The real effects of Next Generation EU

Policy Study

The Next Generation EU (NGEU) fund, established in response to the COVID-19 pandemic, represents an unprecedented financial commitment by the European Union. This policy study offers an alternative method to assess the expected value added of Next Generation EU (NGEU) in France, Germany and Italy.

Unlike usual ex-ante modelling exercises, this study proposes to link the expected ex-post value added of NGEU to the ex-post value added of past domestic fiscal policies by EU member states. The authors, Jerome Creel & Jonas Kaiser, use domestic fiscal multipliers as a benchmark, suggesting that the real impact of NGEU, especially through grants, could exceed those observed with loan-based stimuli, providing a potentially stronger economic boost.

The results confirm that fiscal policy has tangible effects on the economy, with the estimated lower bounds for fiscal multipliers above zero (France and Italy) or at zero (Germany), but never below. These effects are notably more significant during times of high unemployment, emphasising the importance of timely stimulus interventions aligned with economic downturns.

Finally, the authors suggest that even in economically better times, fiscal policies like those under NGEU can be effective in the longer run, especially in countries like Italy, where the fiscal multiplier remains positive even when there is no slack in the labour market.

This policy study is part of the Recovery Watch series of publications. The Recovery Watch is a research that monitors the Recovery and Resilience Facility and assesses its social impact in different countries. Led by FEPS, Friedrich-Ebert-Stiftung (FES), and the Institut Emile Vandervelde (IEV), in collaboration with several first-rate research organisations.