European Commission president, Ursula von der Leyen, proposed on Wednesday (27 May) an unprecedented stimulus of €750 billion, mostly through non-refundable grants, with governments having a crucial role in deciding how the money will be spent.
The new recovery fund will include a total of €500 billion of grants, while the rest will be offered to governments via loans on favourable terms.
“Our willingness to act must live up to the challenges we are all facing,” von der Leyen told the European Parliament.
The fund is part of an updated multi-annual financial framework (MFF), the EU’s long-term budget. The MFF will mobilise an additional €1.1 trillion between 2021 and 2027.
In order to raise the €750 billion, the Commission will ask permission to the member states to borrow from the markets at record levels by increasing the EU’s own resources to 2%, up from 1.2% currently.
The EU executive intends to pay back the debt by spreading the costs over a long period of up to 30 years, and by introducing new EU taxes, including ‘green’ duties on carbon emissions or plastics, or a digital tax.
In order to have the MFF and the recovery fund up and running on 1 January 2021, the Commission said that an agreement on the main features of the package should be reached by summer.
The package announced represents the EU’s biggest fiscal stimulus in its history to overcome the deepest recession since the bloc came together nearly seven decades ago.
On top of the EU package announced today, member states have also adopted national fiscal stimulus measures totalling more than 3% of the EU’s GDP (around €420 billion).
In addition, the EU has offered €540 billion in liquidity assistance to member states and companies.
Von der Leyen said that the funds will benefit the most affected regions and sectors in particular.
As a result, the bulk of the grants will go to Italy, which could receive up to €82 billion and Spain (up to €77 billion).
But all member states could access the recovery funds. The Commission proposed an allocation key that will set a ceiling of the maximum amount of grants and loans each capital could access, as long as their national plans “tick all the boxes” and member states agreed, explained an EU official.
Von der Leyen’s recovery fund is along the same lines of the proposal made by Germany and France last week, supported by hit-hard countries such as Spain.
But the ‘Frugal four’ (Netherlands, Austria, Denmark and Sweden) oppose borrowing such a large amount and giving grants to the countries in need.
“By moving to the South and the East, the Commission has avoided any difficult decisions or compromises at this stage”, said an EU diplomat from a Northern country.
In his view, leaders have been set back “significantly” in their efforts to reach a compromise “fast”.
The approval of new taxes to repay the EU debt burden are also likely to be fraught. Member states have repeatedly failed to adopt digital taxes or a common consolidated corporate tax base.
Von der Leyen however found support among the largest groups of the European Parliament.
“Solidarity is back”, said the head of the European People’s Party (EPP) group, Manfred Weber.
In a concession to Northern countries, von der Leyen proposed that member states have a say in deciding on access to the funds.
National governments will have to present recovery and resilience plans for investment and reform, in order to access the bulk of the €750 billion.
Through these plans, the Commission aims to save and transform national economies.
Investment plans should be aligned with the Green and Digital transformations and respect the Rule of Law. Meanwhile, reform proposals should be “guided” by the country-specific recommendations issued by the Commission to member states last week.
Once the national plans are sent to Brussels, all member states will decide whether those investment and reform proposals are worth receiving the recovery funds via the ‘comitology’ procedure, which requires the consultation of national governments.
Von der Leyen decided to introduce the ‘comitology’ procedure to ensure “collective ownership” of the funds, so all member states are convinced that the EU is financing “the right priorities”, explained an EU official.
National plans would need to be approved by a qualified majority of member states (at least 15 member states representing 65% of the EU’s population).
The ‘Frugal Four’ said in their proposal for the recovery fund that there should be “a strong commitment to reforms and the fiscal framework”.
The blueprint sets the stage for one of the most difficult negotiations in the EU’s history.
“The positions are far apart and this is a unanimity file; so negotiations will take time. It’s difficult to imagine this proposal will be the endstate of those negotiations,” said a Dutch diplomat.
The stakes will also be high for von der Leyen herself. Following a difficult start of her mandate, the German president will try to protect the integrity of the euro and the internal market with her recovery plan, and by doing that regain the political initiative in a decade already deeply marked by the pandemic.
[Edited by Benjamin Fox]