The European Commission has announced its proposal for a recovery plan with a total budget of 750 billion euros, called Next Generation EU. It is based on the new Instrument for Recovery and Sustainability, with a proposed resource of EUR 560 billion, of which EUR 310 billion is earmarked for grants and the remaining EUR 250 billion will be given out the form of loans.
In addition, the Commission proposes to increase cohesion funding to the current Multiannual Financial Framework by around EUR 55 billion, increase transfers through the Fair Transition Fund by around EUR 40 billion and a number of additional initiatives, including a solvency support instrument aimed at to the recovery of enterprises.
It is not yet possible to say what resource will be available for Bulgaria. Commission working documents, for example, show a distribution in which Bulgaria should receive support of up to 15 billion euros over the next four years.
A presentation by the government indicates that Bulgaria will have access to EUR 6.1 billion in grants and EUR 3.1 billion in loans under the Reconstruction and Sustainability Instrument alone, an additional EUR 2 billion under the Fair Transition Fund, additional EUR 692 million under the current cohesion policy and EUR 376 million more for rural development.
However, the European Commission’s proposal has yet to be approved by the member states, which can change both the total amount of funds provided and the distribution by country, as well as the ratio between grants and loans.
Whatever decision is made – and it seems that there will be one, given the extreme change in attitudes in Europe and the active support for the plan in large countries, especially in Germany – Bulgaria will be a big net beneficiary.
Whatever you compare, the amount under discussion will have a huge impact on the country’s public spending capacity. In the period up to 2024, this financial flow will represent – of course, if received and spent – between 4 and 5% of GDP each year, an additional 11-13% of budget expenditures in the current budget trajectory and tax burden, which practice would allow for a doubling of public investment.
We must not forget that this resource complements the expected funding under the new multiannual framework of the EU budget, and in the next two years’ payments on agreed projects in the current programming period are forthcoming.
The logic behind this “recipe” is clear – to compensate for the lack of private investment in the EU economies with public resources and to give a kind of stimulus to domestic demand after the crisis.
It is debatable whether in this short period the Bulgarian economy can “take” such an incentive and the easiest proof is the systematic inability to meet the planned capital expenditures in the budget in recent years, leading to surpluses and reorientation in the days before the New Year holidays.
Beyond the technical barrier to rapid “absorption”, the abundance of foreign money changes the incentives for politicians, businesses and administrations, directs resources to activities that would not exist without transfers and gradually erodes the basic principles of creating and financing public services and responsibility for this. We see that decisions in an entire sector – agriculture – are guided almost entirely by the subsidies available.
We also see how difficult it is to invest in infrastructure with our own resources – indeed, no one wants to pay tolls and vignettes if there can be “free” roads, bridges and tunnels, which are a “gift” from the European taxpayer.
We also see how almost no projects that improve the urban environment and quality of life – from water supply, treatment plants, waste treatment to the renovation of buildings and the modernization of public transport – go without a “grant”.
Even partial loan financing and, consequently, partial “participation” by service users is starting to sound like a political oddity, and the most frequently asked question is “have we found European money for this”. Municipalities are increasingly losing the incentive to encourage investment and job creation in order to increase their own revenues, which in turn can be used for their own policies and priorities, and instead are focusing more and more on project protection. And so on – the list goes on.
Apart from that, we must keep in mind that the whole EU plan will have to be paid for in the future through increased taxation. As it seems at the moment, political will is increasingly leaning towards creating new sources of revenue at the EU level.
The Bulgarian government will participate in making strategic decisions that will shape the long-term trajectory of development of the common market, and dangerous ideas for new taxes and regulations are always waiting for their moment.
All of this should encourage, despite the hype of billions on the horizon, critical thinking about risks and possible ideas for avoiding them. There is no doubt that poor countries have a lower capacity for domestic savings and that rapid growth and improvement of life depend on the inflow of external funds.
While we must always focus on private investment in discussions to increase the potential for economic growth, it is likely that the current budget philosophy in the EU is a reality and Bulgaria, as a poorer country, will invariably be a net recipient of transfers.
From now on, the challenge is what these funds will be spent on and how. History is a useful science because it shows us the different results of different visions for the economic and social use of European funds in recent decades; we can choose to be Greece or Ireland, Portugal or Estonia, and so on.
The details of the mechanisms for managing and controlling funding under the announced instruments are not yet clear, but the published documents give a first outline of the possibilities and limitations. Here’s what to note:
Funding is explicitly linked to respect for fundamental rights and the rule of law. It seems that the control mechanisms will include a new annual report on the rule of law in all member states, as well as a regulation to protect the EU budget from identified deficits in the rule of law for the countries.
In this way, net donor countries are given at least some tools and opportunities to influence spending policies and practices.
Another “conditionality” can be found in the fact that there is explicit talk about financing both investments and reforms. Moreover, these reforms must be in line with the country-specific recommendations of the European Semester.
It is worth recalling that this mechanism was set up in response to the Eurozone debt crisis. It provides a framework for coordination by analyzing economic policies in individual countries in terms of sound public finances, the business environment, the preconditions for the accumulation of macroeconomic imbalances, as well as the long-term foundations for increasing the potential for economic growth.
