Four years into the Next Generation EU programme: an updated preliminary evaluation of its economic impact

Prepared by Krzysztof Bańkowski, Nicholai Benalal, Othman Bouabdallah, Roberta De Stefani, Christian Huber, Pascal Jacquinot, Carolin Nerlich, Marta Rodríguez-Vives, Bela Szörfi, Nico Zorell and Christoph Zwick

1 Introduction

Four years into the implementation of the Next Generation EU programme (NGEU), this article provides an updated assessment of its economic effects. To support Europe’s economic recovery from the pandemic and to make its economies more competitive and resilient, with a focus on digital and green transformation, in July 2020 European Union Member States agreed to launch the EU’s largest ever funding programme, NGEU. To achieve these objectives, the programme offers financial support to EU Member States on the condition that they implement specified investment and reform projects over the period 2021-2026. Earlier ECB staff analysis concluded that NGEU had the potential to deliver these objectives, provided that the planned investments and reforms were implemented in good time and effectively.^[1] Now, more than halfway into the implementation period of NGEU, this article provides a description of the situation to date, as well as an updated assessment of the economic impact of the programme. It focuses on the impact of the Recovery and Resilience Facility (RRF) – the centrepiece of NGEU – on the euro area economy. Among euro area countries, particular attention is paid to Italy and Spain as the main recipients of RRF funds in absolute terms.

2 Stocktaking of RRF implementation

The original budget set aside to fund NGEU was more than €800 billion for the whole EU. Among the several programmes initiated under NGEU, the RRF was by far the largest, accounting for almost €724 billion, around 90% of the total envelope. Under the RRF, funding was made available to EU Member States in the form of grants (up to €338 billion) and loans (up to nearly €386 billion).

EU Member States have since applied for €650 billion in RRF funds. While all of them requested the RRF grants in full, several chose not to apply for RRF loans, or requested less than they were entitled to ask for by the deadline of August 2023. Moreover, the envelope itself was subsequently revised.^[2] As a result of updated national recovery and resilience plans (RRPs) and the updated total envelope, EU countries had applied for €650 billion in RRF funds as at 26 August 2024. This equals 4.6% of 2019 EU gross domestic product (GDP). Additionally, Member States are entitled to €83 billion (0.6% of 2019 EU GDP) in funds from other programmes under NGEU. It should be pointed out that although the size of NGEU disbursements to Member States has increased significantly, this is in part offset by an erosion caused by the unanticipated inflationary shock which occurred after the inception of the programme. In the case of investment financing grants, which are the most relevant in terms of the stimulative macro effect, the nominal increase (around 10% to euro area countries) means that the real value is broadly maintained.

Focusing on the euro area, member countries are entitled to use RRF funds of up to €532 billion, that is, 82% of the EU total of €650 billion. Out of this amount, it is estimated that a little less – €486 billion – will actually be spent.^[3] It is on the basis of this latter figure – almost half a trillion euro in RRF-funded public expenditure – that this article builds estimates of the macroeconomic impact of the RRF on the euro area via the fiscal channel.

In order to disburse these funds to EU Member States, at the time of drafting this article the Commission had already borrowed more than €320 billion. Out of this amount, €265.4 billion were paid to the Member States after their satisfactory fulfilment of the qualitative milestones and quantitative targets related to the completion of the reforms and investments associated with each tranche of the RRF. This means that, at that time, around 60% of RRF grants and loans still had to be paid to the EU Member States (50% for euro area countries).

The implementation of the RRF allowed for joint borrowing and risk sharing among Member States. This is particularly the case for the grant component. As the grants are intended to be repaid through the EU budget, these do not add to the national debt. However, this does not mean it is a cost-free measure for Member States as a group. While repayment risks are minimal owing to the budgetary safeguards in place, the burden of repayment will ultimately fall almost entirely on Member States. The incidence and distribution of this burden across countries remains uncertain.

