European Union recovery funds : strings attached, but not tied up in knots

• The European Union's plan for aiding recovery in member states hit by the coronavirus crisis has been rightly hailed as a major breakthrough for the bloc. But there is much less clarity on the plan's economic aims, its priorities and the content of the contractual arrangements it should entail between the EU and member countries. The plan's main plank, the Recovery and Resilience Facility (RRF) is widely seen as a short-term Keynesian stimulus. Although the EU debt is expected to be repaid through contributions from member states, the resulting transfers are often seen, including by national governments, as money from heaven. There has also been controversy over the conditions attached to grants and loans • fuzziness over objectives and overloaded procedures can derail the RRF. The EU needs to provide clarity from the outset and put the plan on the right track. It should acknowledge and emphasise that the main goal of the RRF is not to contribute to immediate relief or a Keynesian stimulus, but to foster structural transformation, especially in less-advanced and harder-hit member states. • The EU should hold back from trying to impose through overall policy conditionality its reform agenda on the member states. Support for digitalisation cannot be conditioned on pension reform. Instead, there should be a narrow-conditionality approach in which reforms that strongly complement intended investments should be identified and bun-dled with that investment. A grant aimed at encouraging decarbonisation in the transport sector, for example, would, be made conditional on the elimination of transport fuel subsidies. Therefore, in national recovery and resilience plans, each bundle of invest-ments and reforms should be focused on the limited set of policy measures that need to be implemented to maximise the impact of EU-financed investment. • Meanwhile, complementarity across objectives should be addressed through a dialogue with each member state on the sectoral allocation of EU funding and the overall architecture of their recovery and resilience plans. As the provider of the funds, the EU has the leverage and legitimacy to be demanding in this discussion. • The EU should emphasise where relevant the cross-border dimension of investment plans and should encourage member states, including financially, to cooperate on the design and implementation of their plans.