EU Recovery Fund Deal

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An agreement. The European Union has agreed at 5.30 am on Tuesday the biggest leap in its budgetary model since it established the multi-annual financial framework 30 years ago and doubled the resources earmarked for cohesion. The 27 partners of the Union, unanimously, have agreed to establish a reactivation fund to mitigate the economic damages of the covid-19 endowed with 750,000 million euros and a financial framework for 2021-2027 of more than one trillion euros. For the first time in the history of the EU, the grants will be financed with joint debt issues, a milestone in the budgetary evolution of a club that has never been so far on the path of a possible fiscal union.

“Deal”, the President of the European Council, Charles Michel, announced at 5.30 in the morning. A brief message in English on his Twitter account that ended five days of the European summit, one of the longest in the history of the EU. The announcement sparked an immediate cascade of statements and reactions, many of them placing emphasis on the scope of the agreement reached. “A historic day for Europe!”, The French president, Emmanuel Macron, one of the architects, along with the German chancellor, Angela Merkel, immediately proclaimed the largest financial pact in the history of the club: 1.8 billion in total , including the 750,000 million euros of the fund against the crisis of the pandemic. “It was not easy, but in the end we found ourselves,” said Merkel. According to the chancellor, “Europe has shown that it is capable of making its way in such a special situation.”

“It is the right agreement for Europe at the moment,” Michel said at the press conference after the last day of the summit. “We have shown that the magic of the European project works because when we think it is impossible, it succeeds thanks to cooperation and the will to work together, ”said the President of the Council after successfully concluding one of the most complex negotiations in recent years and in which he had at stake much of the credibility of a mandate released just eight months ago Along with him, the President of the European Commission, Ursula von der Leyen, promoter of the fund project, has described the agreement as “a great step forward.” “It has been almost 90 hours of negotiation, but it has been worth it” , added Von der Leyen.

The Prime Minister, Pedro Sánchez, has described the package as “an authentic Marshall plan.” “The European Commission will borrow for the first time in history to finance programs,” recalled Sánchez, who added that this is an “unpublished” event. Sánchez has detailed that Spain will receive 140,000 million euros (the equivalent of 11% of Spanish GDP) in six years. Of this amount, 72,700 million correspond to subsidies and the rest to loans. “It is an extraordinary boost”, added Sánchez, who insisted that it is a “great agreement for Europe and for Spain”.

As their Spanish counterpart, Giuseppe Conte and Mateusz Morawiecki have expressed their satisfaction for the financial injections that Italy and Poland will receive – €209 bln and €125 bln.

The lengthy negotiations, not without tension and friction between the partners, have resulted in a pact that partially cuts the half-billion-euro subsidy program proposed by the European Commission, but maintains considerable pulling power and avoids the threat. veto of any capital. And it marks a milestone in the evolution of the EU budget that will be very difficult to avoid in the future, especially in the face of crises of a magnitude such as that caused by the pandemic, with the largest falls in GDP since World War II. ECB President Christine Lagarde had warned that partners should seal an ambitious deal and not rush. Knowing the content, she considered that “the European Council shows that, when it is most needed, the EU takes a step forward to help the citizens of Europe”.

The plan agreed by the 27 will allocate 390,000 million to subsidies and 360,000 million to loans, 70% disbursed between 2021 and 2022. Brussels calculates that the sum of the fund, the next budgetary framework (1,074 billion) and the triple safety net of loans for systems of regulation of employment, health spending and guarantees to companies (540,000 million among the three mechanisms), will achieve a mobilization of resources equivalent to 17% of the Gross National Income (GNI) of the EU, higher than that undertaken by USA (15.9%) or China (4.2%) to respond to the pandemic.

But beyond the financial scope of the community reaction, the great importance of the pact on the merits lies in its unprecedented design. For the first time in its history, the European Union will go into debt, and also on a massive scale, to launch a subsidy and credit plan aimed at alleviating the impact of the crisis unleashed by covid-19 and to mitigate the risk of economic fragmentation between community partners. “It is the most important economic agreement since the creation of the euro,” said the European Commissioner for the Economy, Paolo Gentilloni.

Until now, the Union has never issued debt to finance a program of direct transfers from the central bank to countries in need, in this case, for suffering the economic consequences of the pandemic. Cohesion instruments, such as the structural funds or the common agricultural policy, are paid for with the annual contribution of the States and with the Union’s own income, such as tariffs. Aid for the pandemic, on the other hand, will be financed with red numbers amortized jointly by the States for 30 years.

The debt formula was taboo for countries like Germany or the Netherlands. But in the wake of the pandemic, German Chancellor Angela Merkel announced on May 18, along with French President Emmanuel Macron, a proposal to create a half-trillion-euro grant fund to alleviate the damage from covid-19.

Merkel’s turn caught both strangers and her own, including the French side, which was not expected such a concession. But above all, she surprised Rutte and her allies, who were trusting Berlin to curb any hint of debt mutualization, off guard when the pandemic opened the debate on Eurobonds and Coronabonds.

The formula proposed by Merkel and Macron, and incorporated into the Commission’s proposal, does not go as far as Eurobonds, but accepts that the Community budget is used, after expanding the spending ceiling to 2% of Gross National Income, to place debt in the markets and inject those resources in the form of subsidies.

EU works! EU functions! EU matters!

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