GP Insights # 389, 25 July 2020
In one of its longest summits that stretched for over four days and lasted for 90 hours, the EU leaders on 21 July agreed to the long-awaited recovery plan to jointly borrow €750 billion. This is meant to respond to the COVID-19 pandemic, which killed 1,35,000 people across Europe and dented their economies.
The EU's recovery fund, to be composed of €390 billion in grants and €360 billion in loans, will be attached to a newly agreed €1.074 trillion seven-year budget and the Multiannual Financial Framework (MFF) thereby bringing the total financial package to €1.82 trillion. The bloc had previously attempted to agree on a recovery fund. However, it remained short of collective consensus over the nature and the number of grants to be given to each affected country.
What is the background?
First, the recovery fund aims to reset the euro-scepticism. Never before has the bloc agreed on an amount that is roughly two trillion dollars, but in saving the economy, the leaders have also aimed to save the political idea that is the European Union. The idea of regionalism has been shocked by the BREXIT, fading trans-Atlantic partnership, and lack of collective response to China. As the pandemic hit, this euro-scepticism was at its pinnacle, and the deal came to ease the falling stock markets, arrest the economic crisis and reset the euro-scepticism.
Second, collective borrowing and debt sharing by the EU. The recovery fund will be supported through borrowing from the market, and the regional organization is committed to sharing the debt together. While the EU countries have borrowed jointly on financial markets at a small scale in the past, including in response to the eurozone debt crisis in 2010 but this time the bloc has come together to borrow in large amounts. The question of how it is going to be paid back is important and risk-prone. Of the total, €360 billion is to be paid back individually by the states, and the remaining €390 billion will be collectively repaid by the EU.
Third, the historic moment off charting through distinct fault lines and a rare Franco-German partnership. The recovery fund comes after overcoming two major divides. The disagreements between the Northern and the southern countries over the extent of the loans had brought the talks to the edge of collapse on 19 July. In addition, the Frugal Four (Austria, Denmark, the Netherlands, and Sweden) had strongly opposed the idea of taking on debt to issue recovery grants. These divides were evaded after the portion of grants was reduced in favour of loans, and big concessions were agreed in the form of rebates that will cap the overall contributions to the EU budget. The working partnership between Macron and Merkel was a rare sight when the personal diplomacy between the two leaders surpassed the subtle competition for leadership within the bloc that worked in favour of the recovery fund.
What does it mean?
First, the plan is a symbolic demonstration of solidarity in response to the pandemic and economic shock. It redeems the EU institutions and marks the coming together of the national leaders for the regional reckoning of liberalism. At the sight of the virus contagion, the values of the open borders and cross border movement were deeply dented when panicked governments unilaterally shut borders and banned exports. The recovery fund plan is definitely a course of action ahead, but it still requires the member countries to ratify it. Furthermore, the possibility of countries like Poland and Hungary resisting the economic reforms that come with any EU grants and loans still remains.
Second, Europe sends a strong lesson in ways to contain the virus and also the role of a regional organization in coming together to save the day. Unlike any other regional organization in the world, the need to come together has evolved from the grassroots, and the European leaders responded to save the economy that is so deeply intertwined. Even though the importance of the nation-state, individualism, authoritarianism never left Europe and is deeply entrenched in the political discourse, in times of crisis the region has lessons for regionalism from the Concert of Europe to the EU.