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The COVID pandemic, the invasion of Ukraine, the war between Israel and Hamas—the first years of this decade will go down in history for their intensity. But there is another event that has gone virtually under the radar. On the 27th of May 2020, the president of the European Commission, Ursula von der Leyen, announced an unprecedented economic plan: an injection of public money totaling more than €850 billion. Which, if properly invested, would put Europe at the forefront of technological progress once again. This money was called the Next Generation Funds.
"Next Generation EU is specifically, um, built for a sound answer to the young generation," she said. "But more important is that we, um, have a pact with the next generation that we say, 'Yes, we have to raise money now and invest it, but we will invest it in the European priorities that are so important for you—that is the European Green Deal and that is the digitization.'" This is of utmost importance for the young generation, so I want—uh—if they have to pay back partly that money, at least they should harvest and reap the benefits of these investments.
Shortly thereafter, former European Central Bank President Mario Draghi published his well-known report. This report made three things clear: The first is that Europe is increasingly poorer than the USA; the reason: lack of productivity. The second is that this lack of productivity is partly due to the fact that Europe doesn't have a capital market that allows companies to grow, and the few that do manage to do so are hit with taxes and regulations. And the third is that the European social model is untouchable. Policies such as the incredibly flexible dismissal—as those that allowed Facebook to lay off 10,000 workers in less than a month to adapt to a new era of AI—are not up for discussion.
So what did Draghi propose to solve it? Money, money, and more money. That is to say, to continue to fuel state-funded investment with mechanisms such as the Next Generation Funds.
So what's the problem? Well, you tell me. It's been more than four years since these funds were announced, and have you seen much of a result? Can't say that I have. And you'll say, "Well, you can't see these things with a naked eye." And I'd accept that argument if it weren't for the fact that we already have data to begin to conclude the obvious: Next Generation has been an absolute disaster, one of the biggest political calamities of the century. And in this video, we'll show you why.
The Next Generation Funds were unprecedented in Europe, for a start, because it is a simply phenomenal amount of money. For some countries, such as Greece, we're talking about more than 15% of GDP—that is more money than a normal country spends on pensions for a year and a half. And yes, Greece is a rather small country, but huge countries like Spain and Italy are going to take between 6 and 10% of GDP, which is more than they spend on education or healthcare. But this is not even the most significant thing; it's not just how much they're paid, but how. And no, I'm not talking about whether this aid comes in the form of loans or subsidies—which, by the way, are half and half. I'm talking about what the European Union has done to finance them: issue Eurobonds.
What is a Eurobond? Well, I'm sure that could be better explained by the man you see on the screen: Alexander Hamilton. Hamilton was the first US Secretary of the Treasury, and he found a country devastated by war. What's more, he didn't even find a country as such; the 13 colonies had just become independent, and many people didn't want to join together in a single country for fear of repeating the same history as under the rule of the United Kingdom. And in the midst of all these debates, Hamilton put a revolutionary proposal on the table. The United States was heavily indebted, but not all regions were equally indebted, and not all regions were equally wealthy. The solution: everyone should get together and negotiate as one, so that the wealthier regions would support the poor ones in order to move forward. Of course, with this backing, the colonies with less debt would lose out, but the land as a whole would be more reliable and would have to pay less interest.
So this is exactly the same thing that the European Union now wants to do—well, not what it wants to do, what it has already done: put together the government debt of the most solvent countries and the most wasteful ones and sell it all together in a single package. For that reason, many say that the Next Generation Funds have been Europe's Hamilton moment—a definitive step from being the European Union to, I don't know, something like the United States of Europe in financial terms. It's a great idea, isn't it? Well, no, because Europe is not the USA, nor do we live in the 18th century. Hamilton was able to pay off the debt without incident, but in today's Europe… well, look at one of the latest reports from the European Central Bank. During the first half of the six-year implementation period of the program (2021-26), the estimated impact of RRF-funded expenditures on Euro area GDP fell short of expectations. Believe me, I'm the first one who would like to say otherwise, but so far, the Next Generation Funds have been a major failure.
