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EU Clinches Massive Stimulus Deal to Bind a Continent Together
Viktoria Dendrinou
European Union leaders agreed on an unprecedented stimulus package worth 750 billion euros ($860 billion) to pull their economies out of the worst recession in memory and tighten the financial bonds holding their 27 nations together.
The agreement, in the early hours of Tuesday after more than four days of acrimonious negotiations in Brussels, required the unanimous approval of the member states and represents a victory for German Chancellor Angela Merkel and French President Emmanuel Macron, who drafted an early outline for the proposal in May. The emergency fund will give out 390 billion euros of grants and 360 billion euros of low-interest loans.
Almost a third of the funds are earmarked for fighting climate change and, together with the bloc’s next 1 trillion-euro, seven-year budget, will constitute the biggest green stimulus package in history. All expenditure must be consistent with the Paris Agreement’s goal of cutting greenhouse gases.
Angela Merkel, right, with Emmanuel Macron in Brussels on July 20.
Photographer: John Thys/AFP via Getty Images
The emergency funds will not only unleash vital financial support to the southern European economies hit hardest by the virus, but serve as validation that the bloc can offer meaningful solidarity to members in need. With more than 100,000 Europeans dead from the virus and an economy to rebuild, investors were looking for a display of unity to sustain the rally in stocks.
Read More: EUROPE REACT: EU’s Survival Instinct Overcomes Frugal Dissent
“I am very relieved,” Merkel said afterward. “We have come up with a response to the biggest crisis the EU has faced.”
Italian bonds climbed on the deal, with the 10-year yield spread over Germany, a key gauge of risk in the region declining six basis points to 151 basis points, the lowest level since February. The euro was little-changed at $1.1445, having hit a four-month high Monday.
Next Generation EU
Source: European Council
Italy, the original European epicenter of the pandemic, will likely be the biggest beneficiary from the plan and expects to receive about 82 billion euros in grants and about 127 billion euros in loans, according to initial estimates, a senior Italian official said. Provisions to combat sliding democratic standards in eastern Europe were weakened at the last-minute to get the deal over the line.
“This agreement sends a concrete signal that Europe is a force for action,” Charles Michel, president of the EU leaders’ council, said at a press conference afterward. “I believe this agreement will be seen as a pivotal moment in Europe’s journey.”
From left, Charles Michel, Ursula von der Leyen and Mette Frederiksen in Brussels on July 21.
Photographer: Stephanie Lecocq/AFP via Getty Images
The agreement did not come easy. Talks came close to collapse at several points over the summit as clashing national interests suggested consensus might be out of reach.
“Occasionally we can collide, but everybody can handle that, we are all professionals,” Rutte said after the meeting.
While governments all agreed that economic contractions of as much as 10% in some countries called for extraordinary measures, they bickered for hours over the final amount of grants, as well as how future disbursements could be scrutinized.
Budget Breaks“The EU is sending a strong signal of internal cohesion. Near-term, the confidence effect can matter even more than the money itself,” Berenberg economists Holger Schmieding and Florian Hense wrote in a report. While the agreement doesn’t amount to a fiscal union, it sets a precedent. “The EU issues debt in a crisis. Expect some common fiscal response to play a greater role in future crises as well,” they wrote.
Crucially, the final compromise also included budget rebates for four fiscally hawkish northern countries, reducing their annual net contributions. Denmark, Germany, the Netherlands, Austria and Sweden will get more than 50 billion euros in rebates over seven years.
In the end, it largely came down to offering enough sweeteners to that group, which had been pushing for a smaller package. To bring them on board, Merkel, Macron and leaders from Europe’s South agreed to reduce the grants envelope from 500 billion euros as proposed.
“We are 27 around the table and we managed together to produce a budget,” Macron said at a press conference alongside Merkel. “In which other political sphere in the world is that possible, is that done? None.”
— With assistance by Diederik Baazil, Boris Groendahl, Milda Seputyte, and John Ainger
(Updates with markets in the sixth paragraph)
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