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War, inflation upend EU’s post-pandemic recovery plans

War, inflation upend EU’s post-pandemic recovery plans

by host

EU countries are seeking to change their national recovery plans — less than a year after they were approved.

The war in Ukraine has rushed the old continent in motion to unshackle itself from its energy dependence on Russia. At the same time, it’s facing the challenges of record inflation, which has forced input costs to balloon, and a planned redistribution of grants that will reshuffle billions around. The combined effect is that many EU capitals will be forced to tweak their national spending plans under the bloc’s €800 billion pandemic response fund.

The upside is that the fund’s rules already required that 37 percent of each country’s envelope be spent on the green transition — a key objective that’s been given new urgency by the war.

“The answer is the same,” Thomas Dermine, Belgium’s secretary of state for recovery and strategic investments, told POLITICO. “To increase our strategic autonomy, to reduce the share of fossil fuels and accelerate the transition to renewable energies.”

But for now, there’s no new money on the table.

Resistance from Northern countries against incurring new joint debt means that the bloc’s pandemic recovery fund, or what’s left of it, is going to be repurposed to answer the current crisis. The question is how far one can stretch existing resources.

“There are €800 billion euros. I’m open to new priorities, but we do not need new funding, new facilities, new measures — let’s use the €800 billion we already have,” German Finance Minister Christian Lindner said last month, echoing comments made by Swedish and Dutch officials.

There’s still something left: Out of the €800 billion recovery fund, €386 billion are loans, of which €232 billion are not yet committed, according to the Commission. Countries have until 2023 to request loans.

Only Italy, Romania and Greece asked for the full amount of loans available to them — amounting to 6.81 percent of their gross national income in 2019 — while Cyprus, Poland, Portugal and Slovenia requested only part. Most countries snubbed the loans last year because they didn’t want to add to their already high debt burden, or because they could get equivalent financing conditions on their own.

But the Commission expects many are likely to come forward now, according to an EU official.

“It is not excluded that we will ask for loans,” said Dermine. Hungary and Spain are among the countries that have already signaled their intention to do so.

Those who can’t — because they’ve already asked the full amount — may request to rewrite their plan to accommodate new priorities and account for inflation.

Inflation blows up budget plans

The rise in prices is also throwing a wrench into EU countries’ investment plans.

The problem is that the plans — including careful costing for each investment — were drawn up under a different price scenario. Those budgets no longer reflect reality, forcing capitals to pick up the bill.

Eurozone inflation reached an all-time high of 7.5 percent in March and isn’t expected to abate soon. In the construction sector, costs have increased steeply, with an EU index tracking input costs reaching 117 in the third quarter of 2021 — the latest period for which aggregate data is available — compared with 109 year-on-year.

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Together with shortages of everything from steel rods to cement to construction workers, inflation is exploding prices and leaving tenders unmet as companies can no longer shoulder the rise in costs. This means countries will have to make up the difference from their national budgets if they are to respect a tight schedule of payments-on-results under the bloc’s recovery fund contracts.

In Italy, the largest recipient of the recovery fund, the government intervened to add price revision clauses in the awarding of public contracts, as well as an ex-post compensation to account for rising prices of construction materials. 

However, that’s not enough, according to contractors.

“The result was far below compared to the increases registered on the markets,” said Flavio Monosilio, director of economic affairs at ANCE, Italy’s construction lobby. Tenders for infrastructure are starting to not attract bids, he added.

Prime Minister Mario Draghi in March floated the possibility of reviewing the country’s investment plan to account for the rise in prices, although he added it would be “premature at this time.”

It’s not a problem just for Italy. 

In Belgium, which registered in March one of the highest inflation rates in the EU at 9.3 percent, infrastructure accounts for 60 percent of the country’s spending plan. “There will be an important impact on construction materials,” Dermine said. 

Greece, meanwhile, will likely have to lose one out of the 18 ports it had planned and readjust costs to reflect the increase in prices, a finance ministry official said. 

In Portugal, only 8.7 percent of the allocated vouchers for home renovation in poor households — part of the investment plan — had been spent as of this month, according to the environment ministry, as companies don’t even bother bidding.

Rewriting plans easier said than done

It’s all coming to a head in June, when the Commission will redistribute 30 percent of the grant component of the fund based on countries’ economic performance in 2020 and 2021. This means that countries that rebounded more quickly than expected are going to see their slice of the pie shrink, sometimes by significant amounts.

Belgium stands to lose up to €1.3 billion, Dermine said. Romania will lose over €2 billion, according to the country’s finance minister, Adrian Câciu. That will likely lead both countries to ask the Commission to modify their plans. 

“Yes, we will need to change — the question is how to finance [the shortfall] through Belgian borrowing or EU funds,” Dermine said. “This question isn’t yet decided.”

“If you have two billion less, you’re obliged to optimize,” Câciu told POLITICO.

“We will talk with the Commission and some of the targets may be optimized,” he added, while promising that Bucharest will stick to the reform agenda.

However, rewriting national plans and getting the stamp of approval from the Commission and EU capitals yet again won’t be a walk in the park.

“You can’t adjust your plan, because you decide it, [and] we also have hundreds of pages of regulation regulating the circumstances allowing some amendments to these plans,” Economy Commissioner Paolo Gentiloni said last month. “If these circumstances are there, and they are quite limited, proposals of amendment could be sent to the Commission and there is a period of negotiation.”

“So it’s not something that ‘snap’ someone decides, ‘oh I want to change the plan,’” he added. “Because I think we have the responsibility to all 27 member states to implement what we have decided in common.”

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