Next Generation EU is the European Union’s €807 billion (US $873 billion) investment programme launched in 2020 in response to the Covid crisis. It aims to support digital and green transformation of infrastructure, energy, industry, cities and transportation.

Combined with supplementary investment from the EU’s five year budget, the overall size of Next Generation EU amounts to €2.018 trillion (US $2.19 trillion).

The first investments in the programme were made in June 2021, and marked the first issuance of debt instruments by the EU – something that had previously been forbidden under the EU constitution.

The Recovery and Resilience Facility

At the centre of the Next Generation EU programme is the Recovery and Resilience Facility (RRF). This is a €723 billion euro lending and grants instrument to support reforms and investments in EU states.

The funds available split roughly equally between grants and loans. €338 billion is available as grants to the member states, while €385.8 billion is available as loans to the member states.

The mechanism of directing funds to and through member states affects the distribution of funds, and places the European Commission in a powerful position to direct grant funds to particular states, while individual northern and eastern states’ financial policies can affect uptake of loans under the RRF.

It has been suggested by some commentators that the RRF grants and loans formulas have skewed funds away from the north and east of the EU and towards the west and south of the EU.

Multiannual Financial Framework

The Next Generation EU investment programme is not only dependent on its own €807 billion funding, it is also receiving funds from the EU’s multiannual financial framework, a five year programme of investment. The investment budget over five years for modernization of infrastructure and digitalization of society amounts to a total of €2.018 trillion (US $2.19 trillion).

In certain programmes, funds coming from the Multiannual Financial Framework far outweigh the Next Generation EU funds. For the innovation and digital headings, Next Generation EU is contributing €11.5 billion while the Multiannual Financial Framework is contributing €149.5 billion. The natural resources and Environment by budget, which finds advances in agriculture and land use as well as programmes to turn the EU’s cities ‘smart green’ is getting €18.9 billion from Next Generation EU, but €401 billion from the Multiannual Financial Framework.

The smallest item in the combined budgets is security and defence. This amounts to €14.9 billion over five years, or 0.7 percent of the combined budget.

Response to Systemic Shocks

Since 2020 the European Union has suffered a number of shocks that have challenged the security, well-being and economy of the bloc. These shocks combined with a continuing overhang from the 2008 sovereign debt crisis that struck the eurozone, have strongly shaped not only the creation of the Next Generation EU programme, but even more, the consequent direction of funds to particular national programmes and EU-wide initiatives.

The 2008 financial crisis affected countries across the block, with recessions in most if not all of the Western and central countries of the Union. But in the Mediterranean the effects bordered on the devastating. EU Mediterranean countries, including Greece, Cypress, Portugal, Spain and Italy entered a decade-long downturn, with the drag on each country’s economy in many cases still evident today.

The economic problems facing the Mediterranean EU member states were compounded and worsened by tumult and war in the south and east of the Mediterranean following the collapse of the Arab spring, the outbreak of civil wars in Syria and North Africa, and the collapse of many South Mediterranean economies as a result.

Against this backdrop, 2020 ushered in a number of even bigger shocks.

Brexit and Covid

The Covid crisis created an enormous humanitarian shock as well as severely affecting the economy within the EU. It exposed severe fault lines in the union’s responses to the emergency. Countries such as Spain, Italy and Portugal, already suffering from the aftermath of the 2008 crisis, were particularly badly hit. The health systems in these countries were strained to their limit, and their economies suffered heavily.

The implementation of Brexit also provided another shock to the EU. It removed one of the largest net contributors to the EU budget, and the second largest economy in Europe. The implementation of Brexit also hit a number of neighbouring economies particularly, including the Netherlands, Belgium, Germany, France and Ireland.

Although long expected and planned for, Brexit played a particular role in the creation of the Next Generation EU, in particular how it has been funded and how the EU could suddenly find over €800 billion in addition to its five year €1.2 trillion multiannual financial framework.

Since its inception, the EU has never issued government bonds nor undertaken other forms of borrowing. However, the hole left in the EU’s budget by the UK’s withdrawal, combined with the acute challenges the EU has faced in the last four years, has made borrowing inevitable.

