Allocation key for Next Generation EU instrument

In its answer to the European Parliament, the European Commission explains the grouping of the Member States in the modelling exercise for the Next Generation EU financial instrument. They also provide feedback on the use of the same allocation key for different parts of the package.

Unveiled by the Commission on 27 May 2020, Next Generation EU is a recovery instrument which will result in large-scale redistribution of funding across the Member States.
The analysis put forward by the Commission’s Directorate-General for Economic and Financial Affairs (DG ECFIN) aggregates an allocation key for the assignment of the EUR 750 billion in grants and loans.

1. For the modelling exercise, the Member States have been grouped into three groups on the basis of their per capita gross domestic product (GDP) and their debt-to-GDP ratio. Why did European Commission select just an output indicator? Why did it not include such additional criteria as a wealth indicator (gross national income), an environmental footprint indicator or the number of deaths linked to the pandemic?
2. The simulations put forward assume that the same allocation key applies to all parts of the package (grants, loans, additional provisioning for InvestEU). Why were different allocation keys not used for each part of the package, since their nature has different implications for net foreign assets and public debt?

Answers given by Mr Gentiloni on behalf of the European Commission:
The staff working document (SWD) accompanying the Commission proposals of 27 May 2020 identifies the economic and financial needs of Member States resulting from the pandemic. It presents a simplified simulation of a Recovery Instrument (RI) and was one of several elements that informed the Commission proposals.

The stylised simulations reported in the SWD are designed to quantify the macroeconomic effects of a large positive investment shock on the EU economy using the Commission’s QUEST model. The Commission has been transparent in disclosing the modelling assumptions, while trying to reflect as closely as possible – within the possibilities afforded by the modelling framework –, the key aspects of Next Generation EU (NGEU), including overall size and the blending of loans and grants.

Gross domestic product (GDP) and government debt-to-GDP indicators allow for clustering Member States in three groups. Since one of the main purposes of the simulation was to illustrate the estimated impact of the RI on exactly these two variables, the clustering according to the same two indicators appears fit for purpose. Other clustering methods are possible, but would not have necessarily increased the analytical clarity of the exercise.

For the purpose of the simulations, a provisional allocation key for the grant elements under the Recovery and Resilience Facility (RRF) was extrapolated to the whole EUR 750 billion RI, including its loan elements. This was done for pragmatic modelling reasons, as allocations under several instruments were not known at the time, as some statistics were not yet available.
Allocations for the other instruments under NGEU are different, reflecting their respective objectives. InvestEU is a demand driven instrument that does not foresee allocation caps.

For the document, please see here.