RRF borrowing, payments and expenditure

NGEU borrowing and repayment

With the implementation of NGEU, the volume of the European Commission’s issuance to international capital markets markedly increased. While the Commission’s issuance on behalf of the European Union to finance EU policy programmes had previously been limited, between January 2020 and May 2024 its net issuance reached almost €500 billion, primarily for NGEU. This surpassed issuances by other EU entities, including the European Stability Mechanism and the European Investment Bank. This large-scale borrowing will continue until the end of 2026 at the latest, with an approximate estimate of €150 billion in issuances per year. In accordance with the Own Resources Decision^[4], after 2026 the Commission will not be able to conduct new net borrowing. However, it does have the leeway to shift to regular liquidity management operations and debt roll-over, aiming to smooth the schedule for repayment of EU borrowing allocated to NGEU until 31 December 2058 at the latest.

The loans will be repaid by the borrowing Member States and the grant component of NGEU will be financed through the EU budget, with budgetary safeguards in place to mitigate risks on future repayments. In particular, the Member States have committed to ensuring that the budget of the Commission will have enough funds to repay the grants. The refinancing is guaranteed by the temporary “budgetary headroom”, that is, the commitment by Member States of up to 0.6% of gross national income (GNI) designed to ensure that the EU can meet its commitments towards investors. In addition, the Commission has proposed to raise an additional 0.2% of GNI through a mix of traditional EU revenues and additional transfers. However, it is still uncertain whether the Council of the European Union will approve the proposal.

While we do not foresee material repayment risk arising from NGEU borrowing, the financial burden will ultimately fall on EU Member States, which should account for it in their medium-term plans. Assuming that the Commission will use the available leeway to ensure a steady and predictable reduction of liabilities, we estimate that the annual repayment cost of the grant component of the RRF will peak at €26 billion in 2028 and steadily fall thereafter. Repayments remain well below the temporary budgetary headroom and could be fully covered through either new EU own resources or higher GNI-based contributions, both of which are sufficient in size. Regardless of the agreement on the Commission’s proposal, repayment will largely rely on national transfers to the EU budget, potentially leading to higher taxes or constraints on investments. Nevertheless, there are country-specific risks, with each option having diverse distributional effects.

RRF payments to Member States

By August 2024, RRF payments of over €238 billion had been made, €156 billion of which were in the form of grants. These payments to Member States followed 45 finalised payment requests to the Commission. In addition, eight further requests had been submitted but not yet finalised at that point in time (Table 1 shows evidence for the euro area, non-euro area and the whole EU).

RRF-funded expenditure in the euro area

The composition of RRF expenditure across euro area countries varies greatly both in terms of the share of national GDP and the share of total euro area GDP (Chart 1). Some differences can also be observed in terms of distribution of the spending categories within countries, although government capital spending – the sum of government investment and government capital transfers – accounts for the bulk of expenditure in nearly all countries.

A large part of the RRF expenditure aims to support the green and digital transitions. In line with the NGEU legislation, countries need to commit at least 37% of expenditure under the RRF to green projects and 20% to digital projects. Yet the actual amounts of RRF funds that euro area countries have committed to spending on those two objectives by end-2026 significantly exceed these targets. According to the Commission, the commitments reach on average 42% (green spending) and 27% (digital spending) of total RRF funds. Contributions of national plans to the climate and digital objectives are heterogenous across euro area countries.

Chart 1

RRF-funded expenditure: distribution across euro area countries

(percentage of 2019 GDP; 2021-2026)

On average, fiscal experts within the European System of Central Banks (ESCB) estimate that around 80% of RRF-based expenditure in the euro area is additive in nature. In other words, this share of expenditure provides a genuine fiscal stimulus rather than a substitute for already planned expenditure. This is the basis for the macroeconomic estimates in this article.

RRF expenditure is heavily backloaded to the second half of the programme, with clear implications for the assessment of macroeconomic impact. In each of the years between 2021 and 2023, there was significant under-execution of RRF-funded expenditure in most euro area countries when compared with their original plans (Chart 2). The pattern is observed for both relatively high and low funding recipients. This is mainly because of (i) limits to the administrative capacity to spend; and (ii) a sequence of shocks which resulted in supply-side bottlenecks and downscaling of procurement contracts because of higher-than-expected inflation. As a result, ECB staff estimate that in 2021-2023 the RRF increased the level of euro area GDP by 0.1 to 0.2% only (see Section 3). This is much lower than the previously estimated effect of around 0.5%, which assumed swift and full implementation of the original plans in the absence of the inflation surge.

