GP Insights # 362, 30 May 2020
A recovery fund worth 750 billion euro has been proposed by the European Union (EU) executive Commission on 27 May to help the European economy recover from the fallout of the coronavirus pandemic. The aid package will be made up of grants and loans for every EU member state, and of the 750 billion euro, 500 billion euro will be in grants and 250 billion euro will be in loans. In its official statement, the EU Commission called the recovery instrument as the 'Next Generation EU' which will integrate its recovery package with the next long-term EU budget.
What is the background?
First, the EU's collective step to rebuild economy. The economies across the 27-nations within the EU bloc have been ravaged by the COVID-19 pandemic, with several southern European states battling more national debts now than before. With nearly all member states breaching the EU deficit limits as they have rushed to spend on supporting healthcare systems, businesses, and jobs, this proposed plan will now allow the EU to borrow 750 billion euro on the financial markets, which would be repaid through future EU budgets.
Second, another institutional step by the EU in the post pandemic scenario. The large recovery fund comes at a time when the EU has been taking the institutional leader in the global search for the vaccine. The proposal for the recovery fund is another step towards how the institution envisions its response to the post-pandemic world.
Last, bypassing the EU north-south divide. The proposal from the European Commission follows the European Union Finance Ministers' deal of 500 billion euro rescue package for the severely affected European economies in the pandemic. The deal was however announced amid an impasse between the southern countries of Italy, Spain, France and the northern countries of the Netherlands, Austria, and Finland that has divided the EU for long.
What does it mean?
First, the EU's collective responsibility may not be as collective as it appears. The EC President Ursula von der Leyen has called the proposal "Europe's moment." But this moment represents a distinct and long drawn divide within the EU member states. While Spain and Italy with the highest number of deaths are particularly keen on grants rather than loans, the four 'frugal' states of Austria Netherlands, Denmark and Sweden have rejected the idea of cash handouts to relatively poorer countries. Poland, Hungary, Bulgaria and Lithuania, have refused to commit in either way until they've read the legal print.
Second, along with EU's proposal, a separate announcement by France and Germany together has brought the focus back on who is leading the bloc better. The Franco-German plan of a 500 billion euro aid package together will boost the EU recovery fund but at the same time will see competition for leadership between France and Germany.
Last, the EU recovery plan is based on dangerous borrowing from the financial market. The question that now remains to be addressed is who is borrowing, is it the EU or the individual country? Massive borrowing by the bloc might push the bloc together into debt. Hence rather than having national debts, the region will have to address a future scenario of institutional debts and sharing of the debt which might deepen the economic divide. The best way forward for the recovery would be to focus on providing the grants as direct transfer to the most affected country out of its budget.