At last, the European Union agrees on a recovery fund At last, the European Union agrees on a recovery fund\images\insights\article\flags-european-small.jpg July 23 2020 July 21 2020

At last, the European Union agrees on a recovery fund

After a heated summit, the bloc commits to a stimulus package.
Published July 21 2020
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European Union (EU) leaders finally reached a deal on a much-needed recovery fund. It marks the first time the bloc has come together on a fiscal plan, albeit on a one-time emergency basis. The agreement, finalized this morning, includes €390 billion grants and €360 billion low-interest loans to combat the recession due to Covid-19. The leaders also agreed on the EU’s next seven-year budget, worth €1.1 trillion, bringing the entire spending package to around €1.8 trillion ($2 trillion).

A deal of any sort is a good outcome given the long-standing debate between a group (led by the Netherlands) arguing for less stimulus and another (led by France and Germany) insisting on more.

At issue, specifically, was what proportion of the recovery fund would be earmarked as grants versus loans. An earlier proposal contained a higher proportion of grants at €500 billion along with €250 billion in loans. Only as the two-day summit rolled into two more days did signs point to the potential that a deal would be reached. Eurobonds will be issued to help support funding, and among the market’s reaction are that the euro touched a 6-month high and Italian sovereign spreads tightened back to levels from earlier in the year.

Not to be overlooked is a provision that would allow any country to raise concerns that another is not honoring promises to reform its economy. While this doesn’t grant any of the countries veto power in disbursing the funds, they could still delay the process. The plan also includes a condition to allow a weighted majority of EU governments to block payments to a particular country over rule-of-law violations.

The EU recovery fund disbursement won’t start until 2021, and the money borrowed as part of the recovery fund must be repaid by 2058. The plan says clearly that funds should be made available "for the sole purpose of addressing the consequences of the Covid-19 crisis." Countries have to submit recovery and resilience plans with the list of projects they want to finance to be assessed by the European Commission.

The next step in the process is to have the deal ratified by the European Parliament. While its ultimate passage is expected, each member country’s legislature needs to ratify the deal, so there could be bouts of high drama.

Tags International/Global . Coronavirus . Markets/Economy . Politics . Liquidity .

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