EU edges toward massive stimulus package with new proposal

Bloomberg | Updated on July 21, 2020

European Union Flag (File photo)   -  Reuters

Granyts portion pared down to €500 billion; €360 billion to be disbursed in low-interest loans

European Union leaders are running over the final details of a €750-billion ($858 billion) recovery fund to help the bloc overcome the economic fallout from the coronavirus pandemic as a marathon summit stretches into its fifth day.

European Council President Charles Michel distributed the latest plan on Monday evening. It would see the bloc’s executive arm raise debt on behalf of the entire EU with €390 billion to be distributed in the form of grants to pandemic-hit countries, according to a copy of the proposal seen by Bloomberg. The money will be repaid from the joint EU budget through 2058.

The grants portion has been trimmed down from an initial €500 billion originally proposed by France and Germany and another €360 billion will be disbursed in the form of low-interest loans.

The 27 national delegations have been working since Friday to break an impasse between fiscal conservatives in northern Europe and a majority led by Germany and France who want decisive action to help the predominantly southern nations hardest hit by the recession.

With investors already pricing in an agreement after a series of bold announcements in recent weeks, leaders are under intense pressure to bridge their differences. At times the discussions grew heated, with several officials saying the whole negotiation was on the brink of collapse as familiar fault lines emerged between the member states.

“After lengthy talks last night, we worked out a framework for a possible agreement,” German Chancellor Angela Merkel said on Monday before the new plan was released. “Its progress and gives hope that perhaps today an agreement will be made, or at least that an agreement is possible.”

Deeper integration

At stake is not just the amount of money that will be given to countries, but the ability of the EU as a whole to offer meaningful solidarity to its members. If they can reach a deal on the plan, which would be financed by joint debt issuance, it would mark an unprecedented deepening of financial integration for the bloc.

Most leaders are seeking a decisive response from the bloc with more than 100,000 Europeans dead from Covid-19 and their economies battered by the lockdown. But a handful of fiscal hawks led by Dutch Prime Minister Mark Rutte have been pushing to reduce the total size of the stimulus package and to impose strict constraints on how it can be used.

Leaders have been warning that an accord is far from a given, though their aides have been sounding increasingly optimistic over the past few hours. All 27 member states need to agree before the plan can move forward.

While officials from all sides have suggested the newly proposed volume of €390 billion in grants would be acceptable, other aspects of the the latest compromise are still to be ironed out.

Democratic standards

The plan will have a provision to ensure that member states respect the rule of law and make funding conditional on upholding democratic standards. In the latest version, the European Commission would propose proportionate measures for those nations that breach EU rules on the issue and those would be approved by a qualified majority of capitals.

This has been a point of friction for Poland and Hungary, both of which have been accused by the EU of democratic backsliding. Hungarian Prime Minister Viktor Orban has even threatened to veto the entire recovery fund if the EU doesn’t withdraw an earlier probe into rule-of-law violations.

To smooth the issue, Merkel agreed with Orban that Hungary will take all the necessary steps for leaders to conclude the so-called Article 7 process, a German government spokesman said. Orban will have Germany’s backing in that effort, the spokesman added.

The document also seeks to strike a balance between Dutch demands that the plan have an iron-clad guarantee that the money will go, as intended, to projects that will upgrade their economies, and concerns by opponents of the idea that such a mechanism could delay vital tranches of funds.

The proposal specifies that a positive assessment of payment requests by the commission will be subject to the satisfactory fulfillment of the relevant milestones and targets. If, exceptionally, one or more countries identify serious deviations, they can request the matter be discussed by leaders in their next meeting, a process that should not take more than three months.

In what is likely to be the strongest bargaining chip to win over the group of rich nations is the amount they’ll get in cash rebates from the EU’s regular budget, thus reducing their annual net contributions. The draft would see Denmark, Germany, the Netherlands, Austria and Sweden getting €52.8 billion in rebates over seven years.

Published on July 21, 2020

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