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A big step forward for Europe. After four days of intense negotiations, EU leaders agreed on a â¬1.8trn package. With a â¬750bn post-pandemic recovery fund and a â¬1.074trn seven-year budget framework for 2021-2027, they resolved two key challenges facing the EU. They did so even earlier than we had expected, with a slightly smaller proportion of the funds paid as grants. Of the â¬750bn recovery fund, â¬390bn will be paid as grants, â¬360bn as loans.
The deal matters for six reasons:
1) With the biggest-ever effort of cross-border solidarity, the EU is sending a strong signal of internal cohesion. Near-term, the confidence effect can matter even more than the money itself.
2) The deal shows that the European Union is working. Loud controversies that end in somewhat complex but workable compromises are part of the game.
3) The EU and the Eurozone are not en route towards fiscal union. But they are taking a significant step towards stronger fiscal co-ordination when it matters. The deal sets a precedent. The EU issues debt in a crisis. Expect some common fiscal response to play a greater role in future crises as well.
4) Although Italy and other countries hit hardest by the pandemic did not get all their wishes fulfilled (a total of â¬390bn instead of â¬500bn as grants), the deal should help to contain the rise in anti-EU sentiment which had been quite noticeable in March and April when the EU was rightly perceived as not showing the required solidarity. The deal should strengthen pro-EU forces.
5) To some extent, the EU can use disbursements from the â¬750bn recovery fund as a carrot to goad Italy and other countries towards pro-growth reforms. After serious reforms in the erstwhile euro crisis countries (mostly between 2012 and 2015) as well as France in the last four years, Italy remains the only major country in the EU in need of a thorough economic overhaul. The deal raises the chance at least somewhat that Italy will take some steps to improve its growth potential and thus narrow the dangerous growth gap between itself and the remainder of the EU.
6) In their stride, EU leaders also settled the financial consequences of Brexit for EU finances.
For the first time, the European Union will be a major force on sovereign debt markets. The deal authorises the European Commission to borrow up to â¬750bn for the so called âNext Generation EUâ fund on the market. Net debt issuance will stop at the end of 2026. The bonds are to be repaid through the EU budget until the end of 2058.
The EU will try to spend the recovery fund money fast, at least by its own standards. 70% of the â¬390bn in grants will be committed in 2021 and 2022, the remainder in 2023.
Grants in 2021 and 2022 to be allocated on the basis of, among other things, average unemployment in an EU member state in 2015-2019. In 2023, unemployment criterion for grant allocation will be replaced by the GDP fall in 2020-2021.
The money matters. It will support the recovery of the EU/Eurozone economies with a pro-investment, pro-green and pro-growth tilt. But more importantly, it strengthens the cohesion of the region and may help to reduce political risks.
Holger Schmieding
+44 7771 920377
Florian Hense
+44 797 385 2381
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