Back in 2023, it was estimated that these funds would increase the Euro zone's GDP by a mere 0.5%, but even so, the impact has only ended up being 0.15%. But that's not even the worst of it. According to studies by the European Commission itself and the UK's National Institute of Economic Research, the impact on GDP growth has not only been much lower than expected but also much worse, even compared to a pessimistic scenario. In other words, no one expected much from the Next Generation Funds, and yet they still managed to disappoint.
What went so wrong? Well, several things, one of them being inflation. While the Brussels bureaucrats were designing this plan, Europe was in the midst of the COVID crisis with hardly any economic activity. In other words, this plan was designed to stimulate economic activity in a scenario of inactivity and deflation. The problem? Well, between the bottlenecks that followed and the increase in private spending, inflation picked up, but it was the Next Generation Funds that finished setting the house on fire with more fuel to the fire, based on government spending and the printing of banknotes. Nevertheless, the bureaucrats must be credited with a positive point here: thanks to the fact that the allocation of funds was slow, the situation was prevented from being even worse—an unexpected success thanks to incompetence. Bureaucracy has to be good for something.
But of course, this brings us directly to the second problem: NextGen funds were so massive that no one knew how to spend it all wisely and so quickly. And what was originally intended as a stimulus plan to deal with the pandemic ended up coming years later when no one needed it. Let's take the example of Spain, one of the countries that received the most money. Between 2021 and early 2024, it received €80 billion. How much of that money made it into the real economy? Well, there were only 70% of the calls for tenders—some €56 billion. But pay attention, because of those €56 billion, only €32 billion were actually awarded—that is 40% of the total. And there's still one thing to keep in mind: some of the money already allocated is not really allocated; it has simply been awarded to regional governments so that they will be the ones to find where to spend the money. Can you imagine what a breeding ground this is for corruption and waste? Nothing better than a mayor eager to build roundabouts from Europe. It has been repeated that this is not just any stimulus plan, like the ones approved to build airports in the middle of nowhere during the 2008 crisis, but the reality: 72% of aid has been taken by 1% of the companies. Obviously, the large companies—in the end, they are the only ones that have the capacity to surf all the bureaucracy that is needed and also the ones that have the most muscle to meet the endless list of requirements and get closer to the wings of political power.
And if all this wasn't negative enough, we still have to come up against news like this: Italy seizes assets worth €600 million in connection with alleged EU recovery fund fraud. The funds were granted to fake companies by Semest, an Italian government-owned entity that was set up to help small businesses grow—in theory. Each project that wants to apply for Next Generation funding must be carefully studied to ensure that it will be a productive investment—in practice… well, in many countries, corruption is the order of the day. And pay attention, because here we're talking about pure and simple corruption. But there are other projects that, although technically legal… well, what can I say? They also border on corruption. Do you want an example? Well, take Italy's flagship policy: paying people to renovate their homes. Italy has spent $14 billion of Next Generation Funds on the upper middle classes changing their windows and upgrading to a more modern furnace. And if you look around, it's not even the least sensible use of the money: compost garbage containers in villages out in the middle of nowhere, bridges for wild boars to cross the road safely. I think you get the picture. In other words, the phrase "selecting productive investments" needs to be put in quotation marks.
Even so, all is not lost yet. The EU still has one secret weapon that we haven't revealed to you yet: the Next Generation Funds are not free, and we aren't just saying that because half of it will have to be paid back. We say this because the European Commission is demanding reforms from countries in order to grant them this money. What's more, the European Commission itself estimates that the long-term impact of these reforms will be even greater than the impact of investments—50% higher, in fact. But perhaps you could see it better in this other graph: in the first years, almost all the impact is in the blue bars, which basically refers to the impact of the new machinery that companies were able to buy with the funds. But as time goes by, this becomes increasingly irrelevant, and in its place comes total factor productivity, which is a metric that tells us how efficient we are. And here we need to consider one thing: the difference between the wealth of the US and Argentina is explained by only half a point in the growth of their productivity during the last 80 years. Or to put it another way: it's preferable to have a small but sustained increase in productivity than a boom of a few years in accumulated capital.