The Next Generation EU programme is funded with the first bonds ever issued by the EU. Once the prohibition on borrowing had been lifted, the EU as an institution has become free to borrow large amounts, unconstrained by the limitations of member contributions. This development has not been welcomed by all member states.

Response to Ukraine War

The invasion of Ukraine by Russia created a number of shocks to the EU: economic and energy-market-related as well as security-related.

Sanctions against Russian oil and gas created economic shocks, especially in Germany, the European country with the closest economic and political ties to Russia. Certain manufacturing and agricultural sectors were especially badly hit in the initial phases of the war.

The war has also underlined the need for European countries to modernise and restructure their energy infrastructures, achieve greater efficiency in energy use in residential buildings, offices and cities. Alternative sources of energy, such as renewables, have become even more vital in the EU as a result of the war.

These priorities can be seen in many of the national plans that are each country’s blueprint for funding and how they will implement their national programmes.

There is clear focus on energy efficiency, modernising buildings and cities to save energy, more efficient forms of transport, with a renewed emphasis on rail, and on building out and modernising energy infrastructure and transitioning to renewables.

Many countries rewrote their national plans in 2023 to reflect new priorities as a result of the ongoing war in Ukraine.

Distancing EU from China

Over the last twenty years, many European countries have formed close economic relationships with China, particularly in R&D, industrial and manufacturing.

There is increasing awareness across Europe, aided by tensions over Taiwan as well as the Ukraine war, that Europe has become over-dependent in many areas on countries that are potentially hostile to it, and to its values.

This new awareness change of direction, that has been championed by the Commission and by Commission President Ursula von der Layen, is reflected by a strong emphasis on R&D in the Next Generation EU programme, with around €50 billion being committed to research projects, as well as a focus on industrial modernisation to be found in the member states’ national plans.

Germany

Germany has approved a Recovery and Resilience Plan worth €28.7 billion. €28 billion is made up of grants from the Recovery and Resilience Facility, while the German Government is contributing €700 million towards the programme.

The German Government is not taking out any loans against the Recovery and Resilience facility.

In the German national plan, 47% of funding is supporting climate and green energy objectives, while 48% of the plan is focused on digital transformation.

Sectors that are receiving particular focus for both green and digital transformation are manufacturing, industry, energy, transport, and building and construction.

This includes €3.3 billion towards making manufacturing more efficient and sustainable; €1.5 billion on developing hydrogen infrastructure; €7 billion on connected clean cars, buses and rail; and €2.5 billion on converting residential buildings to ‘smart green’ technologies.

Among the digital transition initiatives Germany is taking part in, it is committing €3 billion to public service digitalisation for 115 federal and 100 regional services as well as the creation of a national online education platform funded with €630 million. The education platform is being complemented by local pilots of smart learning devices for students, being trialled in Bremen and elsewhere.

A major beneficiary of Germany’s Recovery and Resilience programme is ‘Digital Rail Germany’. Seven pilot projects are being funded to replace old signal boxes and level crossing protection systems with new-generation digital security systems. These will be upgradeable to future European Train Control System (ETCS) networks and systems through common system interfaces.

Among other developments, €3 billion is being committed to digitalise hospitals and €814 million is going to modernise local, community and primary health care.

France

The keystone of France’s Recovery and Resilience plan is transition to green energy as well as digitalisation of services. France is anchoring its programme to the REPower EU Plan, a Europe-wide initiative to diversify and save energy following disruption to the energy market caused by Russia’s invasion of Ukraine.

REPower EU aims to reduce the EU’s energy demand by 20%, replace gas sourced from Russia with alternative supplies, and achieve 39% of electricity sourced from renewables.

France is funding its plans with €40.3 billion in grants from the RRF. It is not taking out any loans from the RRF.

France has identified 73 investment streams, with 49.5% of funds going to green transition and 21.6% of funds going to digital transition.

As part of its green transition France is investing €7.7 billion in modernising buildings with sustainable technologies and energy efficiency features and committing €4.4 billion to the modernisation of its rail network. Manufacturing is receiving €0.6 billion to support modernisation and decarbonisation.

Healthcare is receiving €2.5 billion, with e-health and modernisation of community medical centres and residential care homes receiving the bulk of the funds. The impact of Covid, especially among the elderly, can be seen as the main driver for modernisation of health services, with improvements especially focused on community healthcare.

