Eurozone July 21, 2020 / 05:51 am UTC

EU Cobbles Together Deal That Includes Grants

By Andrew Wroblewski, Giacomo Pallaro

In what turned out to be the longest such summit in history, stretching into a fifth day, EU leaders agreed early today on a what many may consider is a ground-breaking plan to jointly borrow € 750 billion to respond to the COVID pandemic.

The EU's recovery fund, made up of €390 billion in grants and €360 billion in loans, will be attached to a new €1.074 trillion seven-year budget, the Multiannual Financial Framework (MFF), on which heads of state and government also reached unanimous agreement. This brings the total financial package to €1.82 trillion. 

Indeed, the recovery fund centers on a €390 billion program of grants that is a significantly smaller sum than the €500 billion package originally proposed by Berlin. The balance between grants and loans is somewhat more skewed to the latter than perhaps markets and many politicians had hoped for, albeit with the initial response from the former very supportive–Italian BTP yields slipped to the lowest since February!

Partly because of factors such as Brexit, agreeing the MFF was particularly difficult this time around, with an effective financial gap of up to €10 billion a result of the UK no longer being a big budget contributor.

Despite EU Council leader Charles Michel stating that the deal sends a concrete sign of European action, very clearly the agreement has papered over clear divisions over the grants portion of the recovery fund, which had brought the talks to the edge of collapse at various times during the past five days (and nights).  This explains how the frugal four - Austria, Denmark, The Netherlands and Sweden - had to be partly pacified by garnering rebated to their budget contributions. This will be used to assuage doubtful political support in parts of each of their countries. As a result, Austria’s annual reduction will be doubled to €565 million a year compared with previous proposals, while the Netherlands’ rebate will jump to €1.92 billion from €1.57 billion.

In addition, Dutch Prime Minister Mark Rutte, secured an emergency brake that allows any country to raise concerns that another was not honoring promises to reform. But, the mechanism is time limited with the deal stating that EU leaders should “as a rule” take no more than three months to address any complaint and with the ultimate decision is formally left in the hands of the EU commission.

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