The EU recovery fund's feast for the East

LONDON (Reuters) - The European Commission’s proposed 750 billion euro ($853.35 billion) coronavirus recovery fund for EU member states implies an unexpectedly generous package for countries in central and eastern Europe that could significantly benefit their economies.

The CEE region accounts for around 11% of the 27-member European Union’s gross domestic product but has been provisionally allocated 187 billion euros, or 25%, of the ‘Next Generation EU’ plan’s money.

In gross terms, Poland and Romania would receive the largest sums in CEE at 65 billion euros 33 billion euros respectively. Scaled as share of GDP, Croatia and Bulgaria would get the biggest boost.

“The extent to which CEE countries, many outside of the Euro area, are supported by the EC’s recovery package came as a positive surprise to the market,” analysts at JP Morgan said.

(Graphic: Potential allocation of EU recovery fund as share of GDP, )

The recovery fund proposal is currently split between 500 billion euros of loans and 250 billion of ‘grants’. The money is intended for projects spanning 2021-2024, though absorption could be allowed to leak into 2025-2026 as well.

It comes alongside the proposed 1.1 trillion euros EU’s regular seven-year budget for 2021-2027, meaning the CEE bloc could draw in a lot of money over that period.

The recovery fund will likely come with substantial strings attached. The ‘grants’ portion will be distributed to finance specific projects in line with the Commission’s agenda and subject to its authorisation.

European Union flags flutter outside the European Commission headquarters, ahead of an EU leaders summit at the European Council headquarters, in Brussels, Belgium July 16, 2020. REUTERS/Yves Herman

That has rankled with Hungary’s Prime Minister Viktor Orban, whose criticisms of Brussels and clampdowns on academics, media freedom and civil society have long been a thorn in the EU’s side.

What Poland gets will be also be closely watched. The EU has been voicing concerns about an erosion of democracy there too here and Poland's freshly re-elected President Andrzej Duda ran an acrimonious campaign laced with homophobic language and attacks on private and foreign-owned media.

(Graphic: Coronavirus has caused huge slump in CEE economies, )

Central and eastern European economies outperformed after the global financial crisis a decade ago. Taking into account the increased funding, they should be able to consistently outgrow their Western European neighbours.

However, given the lags in absorbing EU money, the degree to which this can materialise is unclear.

Looking only at investment-related disbursements, analysts calculate annual investment funding for CEE countries could range from 2.4% of GDP in the Czech Republic to 8.5% in Croatia. In some countries, such as Bulgaria and Croatia, available funds could exceed public sector investment.

Disbursements of EU funds could also significantly reduce borrowing needs for many countries, though the loan portion would have to be repaid.

Due to the Czech Republic’s high income and low debt levels, it could find itself a net contributor to the pot for the first time under NGEU, even if only by a symbolic net 0.3% of GDP.

(Graphic: EU investment funds per year to 2024 as share of GDP, )

(Graphic: Net allocation of EU recovery fund money as share of GDP, )

In the short term, German stimulus could prove even more important, Societe Generale’s Marek Drimal added, given how much CEE firms sell to Germany and its manufacturers.

(Graphic: CEE exposure to large European economies, )

Editing by Louise Heavens