Monday

13th Jul 2020

Analysis

EU Commission's €1.85trn recovery package - key points

  • EU Commission president Ursula von der Leyen and EU council president Charles Michel will need to bridge the gaps between member states (Photo: Council of the European Union)

The EU Commission on Wednesday (27 May) unveiled its recovery plan and revised budget aimed at restarting the European economy after it came to a standstill due to the coronavirus lockdowns.

The EU is facing its biggest economic slump in its history and the commission hopes that a €1.1 trillion budget and a €750bn recovery package will help avoid the recession turning into a prolonged economic depression.

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Here are some of the key aspects of the stimulus package:

Recovery and budget

After much debate on joint-financing through eurobonds, or a large investment fund labelled as a new 'Marshall Fund', the EU commission proposed to fold the recovery efforts into the EU budget. The commission hopes this will help to make it quicker to have the money flowing to member states, and argued would take longer to agree and set up a new facility.

The commission has revised the long-term budget proposal itself to €1.1 trillion. In 2018, the commission proposed a budget of €1.135 trillion, or 1.11 percent of the EU's gross national income, EU Council president Charles Michel in February proposed a compromise €1.095 trillion. Michel's proposal when last discussed in person by EU leaders deeply divided member states.

The budget and recovery plan will kick in only next year. But the commission is planning to bridge that gap by raising the current EU budget for essential programs that will require a unanimous agreement by EU leaders and the consent of the EU parliament.

Own resources

The EU commission proposes to raise money on the capital markets against the backdrop of the headroom in the seven-year EU budget to give or loan to member states in need. The headroom is the leeway between the actual EU budget and own resources ceiling, the absolute amount the EU can request from member states to finance expenditure. This ceiling is to be temporarily raised to two percent of the bloc's gross national income, so that the commission can raise more money and then re-inject it into the EU budget. Raising the own resources ceiling will require approval on national level, exposing it to domestic political rifts.

Borrowing til 2058 and new taxes

The commission said that repaying the borrowed money would begin under the next-next EU budget after 2027, and last until 2058 "at least", seeking the maximum maturity of 30 years on the loans. It argues they could be refinanced with a combination of new own resources, such as the digital tax, or carbon border tax, taxes on large companies, if governments agree to them, without new money from EU countries.

The commission, however, also said that the borrowing costs for the grants will start to be paid under the 2021-2027 budget, with the estimated costs to be up to €17.4bn.

Grants and loans

From the money raised on capital markets, the EU commission plans to distribute funds through €500bn in grants - that do not need to be paid back by member states - and €250bn in loans - which will add to the debt burden of the countries supported through the scheme. Some countries, like the Netherlands and Austria, have rejected loans, fearing they would end up shouldering the burden of those debts for countries benefitting from the scheme. The balance between loans and grants is expected to be among the most contested issues between governments.

Conditions?

For member states to access the €560bn through the new, so-called Recovery and Resilience Facility, countries will need to draw up reform programmes in line with the EU priorities of digitalisation and greening the economy. The commission will then assess these programmes and other member states can have a say too. Once the programs are approved, money can be distributed. The new money will come with conditions attached. The national programs need to follow the commission's economic advice on deficit and debt.

Allocation?

The recovery money will be pre-allocated to member states, for instance Italy - one of the worse-hit countries by the pandemic - is set to receive €82bn in grants, €90bn in loans, Germany €28bn in grants but not loans. Traditional beneficiaries of EU funds, mostly in central Europe, have been less affected by the pandemic. They will be keen to watch if money is diverted from the money they hoped to receive to finance the recovery, creating another political hurdle in the upcoming negotiations.

More money

The commission's recovery plans also includes grants for municipalities, hospitals, companies, national authorities as a top up to traditional EU funds. The commission plans an extra €15bn to agriculture policy and increase funding for green transition with €32.5bn. The proposal also includes an €31bn element helping to boost private investment through EU guarantees and provide temporary equity support to viable companies throughout the sectors with the help of the European Investment Bank. The commission also plans to put more money into health care, and the EU-level medical stockpiles which the commission could buy directly from the market, not only through member states.

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