Chart 2

RRF-funded expenditure in the euro area: difference between estimated actual spending following the plan revisions and initial ESCB estimates

(percentage of 2019 GDP; year-by-year differences)

RRF-linked structural reforms

Structural reforms are an essential part of RRPs and complement RRF-linked investments.^[5] The planned reforms aim to modernise the euro area economies and increase their resilience over the medium term. To this end, the RRF regulation requires that the reforms be tailored to Member States’ structural weaknesses, commensurate with the size of the individual RRF envelopes and complementary to RRF-financed public expenditure. The reforms also support institutional and economic convergence across euro area countries, since the initial framework conditions in the countries with the most comprehensive RRF-linked reform plans were generally weaker than in many peer countries. Recent RRP modifications have left the overall balance of reforms and investments broadly unchanged compared with the initial plans (with reforms accounting for 40% of all milestones and targets), but planned reforms have become “greener” and less frontloaded overall.

Although the implementation of RRF-linked structural reforms has progressed, significant delays in RRP implementation have materialised. By early September 2024 euro area countries had fulfilled around 40% of all milestones and targets in relation to structural reforms, according to the European Commission’s assessment. Even so, only around one third of all envisaged payment requests had been submitted by that time. This falls short of the indicative timetable included in the RRPs, according to which around one half of all planned payment requests should have been submitted by then (Chart 3). Euro area countries featuring a combination of relatively weak administrative capacity and a large RRF allocation have recorded the longest RRP implementation delays overall.

Chart 3

Cumulative number of RRF payment requests

(percentage of total planned submissions)

Many euro area countries still need to fulfil most or even all of their RRF-linked reform commitments. Although the RRF has already entered the second half of its envisaged lifespan, the share of reform-related milestones and targets already assessed and deemed to have been fulfilled by the Commission is well below 50% in many euro area countries (Chart 4). All milestones and targets will need to be completed by 31 August 2026 at the latest according to the RRF regulation. Only a few countries have already been assessed and deemed by the Commission to have implemented more than 50% of their reform-related milestones and targets.

Chart 4

RRP implementation progress

(percentage of all relevant milestones and targets)

In view of these challenges, there is a risk that the effectiveness of RRFs will be diminished by incomplete or ineffective implementation. Incomplete implementation could arise if Member States were to implement only a subset of the agreed policy measures by August 2026. The 2024 country-specific recommendations issued under the European Semester therefore call on many Member States to accelerate the implementation of their RRPs. However, speeding up implementation of the plans is not sufficient for the RRF to achieve its full potential. Member States will need to ensure that speed does not come at the expense of the quality of measures implemented. If a trade-off between speed and quality were to emerge, prioritising quality over speed would help ensure the effectiveness of the reforms.

By taking targeted policy action, euro area countries can ensure that NGEU-linked investments and reforms are implemented more effectively. Member States could redirect administrative resources towards implementing their RRPs and make more intensive use of available technical support at EU level. In addition, they could take advantage of the streamlining options offered by the European Commission’s updated RRP guidance, which include simplified reporting requirements and synergies between different audit procedures.^[6] Member States could also seek to identify targeted regulatory changes outside the RRF framework; this would facilitate the roll-out of the RRPs without overly absorbing administrative resources.^[7] Overall, such corrective policy measures would help improve reform implementation under the RRPs and might even alleviate any emerging trade-off between the speed and quality of RRP implementation.

3 Estimating the impact of the RRF on the euro area economy

Assessing how NGEU affects the euro area economy involves examining multiple transmission channels. Building on previous analyses, we will consider three primary channels: (i) the risk premium channel; (ii) the fiscal channel; and (iii) the structural reform channel. Given significant implementation delays, the fiscal and structural reform channels warrant re-evaluation.

