SNAPSHOT: Agreement on economic recovery package represents a major success for EU unity

SNAPSHOT: Agreement on economic recovery package represents a major success for eu unity

OVERVIEW

  • On 21 July, EU leaders reached an agreement on a historic economic package totalling EUR1.8 trillion worth of aid and a seven-year budget during a summit in Brussels.
  • According to a joint declaration by EU leaders, the ‘ambitious and comprehensive’ economic recovery programme will help address ‘an unprecedented crisis in the best interest of the EU’.
  • The package will involve the European Commission (EC) using its high credit rating to borrow substantial funds on capital markets through issuing bonds for the first time. Loans received as part of the programme will have to be repaid by 2058.  
ANALYSIS
  • The package will help soften the devastating economic impact of the coronavirus (COVID-19) pandemic; according to the EC, the EU economy is expected to shrink 7.4 per cent in 2020. A potential second wave later this year and associated restrictions could significantly hamper economic recovery.
  • A total of EUR750 billion will be distributed to countries hit by the pandemic as part of the 'Next Generation EU' recovery fund. Of this, EUR360bn will be in the form of loans and EUR390bn in grants (an initial Franco-German proposal announced in May was for EUR500bn worth of grants). The total amount of funds that will be distributed equates to almost 5 per cent of the EU’s annual GDP.
  • Spain is set to receive EUR140bn over the next six years, while Italy will get 28 per cent of total funds allocated or EUR209bn (around EUR81bn in grants and EUR127bn worth of loans).The symbolic importance of the agreement cannot be overstated. It comes amid growing criticism against the EU over an incohesive and uneven response to the pandemic. As case numbers grew in the early stages of the outbreak, some countries unilaterally shut borders with neighbours and others implemented export bans on essential medical equipment. In this sense, the deal will help restore credibility to both EU leaders and institutions.
  • There were occasions when negotiations were on the verge of collapse. French President Emmanuel Macron reportedly threatened to suddenly leave Brussels during the talks, fearing an impasse would prevail.
  • Failure to reach an agreement would have dealt a devastating blow to the European project and increase the likelihood of a two-speed EU economic recovery. This would have accentuated the North-South split, underpinned by structural differences between economies. For example, small and medium-sized enterprises, which generate most of the employment in countries such as Greece, Italy, and Spain, have been among the worst-hit from the crisis.
  • Both Macron and German Chancellor Angela Merkel deserve credit for spearheading the initiative. The French president in particular had a pivotal role in convincing Germany to reverse its long-standing resistance to mutualised debt, taken collectively by all member states.
  • During the summit, Dutch Prime Minister Mark Rutte was a central figure in representing the interests of the so-called ‘Frugal Four’ fiscally conservative countries, consisting of the Netherlands, Denmark, Austria and Sweden. Their support was eventually secured after leaders agreed to a substantial increase in rebates from annual EU budget contributions. Key beneficiaries include net contributors such as Austria, Denmark, Netherlands, Sweden, and Germany.The recovery funds will be distributed by the EC to sectors and regions most affected by the pandemic. The Frugal Four countries sought and successfully managed to reduce the portion of grants that will eventually be distributed. Another goal was met, which included tying loans to reforms aimed at improving economic resilience.The Frugal Four, alongside Finland, had also supported a version of the deal that would allow member states to withhold funding to countries that fail to adhere to EU rule of law standards.
  • Rutte praised an element of the deal that allows countries the option to trigger an ‘emergency break’ on payments if they consider a particular government has failed to meet promised reforms. Fund transfers from Brussels can be halted for up to three months but a final decision will be taken by the EC. An increase in the portion of EU customs duties that countries can keep for national budgets has also been agreed, a big win for countries hosting large commercial ports such as the Netherlands. 

FORECAST

  • The agreement will help finance national recovery plans and marks a step closer towards fiscal integration. For example, France will receive EUR40bn, helping it partly finance its EUR100bn economic recovery plan aimed at generating jobs and supporting hard-hit businesses.
  • Beyond the clear economic implications arising from the deal, it has also important political consequences. In southern European countries, political leaders can demonstrate that they were able to extract substantial funding on advantageous terms. By managing to lower the amount of grants allocated, the Frugal Four states can make a convincing case to taxpayers that their interests have been safeguarded.
  • More broadly, the breakthrough may provide greater momentum in the European project and confidence that member states are able to bridge important differences in times of crisis.
  • Another consequence is that pro-EU parties will now carry more political weight, allowing them to fend off increasing pressure from Eurosceptic movements in forthcoming elections.