21 July 2020

FT: Two cheers for Europe’s €750bn recovery fund

The agreement is far from perfect but the EU has moved with speed and resolve. ... Exceptional situations require exceptional efforts, said German chancellor Angela Merkel as she entered a fourth day of budget talks on Monday and, in the end, the EU made an exceptional effort.

After marathon and often fraught negotiations, the bloc’s leaders reached a momentous deal for a €750bn recovery fund, to help cushion the effects of a coronavirus-induced economic slump, as well as a new seven-year year budget worth €1.074tn.

For the first time, the EU’s 27 leaders have agreed, in effect, to establish a federal deficit as an instrument of macroeconomic crisis management. Brussels will borrow money on the debt markets and distribute it in large part as grants to hard-hit countries to help finance their reconstruction efforts.

It is a historic achievement, although not necessarily a permanent one. After strong resistance from the Netherlands, Austria, Sweden and Denmark, the €500bn in grants envisaged by the European Commission — building on a Franco-German plan — were slashed to €390bn. But most of the cutbacks come at the expense of additional spending on programmes for regional development, research into the green transition and funding for the European Investment Bank.

So the core facility, which channels recovery grants to damaged member states, will be largely preserved. The recovery fund will remove some of the pressure on the European Central Bank, which has shouldered most of the macroeconomic effort in the eurozone. Even before the EU funds start to flow, it will also encourage indebted southern members to do more to cushion their businesses and workers from economic fallout, reducing the gap with Germany’s vast support programme.

But the agreement is far from perfect. It may channel too much money to poorer states even if they have not been as badly affected by the crisis as others. A link between aid payments and respect for the rule of law is still to be defined. There is also a mechanism to delay cash disbursements to member states that appear to drag their feet on reforms, pending a three-month review by EU leaders. This could be a recipe for endless summit arguments, although it falls well short of the national veto sought by Dutch prime minister Mark Rutte, the frugal four’s ringleader....

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