By Alvise Lennkh-Yunus, Executive Director, Sovereign and Public Sector

These funds will help southern and eastern European countries recover from the pandemic and the economic impact from the Russia-Ukraine war. The transfers will be particularly relevant for central and eastern European countries, Greece and Portugal, which will receive funds equivalent to between 25-40% of their 2021 economic output.

While recovery funds target Italy and Spain given their Covid-19 driven economic shocks in 2020, the cohesion funds, which support long-term development objectives, as well as the agricultural funds, will support economic growth precisely in those countries most affected by the Russia-Ukraine war. This includes CEE and the Baltic countries whose growth prospects have markedly declined due to high inflation which is now set to curb domestic consumption.

Overall, the EU (AAA/Stable) will disburse around EUR 1.2trn (about 8.5% of EU-27 GDP) over 2021-27 via its cohesion funds (EUR 387bn), agricultural policy funds (EUR 261bn), resources from the previous 2014-20 budget worth EUR 255bn which can still be disbursed until 2023, and EUR 332bn of grants from the NextGenerationEU recovery and resilience facility. These funds thus represent the most important redistributive mechanisms for supporting the economic recovery and sustainable growth of EU countries.

Main redistributive EU instruments for recovery and growth (EUR bn)

Note: Refers to EC country reports 2022 and requests at that point in time for these policies/instruments. Excludes loans from NGEU. Source: EC, Scope Ratings

However, not all EU member states are set to benefit equally from these funding instruments, reflecting the allocation criteria for each policy, which include countries’ different levels of economic development and social needs but also political priorities and realities that define the financial purpose of each policy.

Italy (BBB+/Stable) is by far the largest beneficiary in absolute terms, set to receive around EUR 185bn, excluding EUR 123bn in NGEU loans, followed by Spain (A-/Stable; EUR 177bn), Poland (A+/Negative; EUR 165bn), France (AA/Stable; EUR 123bn), Romania (BBB-/Stable; EUR 81bn) and Germany (AAA/Stable; EUR 77bn).

Similarly, each instrument benefits a different constituent. While NGEU is set to benefit Italy and Spain the most in absolute terms following the Covid-19 shock, the cohesion funds benefit Poland by far the most with EUR 79bn, followed by Italy (EUR 43bn), Spain (EUR 36bn) and Romania (EUR 32bn). Conversely, the common agricultural policy still benefits France the most with EUR 46bn, followed by Spain and Germany (both 31bn), Italy (27bn) and Poland (22bn).

On aggregate, seven member states receive about 70% of these EU funds led by Italy, Spain and Poland between 13-15%, followed by France (10%), Romania (6.5%), Germany (6.3%) and Greece (5%). The other 20 member states receive around 30% of these funds combined. These figures exclude SURE loans, the temporary instrument to finance employment-related programmes during the Covid-19 crisis, and NGEU loans as they will be repaid by the respective member states over time.

However, the main users of these instruments are the same member states. Italy received EUR 27bn for SURE and is set to receive EUR 123bn in NGEU loans. Spain received EUR 21bn under SURE, followed by Poland with EUR 11bn. Other countries have made minimal requests for NGEU loans so far. Apart from Italy, they include Romania (EUR 14.9bn), Greece (12.7bn) and Poland (11.5bn). While all these loans need to be repaid, countries still benefit from lower interest rates, which, under SURE, the EC estimates resulted in savings of around EUR 3.8bn for Italy, EUR 1.6bn for Spain, EUR 0.9bn for Romania and EUR 0.5bn for Greece.

Finally, Croatia (BBB-/Positive), Bulgaria (BBB+/Stable), Latvia (A-/Positive), Slovakia (A+/Negative), Greece (BB+/Stable), Romania and Hungary (BBB+/Stable) will receive between 30-45% of their respective 2021 GDP over 2021-27, while Poland, Lithuania (A/Positive), Estonia (AA-/Stable) and Portugal (BBB+/Positive) receive between 25-30%. For Italy and Spain, the main beneficiaries in absolute terms, these figures are still high at around 15% for Spain and 10% for Italy, compared with around 5% for France and 2% for Germany.

Main redistributive EU instruments for recovery and growth per member state
EUR bn; % of GDP

Nb. CPF = Cohesion policy funds; CAP = Common Agricultural Policy; ESIF = European Structural and Investment Funds.
Source: EC, Scope Ratings