Of course, given what we've seen, the question is obvious: if investment estimates have been so bad, are they really going to get any better? Well, let's see. In theory, Europe is going to need more than 3,000 reforms to allocate all the funds. Easier said than done. But here are the reasons to be suspicious. I mean, does anyone really believe that Europe needs 3,000 reforms? Well, no. What is needed are two or three, but two or three very significant reforms. This is similar to when you don't want to study for an exam, but you feel bad if you spent the afternoon looking at Twitter, so you start cleaning your room to make it look like you're doing something. On top of that, 25% of the reforms are related to the green transition and the digital transition. Will these reforms improve productivity? Well, maybe, but so far they have achieved just the opposite. There are reforms that don't even try to pretend that they have anything to do with improving the economy. For example, among the demands for Spain to become more productive are things like giving €40 million to digitize the Prado Museum or passing laws that guarantee gender equality in sports. What constitutes good laws? Well, I don't get involved, but they certainly have nothing to do with the real conditions that were demanded from countries like Greece in exchange for the bailout in the banking crisis of 2012. And these are just amusing anecdotes, but the same thing happens with the more serious requirements. Spain had to guarantee the sustainability of pensions in order to collect a large chunk of the funds. Has it done so? No. They are still much more unsustainable than before the 2023 reform, and the patch they have put in is to raise taxes on young people even more. You know, Next Generation Funds: a sacrifice for today so that the young people of tomorrow can live better. The irony.
Even so, Brussels has written the check. And you're probably thinking, "Hey, if countries don't make significant reforms, the European Union will have to increase its demands, won't it?" Well, that question is all very well, but even if it were the case, the union has already issued more than 40% of the funds when only 20% of the targets have been met. In other words, the money is being distributed in advance. What incentive do countries have to tighten their belts if they're going to get the money anyway? Well, that's just it. The Next Generation Funds were supposed to finance super-productive investments and demand structural reforms that would make Europe great again, but we've had neither one nor the other. Investments have been slow and disappointing, and structural reforms are neither evident nor expected. If this was Europe's plan to overtake the US, let them get in line.
In fact, the US case is just the opposite. Joe Biden also approved several stimulus programs during the pandemic—some more short-term, others more long-term—but the execution was completely different. In the US, they opted to lower taxes and give money directly to the people without going through bureaucrats who choose one by one which projects deserve funding or not. The United States also created many incentives for companies to invest rather than financing these investments directly. As a result, not only did the US emerge from the crisis much earlier than Europe, but it also managed to attract much more productive investment in key sectors, such as microchips. Whether or not these investments will be profitable remains to be seen, but Europe has not even reached that stage.
And Europe doesn't have to be the USA to get there either. Take the case of Israel, which is a country with a welfare state, with universal healthcare, many government-funded universities, very well-protected workers thanks to unions, and all those things that Europe likes so much. But Israel opted for excellence: to have some top universities that were far, far better than those in the rest of the country, to support experimentation in research and development, and to do everything possible to attract global private investment.
We started this video by saying that NextGen funds were Europe's Hamilton moment, but in reality, the different countries can't even agree on having a true single market, so let's not even talk about deciding which countries' subsidies should go to or signing free trade agreements. But at this point, it's your turn. What do you think of the impact of the Next Generation Fund so far? And do you think it will really force countries to make serious structural reforms, or should Europe take a different path? You can leave me your answers down in the comments. And as always, don't forget that here on Visual Economic, we release new videos every week, so subscribe to this channel and hit the little bell so you don't miss any of our updates. If you like this video, like it, and I'll see you in the next one. All the best. See you next time.