The risk-premia effects that followed the announcement of NGEU continue to benefit recipient countries. The period following the Franco-German recovery fund proposal was marked by notable spread compression among beneficiaries. Bańkowski et al. (2022) concluded that a sustained reduction in risk premia could permanently increase euro area output by up to 0.2%, with Italy and Spain experiencing the most substantial benefits. We have refrained from updating this evaluation, as no significant developments warranting reassessment have occurred since then.

The fiscal channel operates through increased public expenditure, primarily directed toward capital expenditure through government investment and capital transfers. For analytical purposes, both categories are treated as government investment, as NGEU-induced capital transfers are typically dedicated to private entities, such as railway companies, that are executing projects similar to public investment. The economic impact manifests through short-term demand stimulus during execution and long-term productive capacity enhancement through capital stock increases.^[8]

The structural reform channel, crucial for long-term economic potential, needs to be reassessed owing to implementation delays. These reforms boost potential output by improving the efficiency of resource utilisation. As the reforms extend beyond cyclical factors, they are not expected to have a direct impact on inflation – as a result, this study focuses primarily on output effects. However, the uncertainty inherent in quantifying structural reforms warrants caution when interpreting estimates.

Models and tools

The analysis of the economic impact of NGEU makes use of two large-scale macroeconomic models: the ESCB’s public debt sustainability analysis (DSA) tool and input from a Eurosystem expert group. Applying multiple approaches in this study allows us to tailor methodologies to address the key questions. The use of two different types of macroeconomic model also makes the results more robust and enables us to highlight the specific channels driving particular economic outcomes.

The macroeconomic effects of the fiscal channel are assessed using the EAGLE and the ECB-MC model. EAGLE (euro area and global economy) is a global dynamic stochastic general equilibrium (DSGE) model with forward-looking expectations, while the ECB-MC (multi-country) model is a semi-structural model of the five largest euro area countries which balances empirical fit with theoretical foundations.^[9] Both models demonstrate fiscal multipliers for government investment of approximately unity, aligning with literature that identifies public investment as a potent fiscal instrument owing to its direct impact on GDP and enhancement of productive capital. However, the models exhibit important differences in their expectation mechanisms: EAGLE’s forward-looking approach enables prominent anticipation effects, while ECB-MC’s backward-looking expectations largely preclude such effects, leading to distinct simulated outcomes, especially when it comes to price dynamics.

The analysis is complemented by two additional tools which shed light on potential output and debt-to-GDP ratio effects. A Eurosystem expert group made up of staff from seven euro area central banks has provided an assessment of NGEU’s impact on euro area potential output, considering both reforms and investments across all NGEU instruments. Furthermore, the DSA tool estimates NGEU’s impact on government debt-to-GDP ratios through a detailed decomposition of debt dynamics.^[10]

Data and scenarios

The quantification of the fiscal impact of RRF-funded expenditures relies on data collected by ESCB experts. The data captures essential programme characteristics, including composition, implementation timeline and the distinction between additive and substitutive projects. Differentiation along the last dimension is crucial for identifying projects that would have occurred independently of the programme, thus preventing overestimation of macroeconomic effects.

The quantification is based on scenario analysis across two key dimensions: fund absorption rates and public capital productivity. For absorption, we consider both full absorption by 2026 and an alternative scenario maintaining the observed 50% absorption rate, reflecting implementation challenges (Chart 5, panels a) and b). Regarding productivity, the baseline assumes a Cobb-Douglas production function parameter of 0.1 for public capital in EAGLE, with alternative scenarios of 0.05 and 0.15, while ECB-MC treats public and private capital as equally productive.^[11] In practical terms, these different productivity parameters determine how effectively public capital translates into economic output: a higher parameter of 0.15 generates stronger economic benefits, while a lower value of 0.05 implies more modest returns from public spending.