In short, it is a matter of identifying and implementing structural reforms that will improve the state of human and physical capital, the work of the institutions and stimulate investment, employment and welfare.
Linking access to funds under the recovery plan with reforms is at least a partial victory for those who do not want the EU to provide unconditional transfers of income from taxpayers in some Member States to governments and businesses in others who refuse to pursue prudent economic policies.
Not surprisingly, the plan will support a green, sustainable and digital transition. The clichés in the profane discussion of these processes for photovoltaic subsidies or high-speed internet in rural areas often divert attention from the meaning of long-term transformation to a high value-added economy, energy efficiency and the use of digital technologies.
Between the lines, although at times the requests are quite direct, we must read that the mood is for at least partial “closure” within the common market, for the transition to a Europe with “strategic autonomy” and reducing import dependencies and selective admission. of foreign investors to the Union market. In a sense, the plan is also likely to look favorably on programs leading to some kind of reindustrialization, reducing import dependence, opening plants within the EU – and this will largely affect Eastern Europe and Bulgaria.
It is very important to say that the aim of the plan is not to restore the old structure of the economy, but to facilitate the transition to a new one. This is a sign that state aid for “rescuing” stranded businesses or insolvent and inefficient public services will not be able to last forever, that funds will have to be directed mainly to support and stimulate new successful models, new “champions”.
It is no coincidence that this concept has begun to take over the debate on EU industrial and trade policy in recent years.
In Bulgaria at the moment, it seems that the urgent work is on the formulation of measures to be financed with the additional funds for cohesion (those 692 million euros). Theoretically, it is possible that these are costs as early as 2020.
In fact, the purpose of the increase in funding proposed by the EC is not to interrupt the launched mechanisms for compensation of losses, employment support and promotion of certain economic activities.
However, the government is free to offer various tools – for example, instead of subsidizing the salaries of existing companies, companies that create jobs or restructure their activities with new investments can be supported.
The big challenge for Bulgaria, however, is in preparing its own recovery plan. This should be done as soon as possible, if possible by the end of the year. What is unique in this case is that for the first time in history, key structural reforms that can transform the country’s politics and business environment can be supported and directly linked to funding.
Politicians and the administration will find it difficult to apologize for refusing and postponing bolder changes with a lack of money, whether it is to finance new large investments accompanying reforms or to cover the social cost of the “losers” (if any) of the changes. We are now in a new and extremely favorable situation – the government can simultaneously plan major reforms and new investment projects and guarantee the necessary resources.
More than once in the past, we have encountered the absurdity of some plans and programs saying what is important and wise to do, but in other plans and programs written and agreed upon five or ten years ago, completely different priorities have been set. Now the phrase “money for reform” will have a real dimension.
What should be in this plan for Bulgaria? The ideas for the spending programs should follow the identified problems and specific recommendations for reforms within the European Semester this year and last year, as well as the last analytical report for the country, published in February 2020. The aim is to solve some structural problems that observed before the crisis caused by the pandemic. These documents summarize several necessary reforms in a number of areas.
Undoubtedly, one of them is the functioning of institutions, the application of laws and the protection of property and contracts. At the same time, there is a need for a better business environment that encourages long-term investment, capital accumulation and innovation.
Improving human capital is the next policy area in need of change and support – it is about the quality of education and ensuring broad access leading to results, effective health care, social services and assistance that specifically support the most pressing needs, and in the long run increase and equalize the chances of success. The public investment financed by the recovery plan must support these strategic priorities and, where possible, be at an advanced design stage.
It is worth recalling that the government has already approved the “Vision, goals and priorities of the National Development Program BULGARIA 2030″. If we have to synthesize, the big challenge for the country is to make a huge leap in economic development in a decade, bringing the richer core of the EU closer to at least the levels of some Central European countries.
In order for this to happen, both reforms in the regulations and the way of organizing and financing a number of public spheres are needed, as well as new public investments. There are urgent changes and initiatives that can reduce the negative effects immediately after the current crisis.
At the same time, the draft for reforms and additional investment must address the structural problems and deficits that are already known and were an obstacle to prosperity even before the crisis. These are policies that, in general, make possible and promote economic transformation based on innovation, technology, capital and educated workers.
In short, we need to increase the growth potential of the economy by increasing productivity. Resources must be “moved” from low-value to high-value businesses – but this is not done mechanically, the old is inevitably destroyed, and the new requires capital, time and knowledge.
European funds can contribute to this process – whether investing in new math high schools or technical schools, supporting municipalities to build infrastructure and services to attract investors, whether they are in energy networks that allow real market relations and competition and so on.
Luck helps the prepared, so the speed in preparing the Bulgarian plan is important. Ultimately, however, it will deliver a meaningful long-term result if it cleverly finds real obstacles to growth and competitiveness.
It is by no means possible, of course, to repeat on a huge scale the mistakes already made with previous and current tranches of ‘European solidarity’, but we also have the opportunity to learn from them.