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The EU recovery fund: its implications for European economic recovery and revival

– Will the deal inevitably lead to the Union’s deeper economic integration?

By Emanuel Skog

“We did it: Europe is strong, Europe is robust, and above all, Europe is united” [1]. Those were the words uttered by the European Council President Charles Michel when reaching an agreement on the recovery package and the European budget. The agreement was struck on the 21^st of July this year and preceded a four-day marathon negotiation – the longest EU summit in almost 20 years [2]. Furthermore, the summit also functioned as a litmus test regarding the capability of the Union to overcome deep and firmly entrenched political divisions [3]. The direct response from European markets was a positive one – which saw major indices’ gains and the euro rising against the U.S. dollar [4].

To assist in the restoration of the economic and social destruction wrought by the coronavirus pandemic, the European Commission proposed a substantial recovery plan for the Union in late May. The program is known officially as “Next Generation EU” [5]. Not only is the recovery fund a first regarding its budgetary scope; it also marks the first time the European Commission will undertake massive borrowing on the capital markets [6]. These unprecedented measures have the potential to further lead to the deepening of the Union’s long-term economic integration [7].

The nature of the recovery fund

The Union’s recovery fund is to be composed of 390 billion Euro in grants and 360 billion in loans. In addition, the fund will be attached to a new 1.074 trillion Euro seven-year budget – bringing the total financial package signed off on by the heads of state and government to 1.82 trillion EUR [8]. It is worth bearing in mind that the final agreed upon deal is a watered-down version of the Commission’s initial proposal – that would have included 500 billion Euro in grants advocated by both Germany and France [9]. However, it is still the first time in the Union’s history that the EU has offered grant aid on such a massive scale, which significantly will be collectively borrowed (by issuing Eurobonds or “corona bonds”) on financial markets [10].

As part of any negotiation, several sticking points needed to be bridged before the agreement was struck. They centred mainly on the “frugal” states – Austria, Denmark, the Netherlands, and Sweden and their opposition to the idea of the EU borrowing money and handing it out as budgetary expenditure for member states [11]. Their opposition also focused on the amounts of grants (fiscal transfers) for countries most negatively affected by the pandemic – their initial position was that only loans should finance the recovery fund [12].

Another main sticking point EU leaders clashed over was the control of the funds. Eventually, they agreed on the implementation of an emergency brake that will enable one government to give a warning at an EU summit if the recipient of the funds falls short of fulfilling promised reforms [13]. Diverse and significant sticking points aside – the final agreement underscored the unprecedented steps European politicians were willing to take to provide a united front and response in combating the economic and social calamity inflicted by the pandemic.

The way forward

The European Commission has been planning on establishing a yield curve of debt issuance with the aim to repay all the liabilities by the end of 2058 [14]. Of course, this threatens to be a drain on future EU budgets, and few member states are keen to increase their contributions to Brussels’ coffers. To address this problem the Union will increase the number of revenue streams it can collect. A novel tax on non-recycled plastic waste will be introduced next year. Furthermore, the European Commission is working on proposals on a digital tax and carbon border adjustment mechanism – collectively dubbed Own Resources [15].

The new EU recovery fund has revitalised the debate surrounding the completion of a eurozone banking union with a common deposit insurance scheme union according to some European central bankers [16]. Arguing that with the creation of a Eurobond the banking union is a sequel [17]. Other experts pushed back against the notion that progress towards a common eurozone deposit insurance scheme was preordained, citing divergent and underlying political factors [18]. Presently, it is too early to tell if this will come to fruition. However, it is impossible to argue against the significant economic and political originality, and the scope of the EU recovery fund.

Sources:

[1]. https://www.consilium.europa.eu/en/press/press-releases/2020/07/21/remarks-by-president-charles-michel-after-the-special-european-council-17-21-july-2020/

[2]. https://www.dw.com/en/unmasking-the-eus-coronavirus-recovery-fund-the-fine-print/a-54255523

[3]. https://www.ft.com/content/2b69c9c4-2ea4-4635-9d8a-1b67852c0322

[4]. https://www.bloomberg.com/news/articles/2020-07-21/european-stocks-rally-after-eu-reaches-deal-on-recovery-fund and https://www.theguardian.com/world/2020/jul/20/macron-seeks-end-acrimony-eu-summit-enters-fourth-day

[5]. https://ec.europa.eu/info/live-work-travel-eu/health/coronavirus-response/recovery-plan-europe_en

[6]. https://www.ft.com/content/713be467-ed19-4663-95ff-66f775af55cc

[7]. https://www.wsj.com/articles/eu-leaders-close-in-on-coronavirus-recovery-plan-deal-11595274568

[8]. https://www.politico.eu/article/eu-leaders-reach-deal-on-coronavirus-recovery-fund/

[9]. https://www.ft.com/content/2b69c9c4-2ea4-4635-9d8a-1b67852c0322 and https://thespectator.info/2020/07/21/european-union-leaders-agree-on-2t-recovery-spending-plan/

[10]. https://www.dw.com/en/unmasking-the-eus-coronavirus-recovery-fund-the-fine-print/a-54255523

[11]. https://www.ft.com/content/713be467-ed19-4663-95ff-66f775af55cc