Chart 5

Modelling assumptions on the absorption of the RRF programme

a) Share of RRF funds absorbed in 2021-2023	b) Euro area RRF planned spending
(percentage of total RRF payments)	(percentage of GDP)

Overall impact on the euro area economy

Our study finds that the NGEU programme could deliver substantial macroeconomic benefits for the euro area through various transmission channels. This section distinguishes between the impact on output and inflation via the fiscal channel, potential output gains from structural reforms and implications for the debt-to-GDP ratio.

The impact of the programme on the level of GDP is estimated to range between 0.4% and 0.9% above the non-programme baseline by 2026, with gains increasing to 0.8-1.2% up to 2031 (Table 2). This trajectory reflects two main drivers: initial gains due to the fiscal stimulus, followed by growth-enhancing effects created by structural reforms. The increase in benefits over time primarily stems from the growing returns of structural reforms, even as NGEU spending effects diminish. However, structural reform channel effects carry greater uncertainty than fiscal channel impacts. The output estimates exclude both the already-realised confidence effects stemming from the programme’s announcement and the minimal expected impact of private sector financing facilitation.

Impact of the fiscal channel on GDP and inflation

Our macroeconomic simulations indicate that NGEU-induced fiscal stimulus can generate significant gains for euro area output (Table 3). These gains are projected to range between 0.3% and 0.8% by 2026, the final implementation year, with persistent effects of 0.2% to 0.6% by 2031. This lasting impact reflects the durable nature of NGEU investment projects, which primarily target government investment and contribute to long-term productive capacity. Effects are particularly pronounced in the main beneficiary countries, including Italy and Spain, where gains are two to three times higher than for the euro area average.

The assumptions regarding both RRF fund absorption and productivity are important, with absorption being particularly decisive. In the low-absorption scenario, where implementation maintains the slow pace observed in the past, output gains halve compared with the full absorption scenario, both assuming medium productivity (Table 3, bottom row). Productivity assumptions also significantly influence final outcomes, with low and high productivity scenarios showing notable differences from the central case (Table 3, top rows). Governments aiming to maximise the programme’s impact should prioritise efficient projects offering the highest economic returns.

The output gains from NGEU are still largely to materialise, contingent on implementation catch-up. The programme has experienced significant backloading compared with the previous assessment, resulting in modest output benefits thus far. However, substantial resources should be deployed in the coming years. Assuming high absorption of the remaining funds, the catch-up in implementation should result in output gains that nearly double those observed to date (Chart 6).

Chart 6

Estimated impact of the RRF on GDP, assuming full absorption (euro area, Italy and Spain)

(percentage deviations from the non-programme baseline)

Regarding inflation, the analysis identifies a modest impact on the euro area (Chart 7). Our simulations suggest a peak difference of around 0.1 percentage points compared with the non-programme baseline. In the main beneficiary countries – Italy and Spain – effects could temporarily reach 0.3 percentage points. Inflation dynamics are largely model-dependent: forward-looking models like EAGLE show rapid demand-driven inflation offset by anticipated productivity increases, while backward-looking models like ECB-MC capture gradual price adjustments to demand pressures.

Chart 7

Estimated impact of the RRF on inflation, assuming full absorption (euro area, Italy and Spain)

(percentage-point deviations from the non-programme baseline)

The current assessment reflects significant time reprofiling compared with a previous evaluation. The 2021 assessment assumed ambitious and rapid implementation from the outset, with early output gains.^[12] However, implementation delays have pushed execution into the second half of NGEU’s lifespan, shifting the timing of the programme’s impact. Despite these delays, the magnitude of the overall effect remains broadly in line with initial estimates.

Impact of structural reforms on potential output

Updated estimates by an ESCB expert team suggest that NGEU could raise the level of euro area potential output by 1.0% by 2031 and 1.3% by 2033 if the RRPs are fully implemented. These estimates encompass the impact of both fiscal expenditure and structural reforms. The estimates are not identical to those presented for the fiscal channel in the previous section, since they are based on a different methodology and look at potential as opposed to actual output.^[13] Potential growth could be boosted by 0.10-0.15 percentage points per annum over 2020-2033 (Chart 8). Until around 2027 a significant part of the impact is expected to arrive via the capital contribution, representing the impact of investments. Afterwards, the largest part of the impact is expected to operate via structural reforms, mostly affecting the contribution of total factor productivity to potential growth, and to some extent the labour contribution. These estimates cover the impacts of both reforms and investment.^[14] Moreover, the estimates include the RRF as well as the other NGEU instruments.

