The last 6 days were a historic moment for the European Union. For the first time, its governments reached an agreement which goes beyond economic administration and liberalisation and enters the realm of an ambitious political project of economic stimulus. And they are doing it all together. For the first time, there is also a federal budget administered directly by the European Commission, although this was heavily cut as a result of the pressure from the so-called “frugal four”. This goes in the direction we recommended, a shared debt mechanism. The question now is, is this going to be enough to deal with the coronavirus crisis? First, let’s see what the Recovery Fund actually is, and then discuss what impact it is likely to have.

What’s in the Recovery Fund?

The EU countries will jointly borrow €750 billion in response to to the coronavirus pandemic. These few words alone are enough to give a sensation of the historic moment we are witnessing. It can be broken down into two parts:  €390 billion in grants and €360 billion in loans. Only the former will be used as an economic stimulus without the need to be repaid, while the latter will be a loan from banks with a low-interest rate, due to the fact that it will be covered by the entire community of member states. The allocations of recovery money will be divided among the countries according to the economic harm done by the pandemic. At the same time, it will also have conditions on how the money may be invested. Although the technical details of the agreement are not yet clear, it seems that the European Central Bank will not be the lender. This makes it unclear if the market will trust the bond and what the interest rate will be. The bonds will, it seems, have to be repaid through an increase in European taxation including a plastic tax on plastic consumption.

What was cut?

Here, we come to the downside of the agreement. The compromise entailed a curtailing of funds with respect to the original proposal of the European Commission. The cut impacted mainly upon the EU budget administered by the commission, that is to say, the budget administered at the European level. The initiative remains mostly on the national governments which will be nonetheless required to make certain reforms in order to access the money: energy efficiency; green new deal; digitalisation and other improvements which relate to the job market. The conditions will be then verified by the European Commission and will have to be approved by the European Council. Nevertheless, the cuts to the European Commission budget reduce the most innovative portrait of the initial plan, which regarded a European Commission administered programme of investment in innovation and Green policies. Horizon Europe was cut from €13.5 billion to €5 billion, Invest EU from €30.3bn to €5.6bn, Just Transition Fund from €30bn to €10bn, the rural development grant from €15bn to €7.5bn. Finally, the four countries who championed fiscal surveillance, as well as every other member state, could put a temporary halt to the administration of the economic help by proposing to the European Council a re-examination of the expenditure.

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Differences between the European Commission Proposal and the Final Agreement. Source: 

https://twitter.com/SMerler/status/1285538870340321280/photo/1

 

Is it going to work?

The answer to this question is that it depends on a lot of factors. It depends on how the national governments will spend this money, and if the way in which the bonds were structured will be found credible by the market (that is to say how much money the EU will be able to raise and at what rate of interest). It will also depend on both the technical regulations and what proportion of the bonds will be financed by cuts to the EU budget. In fact, part of the plan constitutes a re-allocation of previous sources rather than the creation of new ones. A more decisive intervention would have been better. Especially involving the ECB as a guarantor would have been particularly important. Also the resources destined to the green new-deal are insufficient. That said, it remains a first but important step towards a more active role of the European Union in the economy, and a step towards the creation of a fiscal union. This step was probably unthinkable only 4 months ago and signals a departure from austerity policies.