RRF boosts institutional quality in Italy, mixed evidence for other EU states
An ECB working paper finds that the EU's Recovery and Resilience Facility (RRF) has led to robust improvements in institutional quality in Italy. For other main beneficiary countries, the evidence is mixed, ranging from suggestive to limited.
Bayesian model reveals RRF impact on governance
The study employs a Bayesian synthetic control model with data up to 2024 to assess the causal impact of the RRF on institutional quality, measured by Worldwide Governance Indicators.
For Italy, the analysis reveals robust and economically meaningful improvements in institutional quality directly attributable to the RRF.
This effect reduced Italy's distance to the institutional quality frontier by an estimated 16.8 percent up to 2024.
However, cross-country results vary significantly.
Bulgaria, Croatia, and Greece show suggestive evidence of a positive RRF effect, though with higher uncertainty.
In contrast, Poland, Portugal, and Spain exhibit limited indication of improved institutional quality.
These differences align with national Recovery and Resilience Plan implementation speeds and reform mixes, reinforcing the findings.
Conditional funding for structural reforms
Launched in 2021, the RRF provides approximately €600 billion in debt-financed EU funds to Member States, conditional on achieving predefined milestones and targets.
The paper focuses on institutional quality—the effectiveness of formal and informal 'rules of the game' for economic activities—as a key supply-side transmission mechanism for the RRF's objective of promoting long-term economic growth.
Institutional quality is measured using a composite of four World Bank Worldwide Governance Indicators: government effectiveness, regulatory quality, rule of law, and control of corruption.
This approach offers early insights into the RRF's effectiveness, despite the program being ongoing and indicators adjusting gradually.
Conditional funding's mixed success
The study provides early evidence that conditional, reform-linked EU funding can improve institutional quality and long-term growth prospects.
However, the varied cross-country results underscore the critical importance of effective reform design and swift implementation.
For the RRF to truly deliver its potential, national plans must be robustly executed, as Italy's experience clearly demonstrates.