Chart 8

Impact of NGEU on potential output in euro area 11

(Left-hand scale: percentage-point deviation from counterfactual; right-hand scale: percentage deviation from counterfactual)

The updated estimates indicate a smaller impact of NGEU on potential output over the period 2020 to 2030 than estimated in 2022.^[15] The ex-ante exercise expected a 0.5% impact on the level of euro area potential output by 2024. In the updated exercise, the estimated impact in 2024 is only 0.2% and the long-term impact of 1.3% is expected to materialise in 2033 instead of 2030 (Chart 9, panel a). The delay is also visible in the expected impact on potential growth: in 2022-2023, the growth impact is estimated to have been around half of what was originally foreseen. A lower growth impact is also expected over the long term, that is, 2025-2030 (Chart 9, panel b). The smaller expected impact on potential growth also reflects the fact that the previously anticipated effects of investments hardly materialised in 2022-2023, with 2024 being a transition year. From 2025 onwards, a pick-up in the impact on potential growth is expected as structural reforms start having an effect on potential growth. In the most recent update, however, this impact is also estimated to be slower. Overall, the lower and delayed impact stemming from investments and the lower impact coming from structural reforms leads to a smaller impact on the near-term potential growth profile than in the initial estimates.

Chart 9

Impact of NGEU on euro area potential output: 2022 vs 2024 exercises

(percentage deviation from counterfactual)

The revisions to the potential output estimates mainly reflect a backloading of previously expected effects on account of observed implementation delays. In fact, the long-term estimates regarding potential output growth converge to a similar level in both estimation vintages.^[16] The differences between the two vintages mainly lie in the time profile over the short to medium term. This reflects the assumption of the ESCB expert group that the RRPs will eventually be fully implemented, despite the delays observed in the first half of NGEU’s envisaged lifespan. Notwithstanding this, the downside risks surrounding the potential output baseline estimates have increased since 2022 owing to the observed implementation delays.

Impact on public debt and quality of public finance

The impact of the RRF on government debt-to-GDP ratios is estimated to be favourable and significant for the main beneficiary countries, as well as for the euro area as whole. For the debt impact, the analysis starts from the June 2024 Eurosystem staff macroeconomic projections under the assumption that all currently expected RRF effects are at play, including a GNI-based repayment as of 2028 (see Section ‎2.1).^[17] A counterfactual scenario without the RRF is built by subtracting all the RRF’s debt-reducing and debt-increasing effects. For Italy and Spain, the overall debt-reducing impact of the RRF is estimated to be around 7-8 percentage points in the central scenario assuming middle productivity (Chart 10). The overall impact on debt does not change significantly when applying high or low productivity assumptions. Turning to the whole euro area, the impact of the RRF on its debt ratio is also estimated to be favourable.^[18]

Chart 10

Estimated impact on the government debt of Italy, Spain and the euro area

(percentage-point deviation from baseline)

The effects of the RRF on government debt ratios operate via four main channels, as illustrated in Chart 11:

1. a direct channel with two opposite effects – (i) a favourable effect through the RRF grant component (recorded as a revenue, with a significant impact on the budget balance of the main beneficiary countries); and (ii) a debt-increasing effect via RRF loans. The latter is the only debt-increasing factor, although it has a lower marginal cost than it would if the individual countries, especially the high-debt ones, were to finance themselves on the market. As this second effect prevails, in net terms the direct channel increases the public debt ratio in the two main beneficiary countries (Chart 11, yellow bars);^[19]
2. a confidence channel via lower sovereign risk premia and, therefore, lower financing costs. This effect has been more pronounced in the case of Italy, where the spread vis-à-vis German Bunds widened more substantially at the beginning of the COVID-19 crisis. Therefore, the mere announcement of the NGEU agreement in May 2020 shifted the entire sovereign yield curve, including the long end of it, significantly downward (Chart 11, red bars);
3. the demand-driven stimulative impact of the RRF on the economy, which leads to higher government revenues and a higher real GDP denominator in the public debt ratio, consistent with the GDP and inflation impact as estimated by EAGLE under the different assumptions for productivity illustrated in Chart 6 and Chart 7 (blue bars);
4. the effects on the supply side, that is, on potential GDP due to investment and reforms. The more favourable impact on potential growth estimated for Italy compared with Spain partly offsets the larger debt-increasing impact of higher RRF loan uptakes (Chart 11, green bars).

