articles | 23 July 2020 | ServPRO Accountants & Consultants

EU marathon summit concludes in $2 trillion recovery fund

Following marathon talks in Brussels since Friday morning that lasted four days, 27 European Union (EU) governments have reached a breakthrough agreement over the new fiscal stimulus.

The heads of state discussed the proposed recovery fund and the next budget. However, differences on how to divide the amount between grants and loans, how to oversee its investment and how to link it with the EU’s democratic values extended the talks into one of the longest EU summits in history.

The European Commission has been tasked with tapping financial markets to raise 750 billion euros ($857 billion) to be distributed among the countries and sectors most impacted by the coronavirus pandemic.

The final agreement is to distribute 390 billion euros (out of the total 750 billion fund) in the form of grants and that net debt issuance will end in 2026 and that they will repay all the new debt by 2058.

Meanwhile, member states will have to develop their own plans outlining how they will invest the new funds. These “Reform and Recovery” plans will have to be approved by their European counterparts, by qualified majority.

In addition to the recovery fund, the EU said its next budget will fund initiatives between 2021 and 2027 and will total 1.074 trillion euros raising the total of both upcoming investments to 1.824 trillion euros.

European Council President Charles Michel said that he believes this deal will be seen as a “pivotal moment” for Europe.

European Commission President Ursula von der Leyen also said: “Europe, as a whole, has now a big chance to come out stronger from the crisis.”

“This recovery fund will help us to almost double the European budget for the years to come,” French President Emmanuel Macron said.

The recovery fund will be available from January 2021 and there will be no new bridge financing until then, as the EU has already taken other measures to provide liquidity to the member states since the crisis struck.

European governments will have to find new financial resources to repay some of the additional debt, and this includes new taxes.

The deal states that there should be a non-recycled plastic waste levy introduced as of Jan. 1, 2021, and that a carbon border adjustment mechanism and a digital duty should be in place by Jan. 1, 2023.

The latest deal from Brussels marks a precedent for common debt borrowing at the EU level.

“With the biggest-ever effort of cross-border solidarity, the EU is sending a strong signal of internal cohesion. Near-term, the confidence effect can matter even more than the money itself,” analysts at Berenberg bank said in a recent note.

Analysts at Goldman Sachs said that they were “encouraged that leaders were able to find agreement earlier than expected. Taken together, we therefore see the agreement as welcome, supporting our view that the Euro area is well placed to recover from the Covid shock.”


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