eco TV Week

Impact investing and the European Recovery Plan

6/26/2020

Faced with the depth of the recession, there is no doubt about the need for a European recovery plan, in addition to the massive national measures that have already been taken. The European Commission has proposed an ambitious plan, but it has run up against two considerations, among others: moral hazard and strict conditionality. One solution would be to apply the principles of impact investing: targets would be set, and once reached, they would open the door to better financial terms, or even the partial conversion of loans into grants.

William DE VIJLDER

TRANSCRIPT // Impact investing and the European Recovery Plan : June 2020

Part 1

Faced with the depth of the recession, there is no doubt about the need for a European recovery plan, in addition to the massive national measures that have already been taken.

Clearly, there are major differences in terms of the policy leeway of the various member countries. 

These differences risk widening structural divergences, which could strain the smooth functioning of the internal market.

A European stimulus plan is also urgent to accelerate the recovery.

In this respect we are likely to be disappointed, since new funds are unlikely to be deployed before 2021.

Necessity:

·         Depth of the recession

·         Differences in terms of policy leeway

·         Divergences widen

·         Functioning of internal market

Urgency:

·         Accelerate the recovery

·         Money deployed as of 2021

 

Part 2

In late May, the European Commission presented its proposal for a recovery plan.

The most striking feature was the size of the plan, which totals EUR 750 billion, or about 5% of GDP, comprised of EUR 500 bn in grants and EUR 250 billion in loans. It will be financed through the issuance of EU debt.

The recent European summit highlighted the depth of disagreement. There is disagreement over the allocation keys, which some argue are based too much on the past (i.e. the average unemployment rate) and not enough on the impact of the shock (i.e. the increase in unemployment).

Another stumbling block is the notion of providing grants and transfers.

Lastly, there is the question of conditionality and who will benefit from the financing, with the so-called frugal countries (the Netherlands, Austria, Denmark and Sweden) demanding very strict conditions.

 

Next Generation EU: 

·         EU debt issuance

·         EUR 750 bn

o   EUR 500 bn grants

o   EUR 250 bn loans

Disagreement:

·         Allocation keys

·         Grants/loans

·         Conditionality

 

Part 3

The insistence on strict conditionality can be traced back to two considerations.

First, the past. Certain countries argue that their past fiscal austerity provides them with greater policy leeway today. Yet this argument overlooks the fact that the pandemic’s economic shock is more a question of bad luck rather than bad policy.

Second, the future. Some countries want to make sure that the funds are not put to poor us. In other words, they are worried about moral hazard. In contrast, the countries that need financing tend to refuse strict conditionality, primarily for political reasons (voter approval).

To resolve this squaring of the circle, we could apply the principles of impact investing. Targets could be set that once reached would give rise to better financial terms, such as lower or even negative interest rates. We could also envision the partial conversion of loans into grants.

This approach would create a win/win situation: it is in the interests of all member countries to see their neighbours doing better economically. Moreover, the targets should be more acceptable from a political standpoint if their realisation results in better financial terms.

The next European Summit will be held on 17 and 18 July. Its importance is underscored by the fact that the European leaders will be attending in person.

 

Conditionnality:

·         Bad luck/bad policy

·         Moral hazard

Impact investing:

·         Setting objectives

·         Better financial terms

·         Conversion of loans into grants

·         Win/win

Next European Summit 17-18 July

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