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The Financial Express
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Sensitive European agreement reached


Sensitive European agreement reached

Most of the world thought that the EU leaders would be unable to reach a compromise with regard to finding a recovery solution in the post-Coronavirus world. However, such a recovery deal was reached after a marathon summit that saw more than 90 hours of talks and became the EU's longest since 2000. It lasted for four days. The "EU enlargement" summit in Nice 20 years ago lasted only 25 minutes. The agreement for a joint EU economic recovery fund is a victory for German Chancellor Angela Merkel and French President Emmanuel Macron who drafted an early outline for the proposal in May.

As agreed upon, the deal involves Euro €750 billion in grants and loans to counter the impact of the pandemic in the 27-member bloc. However, as anticipated, it was not easy. The discussion saw a split between nations hardest hit by the virus and so-called "frugal" members concerned about costs. At the end, as described by Summit Chairman and President of the European Council Charles Michael, it emerged as a "pivotal moment" in the form of being the biggest joint borrowing ever agreed to within the European Union. He also noted that "We showed collective responsibility and solidarity and also demonstrated our belief in our common future."

The deal centres on a Euro €390 billion programme of grants to member states hardest hit by the pandemic. Italy and Spain are expected to be the main recipients. A further Euro €360 billion in low-interest loans will be available to other members of the bloc. The package will now face technical negotiations by EU Members and will then have to be ratified by the European Parliament.

It needs to be noted here that a group of wealthy and fiscally "frugal" northern EU states -- Sweden, Denmark, Austria, the Netherlands, along with Finland -- had opposed extending Euro €500 billion in grants. This group had originally set Euro €375 billion as the limit. They had also underlined the importance of being able to include conditions that would facilitate the right to block requests. However, other members, such as Spain and Italy, did not want to go below Euro €400 billion. Eventually the Euro €390 billion figure was suggested as a compromise, and "frugal" nations were reportedly won over by the promise of rebates on their EU budget contributions.

Another interesting and significant factor has also surfaced during the discussions leading to the recovery deal. Some EU States, quite strongly has pointed out that disbursements need to be linked to governments observing the rule of law and democratic principles. There was remonstration in this regard from Hungary, backed by its euro-sceptic ally Poland. They threatened to veto the package if funds were made conditional on upholding democracy, but diplomats finally found a way forward.

The response of the European leaders has been warm and optimistic. French President Macron has described the achievement as a "historic day for Europe". European Commission President Ursula von der Leyen tweeted, "Today we've taken a historic step we all can be proud of. However, other important steps remain. First and most important: to gain the support of the European Parliament. Nobody should take our European Union for granted." Europe's most powerful leader, German Chancellor Angela Merkel appears to have been satisfied with the end result. German Foreign Minister Heiko Maas has hailed the deal as "a restart of Europe on the basis of solidarity". Dutch Prime Minister Mark Rutte, who led the "frugal group", welcomed the agreement, but acknowledged the fractious nature of the talks.

The battle for European solidarity has not been definitively won; however, it has been noted by some that the agreement seems to have by-passed potential required expenditure on certain areas of research and also projects related to climate variability and climate change.

Geo-strategists have also pointed out that the "Club Med" countries -- Spain, Italy and Portugal -- appear to be satisfied with the smaller size of grants that are being made available. They have also taken the opportunity to point out that the tough nature of the talks reflects the shift of power.

This whole newly created fund by the European Union will be generated by the European Commission borrowing in the capital market the required Euro €750 billion on international markets and then distributing it in the form of aid. It may be mentioned at this point that the arrangement was agreed to alongside another agreement pertaining to the bloc's next seven-year budget, worth about Euro €1.1trillion. The UK, which has left the EU in January, will not be involved in the deal.

 Several countries have already indicated how much of the EU's recovery package they expect will be made available to them. Having suffered severe coronavirus outbreaks, Italy and Spain feel that they should receive the most financial support from the EU. Country-wise allocations, quite understandably, have yet not been finalised and made public but it is being speculated that Italy, the original European epicentre of the pandemic, will be given about Euro €209 billion, which will be composed of Euro €81billion in grants and Euro €127billion in loans. This will be about 28 per cent of the fund. The deal is also expected to provide Euro €140 billion to Spain, of which Euro €72.7 billion will be in grants and the rest in loans. Greece has claimed that the EU would allocate it around Euro €72 billion to help deal with the fallout from Covid-19, but did not specify the composition in terms of grants or loans. France's government has mentioned that it is looking forward to receiving Euro €40 billion in subsidies as part of the deal.

One country -- Greece -- is particularly happy with what might flow towards re-invigoration of its economy. Greek Prime Minister Kyriakos Mitsotakis has indicated that the oval package for his country might surpass Euro €70 billion. Apparently almost half of this, Euro € 32 billion will come from the Next Generation EU Fund, with some Euro €19 billion in the form of grants and more than Euro € 12 billion in the form of loans. Over a five-year period, the grants alone are expected to boost about 2 per cent of Gross Domestic Product (GDP) per year.

It may be mentioned here that economists feel that the pandemic is likely to have claimed 8.3 per cent of the EU economy/ However, some European countries in the European south by the end of this year stand to lose even more with their recessions hitting the tune of 11 per cent. It may be recalled here that when the post-2008 global financial crisis bankrupted Greece a decade ago, the Eurozone area created a fund to bail it out -- eventually also bailing out Ireland, Spain, Portugal and Cyprus. It also needs to be stated that Next Generation EU marks the first time all 27 EU members are selling debt together, and it is the first time the European Commission is to be given powers to levy taxes and raise resources of its own to service that debt. This will help in the creation and generation of fiscal union and also pave the way towards Eurobonds.

Consequently, this basic agreement is bringing forth a sense of relief in international financial institutions. This is seen as positive given the comment of the International Monetary Fund. The IMF, it may be recalled, estimated that the post-2008 financial crisis cost the world roughly one-tenth of its GDP. It believes that this pandemic will cause a recession almost twice as deep. The implication is that the combination of recession and higher borrowing could lead to already unsustainable debt levels of countries' to rise -- in the case of the EU from an average of 75 per cent of GDP to 95 per cent. Analysts have noted that the emergence of the European Commission as a new debt-issuing entity is a form of relief to these countries because the Commission's debt does not appear on their balance sheets.

European nations appear to have done a better job of containing the coronavirus than the United States by closely collaborating on medical, travel and economic fronts. The European Central Bank has also pumped unparalleled amounts of money into economies to keep them going. 

It would be worthwhile to mention that this latest European deal to help address Europe's deepest recession since World War II has sent Asian shares to a five-month high. The main stock indices in Paris, Frankfurt, Madrid and Rome also were between one per cent and 1.5 per cent higher in early European trade after reports surfaced that a deal had been achieved. This also pushed the Euro to a 19-week high against the US Dollar.

One is tempted after this deal to call the glass slightly more than half-full. Britain should take necessary lessons after this. So should the United States. 

Muhammad Zamir, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance. 

muhammadzamir0@gmail.com

 

 

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