Chart 11

Decomposition of the estimated impact on the government debt of Italy and Spain

(percentage-point deviation from baseline)

Although the favourable effects on the debt-to-GDP ratios of the main beneficiaries remain significant, this update points to a significant downward revision compared with initial ECB staff estimates. For Italy and Spain, the projected impact by 2031 has been revised down to 7-8 percentage points from 12-14, as per Bańkowski et al. (2022). This is mainly due to delays in implementation, which have reduced the impact on both budget outcomes and GDP. More crucially, these delays have led to a significant downward revision in potential GDP, affecting long-term debt projections.

Lastly, the RRF implementation may also be driving some improvement in the quality of public finance at the national level. Preliminary evidence on the changes in the composition of public expenditure in the main beneficiary countries suggests that the implementation of the RRF has resulted in a shift towards items with stronger effects on GDP growth, such as renewable energy, charging stations for electric vehicles, the digitalisation of small and medium-sized enterprises and artificial intelligence.^[20]

4 Conclusion

NGEU is expected to have a positive impact on euro area output in the long run, while the impact on inflation is expected to be relatively muted. Model-based estimates suggest that public expenditure and structural reforms linked to NGEU have the potential to increase the level of euro area GDP by around 0.4 to0.9% by 2026 and 0.8 to 1.2% by 2031. The estimation ranges reflect the prevailing uncertainty around key assumptions, most notably whether the planned investments and reforms will be implemented completely and effectively. The favourable impacts of NGEU are projected to contribute to a decline in the government debt-to-GDP ratios of the main beneficiary countries. On the nominal side, NGEU is only likely to have a muted impact on euro area inflation owing to countervailing demand and supply effects.

However, the expected positive impact on output is likely to materialise later than initially expected and subject to downside risks. Even the upper bound of the updated estimates of NGEU’s impact on the level of euro area output in 2031 is lower than what was envisaged in ECB staff estimates from early 2022. This downward revision largely reflects delays in the implementation of the national investment and reform plans. These delays, in turn, mainly reflect administrative constraints and the ramifications of the energy inflation shock following the Russian war on Ukraine. Despite the inflation surge, the programme’s real value has remained approximately stable through concurrent increases in RRF-related investment financing grants to euro area countries. Also, the projected long-run impact of NGEU on the growth rate of euro area output is largely in line with previous results. Therefore, the revisions to the output estimates overall constitute a reprofiling rather than a reassessment of NGEU’s long-run effectiveness. Given the transmission lags involved, it is arguably too early to draw firm conclusions regarding the effectiveness of NGEU-linked investments and reforms. Even so, the risk of ineffective or incomplete implementation of NGEU-linked investments and reforms has increased since 2022. The implementation delays observed so far, combined with the fixed end-date of NGEU, suggest that some projects could either be “rushed through” at the expense of implementation quality, or cancelled altogether.

By taking targeted policy action, euro area countries can ensure that NGEU-linked investments and reforms are implemented more effectively. Most notably, Member States could redirect administrative resources, make more intensive use of available technical support at EU level and identify targeted regulatory changes that would facilitate the roll-out of their NGEU projects. Such corrective policy measures might alleviate any emerging trade-off between the speed and quality of plan execution in the second half of the NGEU’s envisaged lifespan, that is, until August 2026. More generally, such policy efforts are vital to ensuring that NGEU can unlock its transformative potential and act as a catalyst for the modernisation and strengthening of the euro area economies.