The Economic Impact of Next Generation EU: A Euro Area Perspective

59 Pages Posted: 28 Apr 2022 Last revised: 13 Jun 2022

See all articles by Krzysztof Bańkowski

Krzysztof Bańkowski

European Central Bank (ECB)

Othman Bouabdallah

European Central Bank (ECB)

João Domingues Semeano

Independent

Ettore Dorrucci

European Central Bank (ECB)

Maximilian Freier

European Central Bank (ECB)

Pascal Jacquinot

European Central Bank (ECB)

Wolfgang Modery

European Central Bank (ECB)

Marta Rodríguez Vives

European Central Bank (ECB)

Vilém Valenta

European Central Bank (ECB)

Nico Zorell

European Central Bank (ECB)

Date Written: April, 2022

Abstract

This paper assesses the potential economic impact of Next Generation EU (NGEU), focusing on the euro area. Its findings suggest that the envisaged national investment and reform plans present a coherent package to support both recovery from the pandemic-induced crisis and longer-term modernisation of the euro area economy through their digital and green transitions. NGEU, however, can only unfold its full potential if all plans are implemented in a timely and effective way. We estimate the impact of the national plans on output, inflation and public debt using ECB staff economic models under the assumption of successful implementation. Specifically, NGEU is expected to take effect through three channels: structural reform, fiscal stimulus and risk premium. Overall, NGEU may increase gross domestic product (GDP) in the euro area by up to 1.5% by 2026, with the impact expected to be significantly larger in the main beneficiary countries. In Italy and Spain, two of the main beneficiaries, the public debt-to-GDP ratio may be more than 10 percentage points lower by 2031. At the same time, all euro area countries are expected to benefit from NGEU through positive spillovers, greater economic resilience and convergence across countries. Finally, the effect of NGEU on euro area inflation over the medium term is deemed to be contained to the extent that the inflationary effect of additional public expenditure is offset, at least to some degree, by the disinflationary effect of greater productive capacity resulting from the planned structural reform and investment measures.

Keywords: Next Generation EU (NGEU), public investment, Recovery and Resilience Facility (RRF), structural reform

JEL Classification: C54, E02, E22, E62, F45, H87, O52

Suggested Citation

Bańkowski, Krzysztof and Bouabdallah, Othman and Semeano, João Domingues and Dorrucci, Ettore and Freier, Maximilian and Jacquinot, Pascal and Modery, Wolfgang and Rodríguez Vives, Marta and Valenta, Vilém and Zorell, Nico, The Economic Impact of Next Generation EU: A Euro Area Perspective (April, 2022). ECB Occasional Paper No. 2022/291, Available at SSRN: https://ssrn.com/abstract=4095550

Krzysztof Bańkowski (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Othman Bouabdallah

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

João Domingues Semeano

Independent ( email )

Ettore Dorrucci

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 13440 (Phone)
+44 69 1344 6000 (Fax)

Maximilian Freier

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pascal Jacquinot

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Wolfgang Modery

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marta Rodríguez Vives

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Vilém Valenta

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nico Zorell

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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