Briefing Paper N.2

Introduction

The Next Generation EU (NGEU) initiative, launched in the wake of the COVID-19 pandemic, represents a historic shift in the European Union’s governance framework. Central to this initiative is the Recovery and Resilience Facility (RRF), a €672 billion stimulus mechanism combining grants and loans aimed at fostering investments and structural reforms across member states. Unlike previous EU governance frameworks that relied, by and large, on punitive enforcement mechanisms, the RRF employs a ‘carrot and stick’ approach, tying financial incentives to the implementation of specific reform, as outlined in Country-Specific Recommendations (CSRs), proposed by the European Commission and issued by the Council of the EU. These recommendations form part of the European Semester, the key policy coordination mechanism, devised in the aftermath of the global financial crisis and designed to align member states’ fiscal and structural socioeconomic policies with EU objectives (Verdun and Zeitlin, 2018).

Several studies pointed out that, before the pandemic, compliance with CSRs was weak and declining (see Darvas and Leandro, 2015; Efstathiou and Wolff, 2023). The non-binding nature of these recommendations, coupled with a lack of credible enforcement tools, meant that member states often failed to implement the prescribed measures. The introduction of the RRF, with its conditionality-based funding model, sought to address these shortcomings. By linking financial disbursements to progress on recommended reforms, the RRF introduces a performance-based incentive structure that has the potential to reshape EU governance (see Zeitlin et al., 2024). 

This study investigates the impact of the RRF on CSR compliance and explores whether conditional funding has successfully incentivized reform implementation, as hypothesized by, for example, Corti et al. (2024). It also examines the factors—economic, institutional, political, and sector-specific—that influence compliance outcomes, contributing to a deeper understanding of how the NGEU has influenced the effectiveness of the European Semester.

Research Design: Tracking Compliance Over Time

To assess the impact of the RRF, this study adopts a longitudinal analysis, tracking changes in CSR compliance from 2021—the year before the new form of conditionality kicked in—to subsequent evaluations in 2022, 2023, and 2024. Unlike traditional methods that assess annual compliance both in absolute terms and in isolation, this research uses a dynamic ‘regatta’ approach, measuring progress over time for the same CSRs. This method provides a clearer picture of how RRF’s conditionality affects domestic reform implementation.

The analysis is based on the Commission’s CSR dataset, from which we extracted the 756 CSRs issued in 2019 and 2020 and their respective evaluations. As required by the supranational institution, these recommendations are, to a large extent, incorporated into National Recovery and Resilience Plans (NRRPs), a precondition for accessing RRF funding. Compliance is measured using the Commission’s qualitative multi-annual assessments, which rate progress on a five-point scale from ‘No progress’ to ‘Full implementation’. 

The annual evaluations are converted to a numerical scale (ranging from 0 [‘no progress’] to 1 [‘full implementation’]) and the difference with the 2021 assessment (i.e., the reform progress since 2021) is then fed into fixed-effects linear regression models as the dependent variable. The amount of RRF funding each country received as a percentage of its GDP represents the primary explanatory variable. Other factors, such as a country’s pre-pandemic problem load (measured by the average number of CSRs received annually from 2011–19), macroeconomic indicators (e.g., GDP growth, the unemployment rate), and sectoral dynamics, are included as controls. This comprehensive approach allows the study to isolate the impact of RRF conditionality while accounting for other influences.

Findings: The Effectiveness of Conditionality

RRF Funding and Compliance

The study finds a significant positive relationship between RRF funding and CSR compliance. Countries receiving larger RRF allocations relative to their GDP, such as Italy, Spain or Romania,  exhibited greater improvements in reform implementation. As shown in Figure 1, the predicted change in average assessment shows that member states receiving RRF funds equivalent to 19% of their GDP improved their compliance scores by an average of 0.17 points on the evaluation scale, compared to 0.06 points for those receiving less than 1%. 

All else being equal, this finding demonstrates the usefulness of conditional funding as a tool for driving national reforms, implying that dangling carrots can be more effective than wielding sticks. Yet, not all that glitters is gold: Croatia and Hungary are clear examples of insufficient commitment to reform, meaning that even generous allocations are not always a guarantee of national reform propensity.

Sectoral Disparities

Compliance outcomes varied across policy areas, revealing sector-specific dynamics. Reforms in financial and fiscal governance achieved above-average compliance, likely due to their supranational salience, alignment with well-defined benchmarks and strong institutionalization. Member states prioritized public investment projects and measures to enhance financial stability, addressing vulnerabilities exposed by the pandemic. For instance, Finland improved household debt management alongside robust public finances and even Croatia successfully mitigated risks in its banking sector.

In contrast, compliance with CSRs in energy and transport policies lagged. The geopolitical disruptions caused by the Ukraine war exacerbated existing challenges in the green transition. Nordic countries faced difficulties diversifying away from Russian fossil fuels, while Mediterranean states, such as Malta and Spain, struggled with delayed renewable energy adoption.

Initial Compliance and Problem Load

Member states with lower initial compliance scores in 2021 showed significant improvements. This ‘low-hanging fruit’ effect suggests that countries starting from a weaker baseline had greater room for progress, as early reforms are often easier to implement and receive lenient evaluations from the Commission.

Conversely, countries with a higher pre-pandemic problem load—those receiving more CSRs annually before 2020—performed worse in implementing reforms. This suggests that institutional bottlenecks and reform fatigue hindered progress in states with a long history of unresolved policy challenges. Here, the worst offender is possibly Germany. Its poor record in reform implementation has attracted the ire of the Commission, as the biggest and economically powerful member state should set an example for all others. 

Minimal Influence of Macroeconomic and Political Factors

Contrary to the findings of studies tracking absolute levels of compliance (see Guardiancich & Guidi, 2022; Mariotto, 2022; Efstathiou and Wolff, 2023; Guidi and Guardiancich, 2024), traditional macroeconomic indicators, such as GDP growth, unemployment, and inflation, had little impact on the differences in assessment under the RRF framework. Similarly, political factors, including electoral cycles and government ideology, played a negligible role.

Implications and a New Chapter in EU Governance

This study's findings underscore the transformative potential of NGEU’s conditionality mechanisms in addressing longstanding compliance issues within the European Semester. By linking funding to tangible reform outcomes, the Recovery and Resilience Facility has reinvigorated the EU’s governance framework, shifting the focus from punitive sanctions to performance-based incentives. The results demonstrate that financial incentives can be a powerful tool for driving national reforms, even in politically complex environments.

The eventual success of the RRF highlights its broader implications for the future of EU governance. While NGEU is a temporary measure, its framework offers a compelling case for the continuation of conditional funding in future coordination mechanisms. Still, sectoral disparities remain a challenge. The uneven progress across member states and sectors underscores the need for more tailored approaches to sector-specific reforms, especially in areas where structural and geopolitical obstacles persist.