7 Some illustrative scenarios
To illustrate a range of scenarios for each country’s share of EU GDP, and then the implied contribution to EU debt repayment , I consider 12 alternative scenarios for GDP per capita.
GNI scenarios
Longer-term projections are available for GDP than for GNI. Thus, I make assumptions about GDP per capita. To obtain GNI values, I assume that the ratio of GNI to GDP in 2020 will remain the same from 2021 to 2058.
I measure GDP per capita at PPP relative to the weighted average of nine higher-income EU countries: Austria, Belgium, Denmark, France, Finland, Germany, Luxembourg, the Netherlands and Sweden. As a baseline, the 2014-2025 trend (as reflected in the October 2020 IMF forecast) is extrapolated up to 2058, with one exception and two sensitivity analyses. The exception is Ireland, for which I extrapolate the trend in 2020-2025 to leave aside the extraordinary growth which boosted Irish relative GDP per capita from 114 percent in 2013 to 173 percent in 2020. Still, Irish relative per-capita GDP is projected to growth further to 196 percent by 2058.
One sensitivity analysis considers those 13 countries that have per-capita GDP at PPP below 75 percent of the average nine higher-income countries in 2020. Most of these counties were converging to the average of the nine higher-income EU countries, but it is uncertain to what extent this convergence will continue. For these countries, I set four alternative scenarios:
- Baseline projection of the 2014-2025 trend;
- A ceiling at 100 percent (ie by projecting the 2014-2025 trend, if and when relative per-capita GDP reaches 100 percent, it is expected to remain at 100 percent in the rest of the projection period);
- A ceiling at 80 percent;
- A ceiling at 90 percent.
The 100 percent ceiling would constrain seven countries: Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia.
The second sensitivity analysis considers Italy, the third largest EU economy. Italy has been falling behind during the past two decades and its economic prospects are uncertain. Given Italy’s large size, its future economic development will significantly impact the cross-country distribution of EU GNI. I consider three alternative scenarios for Italian relative GDP per capita:
- Baseline projection of the 2014-2025 trend (implying a decline from 77.6 percent in 2025 to 73.1 percent in 2058),
- Unchanged position relative GDP per capita at its 2025 level (which is 77.6 percent),
- Convergence from 77.6 percent in 2025 to 88.8 percent by 2058, ie closing half of the 2025 gap.
Thus, there are 4x3=12 alternative scenarios for GDP per capita at PPP.
Several other alternative scenarios could be considered, including for the other large EU countries such as Germany, France and Spain. Nevertheless, the twelve scenarios I consider already illustrate well the great uncertainty of the cross-country distribution of EU GNI in 2027-2058.
Further assumptions:
- The price level relative to the weighted average of nine higher income EU countries is assumed to change by the same magnitude as the change in relative GDP per capita. Eg German relative GDP per capita is expected to increase from 104.0 percent in 2025 to 104.2 percent in 2026, so the corresponding price level change is from 97.5 percent to 97.7 percent.
- Population: the median of the UN prediction interval is used for each country.
- Average nominal per-capita growth of nine higher income EU countries: 2 percent per year (this can be thought of as eg 1 percent per capita real growth and 1 percent inflation per year, or any other combination that adds up to 2 percent). Note this assumption only sets the absolute level of GDP and GNI, while for the repayment of NGEU, what matters is the relative position of each country in EU GNI.
With these assumptions, the nominal euro value of GDP can be projected up to 2058. By assuming that the 2020 ratio between GNI and GDP remains unchanged, I obtain scenarios for GNI.
As an example, Figure 7 shows Italy’s share of EU GNI under the twelve scenarios. It is useful to consider the example of Italy, because I built alternative scenarios for Italy’s future development. Also, since Italy is a large EU country, its share of EU GNI can have a significant effect on other countries’ shares of EU GNI. If Italian per-capita real income relative to the average of nine higher-income EU countries converges from 77.6 percent in 2025 to 88.8 percent by 2058, and countries that currently have less than 75 percent relative real incomes do not converge to over 80 percent, then Italy’s share of EU GNI could slightly increase from 11.9 percent in 2025 to 12.5 percent in 2058. But if Italian per-capita relative income continues its downward slide, while current lower-income countries continue their convergence processes, then Italy’s share of EU GNI would fall to 7.9 percent by 2058. The 7.9 percent to 12.5 percent range for Italy’s share of EU GNI in 2058 is rather wide and implies a major uncertainty about how much Italy would contribute to the repayment of EU debt.
Figure 7: Italy’s share of EU GNI under the twelve alternative scenarios, 2000-2058
Source: Bruegel.
Moreover, the range displayed in Figure 7 does not reflect the uncertainty in population developments, because the calculations use the median projection of the UN for all countries. Incorporating the uncertainty resulting from population projections would widen this range, as would incorporating the uncertainty about GDP developments in EU countries beyond the 13 lower-income EU countries and Italy that I already consider.
