Financing Europe’s Future: European leaders secure mammoth post-pandemic recovery package
July 24, 2020
3 min read
What's going on here?
After a marathon meeting, European leaders have agreed a €750bn package to help Europe recover economically from COVID-19. €390bn will be distributed in grants to member states that have been particularly hard hit and a further €360bn will be made available in low interest loans. Leaders also agreed a new seven-year budget which totals €1.074tn.
What does this mean?
The summit and its outcomes are remarkable for a number of reasons. Firstly, after 90 hours of talks it ranks as the second longest meeting of the European Commission ever (second only to a summit in 2000 which paved the way for expansion of the bloc). More importantly, the €750bn package agreed will see the European Commission borrowing from capital markets the first time (lenders will include commercial banks, national banks (e.g. the Bank of England) and international banks (e.g. the European Central Bank)).
The summit pitched the nations hardest hit by the pandemic (such as Italy and Spain) against the “frugal four” (Austria, Denmark, the Netherlands and Sweden) who made the case for less drastic economic intervention. The latter group’s assent was secured by a guarantee from the European Commission that these nations would enjoy larger budget rebates, i.e. significant discounts on the money they pay into the EU.
What's the big picture effect?
The recovery package is a landmark moment in the history of the EU. In March 2020, Europe became the coronavirus epicentre of the world and as a result the EU’s GDP (the value of all goods and services produced within member states) is predicted to fall 7% in 2020 and 6% in 2021. It was therefore imperative that the leaders acted decisively, which by all accounts they have. The Commission moved with a speed and resolve (90-hour meeting forgiven) that many detractors would have thought impossible a matter of days ago, taking a decidedly proactive approach. In contrast, in the aftermath of the 2008 financial crisis the response of European countries was characterised by national governments acting alone (e.g. the UK government’s move to part-nationalise RBS by buying a majority shareholding).
The recovery package represents a hard-fought compromise for European leaders, with member states prioritising different interests. For the likes of Spain and Italy, the imperative was to secure generous grants to resuscitate devastated economies. They will cite the Commission’s decision to borrow from capital markets for the first time as a significant victory. On the other hand, the fiscally conservative “frugal four” secured valuable concessions in the form of budget rebates, which means they will contribute less to the recovery package in the long run. Of course, it is also in this group’s interests that the bloc as a whole prospers, so they may have secured the best of both worlds.
Another faction that will consider itself victorious is the Visegrad Group (namely Hungary, Poland, Czechia and Slovakia) who resisted an attempt by other states to limit disbursements of the €750bn to governments who respect the rule of law. In recent years Hungary and Poland have been the subject of actions to suspend the rights of member states that offend the EU’s founding principles after making moves to curb media freedom, attack civil organisations and limit judicial independence. For now, the Visegrad Group got their way, but a qualified majority of member states (representing 65% of the EU population) may impose such a condition going forward.
Two things must now happen to make the recovery package a reality. The deal must first be ratified by the European Parliament and later national parliaments must authorise the Commission to borrow from capital markets. From the outside looking in, the EU’s united front may come as unwelcome news to Brexiteers on home shores hoping to exacerbate discord to secure a favourable deal.
Report written by Sam Denison
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