Next Generation EU: the turning point in an uncertain recovery?

What are the main causes of uncertainty still weighing on the economic recovery? What role could Next Generation EU play? Will it really be a game changer for Italy's growth? This brief looks at the impact of European funds on real GDP, employment and public debt in two different scenarios for the pandemic. In addition, it considers scenarios where the absorption of funds is not full, but more in line with Italy's historical spending capacity for European funds.

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• Over the coming weeks, the National Recovery and Resilience Plan (NRRP) must be finalised for submission to the European Commission by 30 April.
• NRRP approval takes on particular importance in light of the uncertainty that still surrounds economic recovery, influenced, on one hand, by the evolution of the coronavirus and, on the other, by headway made with the vaccination plan.
• Assuming that the funds are used in full in the way outlined in the public finance documents, the estimates in this brief show that, thanks only to the impact of NGEU, Italian GDP would exceed its pre-pandemic level by 2022 in the event of a favourable pandemic scenario.
• Specifically, based on 2019 comparisons, the use of NGEU would achieve the following results in 2023 when compared with a scenario without the use of funds:
  1. Real GDP would be around 2.2% higher (i.e. around €37 billion);
  2. The number of jobs would be around 130 thousand higher;
  3. The public debt/GDP ratio would be around 4 percentage points lower.
      
• Even in the event that only 50% of the funds are used, pre-pandemic GDP and job numbers would recover by 2023 thanks to NGEU.
• In this situation, the economic sectors that stand to benefit most from an NGEU led recovery would be construction, transport, ICT and communication services and, within manufacturing, the mechanical engineering sector.
• The real challenge, however, is to make NGEU a real game changer. This will depend on the ability of the projects and reforms financed through European funds to stimulate the productivity of the Italian economy in the long term, structurally raising the country's growth profile.