Overall, there is great uncertainty about GNI developments up to 2058.
Net financial benefit
I calculate the net financial benefit as the present value of gross financial benefit minus the present value of gross financial contributions. I calculate the 2020 present value of future benefits and contributions by using the country-specific government yield curves as the discount factor, eg the one-year yield to discount the 2021 benefits, the 20-year yield to discount the 2040 contributions, and so on. Thus, for countries with negative interest rates, such as Germany and the Netherlands, the present value is larger than the nominal euro values in the future, while for countries with somewhat higher interest rates, such as Italy and central European countries, there is quite some discounting of longer-maturity future obligations.
Financial contributions in 2027-2058 depend on each member state share of EU GNI in this period, for which I apply the 12 scenarios above. To simplify things, I consider only the two scenarios leading to the highest and the lowest shares of EU GNI for each country (these are labelled as ‘lower’ and ‘upper’ in Table 1) among the twelve scenarios I considered.
Note that the GNI scenarios differ substantially for Italy and for those central European member countries that experience rapid growth in 2014-2025 (according to IMF forecasts). But there is only one GNI scenario for the other member states and hence their share of EU GNI differs only because of the alternative scenarios for Italy and central European countries. Thus, for most EU countries, GNI uncertainty is not captured in my calculations.
NGEU benefits include cash transfers from the EU budget and many other direct and indirect impacts, ultimately leading to higher output, which means higher incomes (see section 2 for further discussion). I look at two scenarios for gross benefits:
- Only direct payments from NGEU to member states (assuming that the NGEU is a zero-sum game),
- Direct payments from NGEU plus GDP impact.
On the GDP impact, I consider one-half of the low-additionality scenario of European Commission (2020b). Beyond the overall impact on the EU, the Commission discriminated between three country groups: above-average income (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands and Sweden), below-average income with high debt (Cyprus, Greece, Italy, Portugal and Spain), and below-average income and low debt (Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). For the high additionality model, the 2026 impact is estimated at 1.0 percent, 3.25 percent and 3.5 percent, respectively, for the three groups, while the impact for the EU as a whole is approximately 1.8 percent. I assume that the economic impact on the three country groups is proportionally the same for the one-half of the low-additionality scenario in each year in 2021-2043, when the Commission estimate implies a positive impact. This leads to the following total cumulative economic impact expressed as percent of annual GDP: 3.7 percent for the above-average income group, 12.1 percent for the below-average income group with high debt, and 13.1 percent for the below-average income group with low debt. These values are simply the sum of annual GDP deviations from the baseline (expressed as each year’s GDP), yet for a proper assessment, I calculate the present value.
There are notable differences within the two below-average income groups in terms of the expected NGEU grants received as a share of GNI (eg Greece’s 11 percent vs Italy’s 5 percent, and Croatia’s 12 percent vs Malta’s 3 percent; see Figure 1). This likely implies different impacts within these groups. Nevertheless, I do not complicate my calculations further with country-specific economic impacts on NGEU, but use the group-average value for each group members.
Whether we consider NGEU a zero-sum game, or an instrument with positive economic impact makes a huge difference for assessment of the net benefit (Table 1). This finding highlights the importance of considering the economic impacts of NGEU. The overall ranges of net benefits are very wide, for example from -2.4 percent to +1.7 percent for Germany, from 3.1 percent to 14.9 percent for Italy, and from 1.4 percent to 15.5 percent for Poland.
When the economic impact is considered, all countries are net beneficiaries under the assumptions I made. The present value of net benefits is very large, over 10 percent of GNI for central and southern European members, and even over 20 percent of GNI for Bulgaria, Croatia and Greece.
Table 1: Some scenarios for the net financial implications of NGEU (present values % 2020 GNI)
Source: Bruegel. Note: alternative growth scenarios are considered only for Italy and several central European countries, but no uncertainty is considered for growth in some central and southern European countries and in all western and northern European countries, no uncertainty in the relationship between GDP per capita and the price level is considered, and no uncertainty in population projections is considered. Thus, the ranges presented in this table likely significantly underestimate the possible ranges. I use the country-specific government bond yields to calculate the present value of both future contributions to NGEU and future benefits from NGEU. Since information about the yield curve is not complete for several countries, I made assumptions to approximate the full yield curves. For central European non-euro members with floating exchange rates, I approximate the euro yield curve using the 12 November 2020 Hungarian euro bond issuance, which resulted in a spread of 1.18 percentage points over the German bund at the 10-year maturity and 1.88 percentage points over the German bund at 30-year maturity. For the other countries, I adjusted these spreads with the difference between their national currency borrowing rates and Hungary’s national borrowing rate. For Estonia, a country with negligible public debt, government bond yield data is not available, so I assume a small spread to Germany, equivalent to the spread paid by the Netherlands.
