Brief: EU Recovery Worries

Divergencies in the rate of recovery are likely to get worse.

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Background: Last year, the European Union approved the 672.5 billion-euro ($815 billion) Recovery and Resilience Facility to help member states recover from the impact of the coronavirus pandemic. The funds are supposed to start flowing by mid-2021. In the meantime, member states’ economies are diverging, and there are mounting concerns over the recovery fund’s rollout and effectiveness.

What Happened: The EU commissioner for budget and administration warned that economies would recover at different rates. Southern European countries whose economies rely heavily on tourism are particularly vulnerable, whereas states with sizable industrial and manufacturing sectors are seeing growth sooner. The commissioner also cautioned against delays in the recovery fund’s rollout.

Separately, International Monetary Fund Managing Director Kristalina Georgieva warned of a widening wealth gap in Europe, with per capita incomes of Central and Eastern European countries forecast to be 3.8 percent below pre-crisis projections even at the end of 2022, compared with a 1.3 percent shortfall in Western Europe.

Bottom Line: An uneven recovery is expected given the varying resources available across member states and the differences in their growth models. The danger is that as recovery comes into focus, the discrepancies and competition between member states will become more pronounced. This will further politicize the recovery and exacerbate the economic, political and social issues pulling at the eurozone, all of which will return with force as lockdowns end, and will likely be exacerbated by the politicization of the disbursements of recovery money.