EU leaders agree €750bn Covid fund after fractious 5-day summit

Deal will see cash disbursed as grants, loans to hardest-hit states

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Sharecast News | 21 Jul, 2020

Updated : 11:27

A bad-tempered European Union summit ended early Tuesday after almost five days, with leaders agreeing finally on an historic stimulus plan worth €1.8trln to save their coronavirus-ravaged economies.

The deal, whose potential failure threatened the very heart of the European project, now means the European Commission can press ahead and raise €750bn on capital markets for the 27 member states for a recovery fund.

The euro hit a four month high on news of the agreement, struck at 0315 GMT, which also includes a related €1.1trln budget from 2021-2027.

A deal will see the commission borrow €750bn euros using its triple-A debt rating, and disbursing €390bn in grants - less than the €500bn originally targeted - and €360bn in cheap loans, much to the annoyance of French President Emmanuel Macron, his German counterpart Angela Merkel and European Union chief Ursula von der Leyen.

Net debt issuance will stop at the end of 2026 and the bonds are to be repaid through the EU budget until the end of 2058. The EU will try to spend the recovery fund money quickly with 70% of the €390bn in grants committed in 2021 and 2022, the remainder in 2023.

BATTLE OF THE 'FRUGALS'

The fractious meeting revealed underlying divisions between members states, with wealthier northern countries insisting any bailout should take the form of a loan, angering poorer southern nations hit hardest by the pandemic, such as Spain and Italy, who accused them of grandstanding for domestic political gain.

Berenberg Bank chief economist Holger Schmieding said the EU was sending "a strong signal of internal cohesion", adding that near-term, "the confidence effect can matter even more than the money itself".

"The deal shows that the European Union is working. Loud controversies that end in somewhat complex but workable compromises are part of the game," he said.

The Netherlands led a group of so-called ‘frugal’ states with Austria, Sweden, Denmark and Finland in resisting calls from the Mediterranean group for non-repayable grants.

Italian Prime Minister Giuseppe Conte at one stage warned his Dutch counterpart Mark Rutte that he might become a hero at home but he faced being blamed by the rest of Europe for his lack of solidarity.

They also managed to secure bigger rebates from the next multi-year EU budget, , a reminder of 1984 when British Prime Minister Margaret Thatcher secured discounts on the UK’s outsized budget contributions.

The recovery plan now faces a potentially difficult passage through the European Parliament and must also be ratified by all member states, which will delay the disbursement of funds to economies in desperate need now.

Berenberg's Schmieding said the EU could also use disbursements "as a carrot to goad Italy and other countries towards pro-growth reforms".

"After serious reforms in the erstwhile euro crisis countries (mostly between 2012 and 2015) as well as France in the last four years, Italy remains the only major country in the EU in need of a thorough economic overhaul. The deal raises the chance at least somewhat that Italy will take some steps to improve its growth potential and thus narrow the dangerous growth gap between itself and the remainder of the EU."

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