Spain

Spain was one of the EU countries that suffered most heavily from the Covid outbreak. The country, one of the EU’s largest economies, was also heavily hit by the Eurozone crisis of the early mid 2010s with lingering effects on its economy persisting today.

Spain has consequently engaged heavily with the Next Generation EU programme, and its plan is one of the most far reaching and ambitious of any the national plans in the EU.

It has particularly focus on 5G and IoT, and digital transformation across swathes of Spanish society, including healthcare, buildings, cities, industry and manufacturing, education and workplace training.

More than most EU countries, Spain is treating the programme as a strategic turning point for its society, industry and infrastructure.

The country is accessing €163 billion of funds, with €80 billion in grants from the RRF and €83 billion in RRF loans.

This is far larger in absolute terms than the amounts that Germany and France are making available. But in proportion to Spain’s economy it is significantly even more when compared to the sums as a proportion of their economies that Germany and France are committing. Germany’s Recovery and Resilience plan amounts to around 0.67% of its economy. Spain’s Recovery and Resilience Plan amounts to around 11.42% of its economy, a figure around 17 times greater in its potential economic and social impact.

40% of Spain’s plan will support green transition and sustainability objectives and 26% will be committed to digital transition.

€12 billion will be committed to transforming buildings to make them more sustainable and energy efficient. This investment includes new, sustainable social housing.

€35 billion is being invested to modernise Spain’s energy infrastructure, including energy storage and grids. The initiative aims to also introduce new clean technologies, accelerate adoption of renewables, and jump-start a Spanish hydrogen economy.

€13.2 billion will be invested in sustainable mobility in urban areas and also for long distance travel. These plans include creating low-emission zones in urban areas, building out an electric charging infrastructure, developing urban public transport as well as developing and modernising long range rail infrastructure. In addition, Spain has embarked on around 175 local schemes aimed at improving the urban environment, city-based industrial and logistics infrastructure, and urban transport.

Spain is planning to commit €15.4 billion to improve 5G and fixed infrastructure, and €10.2 billion to modernise manufacturing and industry.

Local public services are to receive €4.5 billion to implement new technologies and to digitalise, with a large share going to modernise healthcare provision and social services.

Italy

Italy was the first European country to be struck seriously by Covid, and it was as badly hit as any by the pandemic. Also, like Spain, Italy had been hit hard during the Eurozone crisis, with effects lingering for longer than in most of the rest of Europe.

With a plan priced at €194.4 billion, Italy has the largest Resilience and Recovery Plan of the four major EU economies. As a proportion of GDP, standing 9.22%, it is still smaller than the proportion of GDP represented by Spain’s however.

The country is committing €5.3 billion to upgrade its high capacity networks, including 5G. It is also investing €13.4 billion in fostering digital transformation of Italian industry and adoption of Industry 4.0.

Italy is planning spending €34.5 billion on transforming its transportation systems and networks.

It is also to commit €24.7 billion to upgrading the country’s water and waste-water infrastructure as well as develop a renewable energy infrastructure.

It is planning to spend €15.7 billion on new healthcare technologies, with a particular focus on home healthcare medical devices and far greater use of telemedicine.

Italy is also planning an extensive modernisation of its schools system, with a planned digitisation of teaching and a move to more flexible teaching through use of devices and online technologies.

Permanent Transformation?

The EU’s Next Generation EU programme is the most ambitious industrial and civil regeneration initiative undertaken in Europe since the 1950s.

Its scope is broad, stretching from renewing healthcare, social care and education to modernisation of industry, logistics and transportation, energy grid regeneration and renewables.

Although an EU-wide initiative, funded by EU issued debt for the first time, it is dependent on national implementation plans drawn up by each member state. These differ widely in scope, ambition and funding depending on the willingness of different countries to embrace the opportunities that the programme offers. Above all, countries in the EU’s south have been particularly ambitious in their approach to the initiative.

Although Next Generation EU has a limited timeframe, it is possible that it could become a rolling programme of investment in social, infrastructure and industrial transformation, funded by continuing debt issuance. Some governments are keen on such a development, while others are likely to resist it.

As Europe continues to face challenges to its security, civil society, energy and industries, the role of Next Generation EU, and its successor programmes, is only likely to grow.