“Deal!”. It was 5.31 AM when the President of the EU Council Charles Michel announced today on Twitter that the 27 Member States have finally signed an agreement concerning the ultimate content of the Recovery Fund, at the end of four days of exhausting negotiations. The starting point was represented by the Commission’s proposal, which embedded the previous Franco-German understanding, eventually providing for €750bn of redistributive aids aimed at relieving the economic damages caused by the pandemic.
Deal!— Charles Michel (@eucopresident) July 21, 2020
It was crystal clear from the very beginning that two opposite groups with radically different points of view were facing each other in this extraordinary meeting of the Council. On the one hand, those countries which were hit the hardest by coronavirus such as Spain and Italy were calling for solidarity, demanding considerable quantities of grants with few or no conditionality. On the contrary, the so-called frugal nations (i.e. Austria, Denmark, Netherlands, Sweden and Finland) were looking exclusively for loans subjected to rigorous requirements. Within such framework, France and Germany were acting as mediators.
The resulting compromise turned out to be the following: a €750 billion package, made of €390bn of grants and €360bn of loans. Compared to the Commission’s proposal, the cumulative amount of aids remained unchanged, whereas the proportion of grants was revised downwards from the initial €500 billion. Italy was confirmed to be the biggest recipient of the Recovery Fund, as the country will get €209bn, of which €81bn would be in grants and €127bn in repayable loans. Spain was awarded €140bn, almost half of which to be paid back.
The winning tool to convince even the most inflexible Member States was a boost to budget rebates, that is lower quotas to be paid in the next EU Budget for the frugal countries, recalling the financial mechanism that reduced the United Kingdom’s contribution since 1985. In fact, the Council also agreed on the size of the common budget for the period 2021-2027, which will equal €1.074 trillion, slightly higher than the previous ceiling of €960bn set for the period 2014-2020.
Funds won’t be available until the first trimester of 2021, but they could be used retroactively to finance projects starting in February 2020. However, each country must prepare a national recovery plan to be approved by the Commission and the Council with a Qualified Majority Vote (while the frugals had asked for unanimity). The national recovery plan should explain the reforms that the Member State intends to implement using the funds it is entitled to. The frugal countries obtained a provision which allows a single nation to trigger an “emergency brake” on payments if it thinks a government hasn’t fulfilled its reform promises, the consequent evaluation would be carried out by the Ecofin.
Regardless of the details of the agreement, the ultimate draft approved unanimously represents a groundbreaking achievement in the European History. In fact, the deal opens the precedent for common debt borrowing as the European Commission will be raising capital on financial markets through the emission of common bonds to be repaid by 2058. As many observed, this could be the first step towards an effective fiscal union within the EU, which was inconceivable only four months ago.
Last but not least, it is fundamental to comprehend how the money will be actually spent. The European Commission affirmed that national reforms should focus on boosting growth through accomplishing green and digital transitions, while investing in key sectors, from 5G to Artificial Intelligence, and from clean hydrogen to offshore renewable energy. It is now up to national governments to develop proper policies to realize these objectives while persuading their partners as well as the Commission.