EU projects’ viability in doubt

EU projects’ viability in doubt

The energy supply crisis and rising inflation are endangering the prospects of projects partly financed through the European Union’s Recovery and Resilience Facility, a report by Bank of America warns.

The absorption of available EU funds has always had a checkered history.

The existing macroeconomic conditions add to the burden: the energy crisis, constant inflationary pressures, Russia’s invasion of Ukraine all contribute to an expected economic slowdown in the second half of 2022 and likely beyond.

The infrastructure works and investments funded by the RRF were planned when prices and supply bottlenecks were very different, BoA notes. The rise in the cost of public works and the supply delays could derail the implementation of the investments.

The BoA report focuses on transport and construction, set to receive 18% and 8% of the RRF funds, respectively. Higher costs could well threaten these projects.

Many sectors expecting growth through the funded projects are highly exposed to energy sector developments. Rationing of natural gas next winter, now a very real possibility, is the major threat for the eurozone’s prospects and also for the RRF targets. Some of the sectors given priority in the national plans are especially dependent on energy and thus on supply disruptions. This could make absorption of EU funds problematic.

BoA also notes that current economic circumstances make it very difficult to attract private funds.

The member-states’ recovery plans differ significantly on the importance of direct state financing or capital transfers. Germany, Greece and Spain, for example, place greater emphasis on the state’s facilitating and supporting private investment than on state capital expenditure.

While private sector participation could whet the appetite for more private investment through loans on favorable terms, for example, the danger of less-than-robust demand is significant.

A recent European Central Bank survey about loans related to capital expenditure found that demand was especially anemic in the latest quarter. This, in turn, could hurt RRF fund absorption.

Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.