vineyards dotted across Spain, sensors and drones paid for by Europe's largest recovery fund since the post-war Marshall Plan are gathering soil data to feed into AI models which will help farmers better manage their crops.

The project - decarbonising and digitalising a key economic sector - is exactly what the European Union's $955-billion "Next Generation" fund, agreed six years ago and fast approaching final payout deadlines, was designed to nurture.

Impact of Bureaucracy and Skills Shortages

Yet skills shortages, laborious bureaucracy and uncertain long-term funding mean the historic stimulus package - billed as a "chance to emerge stronger" - has struggled to break through the bottlenecks which have repeatedly stalled Europe's attempts at economic transformation.

Mixed Outcomes Across Member States

"The funds left us with data infrastructure, common governance and teams capable of operating AI at scale," said Juan Francisco Delgado, a coordinator of the agriculture project.

Spending Timelines and Future Outlook

"What they haven't left us with is a business model," he said, adding his team was working on a financial plan to develop the data platform, upgrade hardware and hire talent once the money runs out.

LOFTY AMBITIONS, MIXED OUTCOMES

EU leaders grappling in 2020 with an unprecedented collapse in GDP from the pandemic launched the recovery fund with an ambitious aim: rescue the bloc's economy with reforms and investments that could also spur digitalisation and sustainability.

Spending the money wisely has taken on a renewed urgency as threats of economic coercion from China and an increasingly hostile United States have sharpened awareness across the bloc of the need to bolster its defences.

Over 700 billion euros were made available as grants and loans in 2021, though that figure fell to 577 billion after some countries decided against taking up some or all of the loans they were offered.

Half a decade later, a total of 182 billion euros in allocated funds have not yet been disbursed, according to Reuters calculations from EU figures.

The European Commission says the fund has delivered on both its short- and long-term goals but officials, businesses and others interviewed by Reuters said the outcome was more differentiated.

There is broad consensus that the fund cushioned the blow from the pandemic. It also broke a long-held taboo on joint borrowing, since cemented as part of European policymakers’ toolbox.

The requirements for accessing funds, from labour reform in France and Spain to simplified renewables licences in Italy, Greece and Portugal and cybersecurity improvements in Slovakia and Romania, may yet yield longer-term boosts to productivity and growth.

But implementing those reforms and spending the money took longer than hoped, dampening any rapid acceleration of growth, which has remained sluggish across the bloc since rebounding from the pandemic compared to the U.S. or China.

Marco Leonardi, an economics professor and senior government official under Italian Prime Minister Giorgia Meloni's predecessors Giuseppe Conte and Mario Draghi, said Italy's six revisions of its 194-billion-euro plan, one of which took nearly a year to negotiate, explain much of the spending delay.

"The 2023 revision was disastrous," he said. "Meloni removed billions from local authorities to fund over 6 billion euros in tax credits for companies investing in energy-saving equipment, only for them to struggle to apply for the credits because of cumbersome bureaucracy," Leonardi said.

Pushed for time, Italy scaled back targets like building nurseries, considered crucial to improving its low female participation in the workforce, from 264,000 to 150,480.

Opposition politicians in Spain and Italy - together allocated over half the available funds - criticised the spending of some of the money on cosmetic projects, such as signs for hiking paths or paint touch-ups in tourist centres. 

"Italy is full of cities and villages with squares, railway stations, cycle paths and even cemeteries built or renovated by using EU funds," Luigi Marattin, economics professor and head of the Italian Liberal-Democratic opposition party, told Reuters.

The desire to distribute funds evenly and fairly at times reduced their impact, Spanish think-tank FUNCAS wrote.

Though just over 40% of Spain's allocation went to small and medium enterprises, time-consuming and complex applications dissuaded many small businesses from applying for funds, said Juan Manuel Martinez, head of Spain’s transport association AET.

"The criteria and reforms are demanding. You need the architecture and systems to manage them," said Laia Claverol Torres, manager of the city council in Barcelona, which oversaw projects from biodiversity refuges to robot assistants for the elderly. 

SPENDING TIMELINES BEING EXTENDED

Countries have until August 31 to implement their reforms and September 30 to make the last requests for payment.

Spain in December renounced over 60 billion euros in allocated loans, admitting it could not meet some of the required milestones in time due to supply chain constraints and unexpected technical difficulties. 

Its government also argued that Spain's improved standing on capital markets, bolstered by its comparatively stronger growth outlook, eroded the advantage of taking on debt via the EU, reducing demand for the loans.

In Italy, which by last December had spent 110 billion euros of its funds according to government estimates, lawmakers and economists are concerned investment spending could collapse once the money runs out, weakening the country's already sluggish economy.

In comments to Reuters, Italy's EU Affairs Minister Tommaso Foti, who manages the funds, was optimistic that positive effects on growth and productivity would become apparent from this year.

"Now that we are in the implementation phase, the effects will be more tangible," he said.  

Economy Minister Giancarlo Giorgetti has repeatedly said that Italy would replace the recovery funds with other spending within the budget, without providing details. 

In a move that effectively extends its spending timeline, Spain received the Commission's approval to use 10.5 billion of its recovery fund loans as capital for a further 60 billion euros in state-backed financing it hopes will mobilise billions more in private investment.

Italy has also secured EU backing to spend 23.5 billion euros beyond 2026.

Such extensions allowing countries more time to spend the money are wise, said Carsten Brzeski, economist at ING.  

"An easy way to make sure the money reaches the economy would be to extend the programmes by 1-2 years," Brzeski said. "Why not allow countries to deviate from fiscal rules if they implement structural reforms that bring relief for public finances in the long run?"

(Reporting by Victoria Waldersee in Madrid, Giuseppe Fonte and Gavin Jones in Rome, Editing by Mark John and Toby Chopra)