The EU’s agreement on a €750bn recovery fund coupled with a new seven-year €1.074tn budget is a landmark moment in European integration. For the first time, the EU will be able to run a federal deficit to respond to an economic shock. It will raise commonly-issued debt and channel a large part of it in grants to countries most in need of a rebound from the coronavirus economic slump.
The fund is supposed to be temporary. Proposed new EU taxes, starting with one on non-recycled plastic waste, are unlikely to be enough to repay €750bn, let alone finance a permanent facility. It falls well short of fiscal union or a true Hamiltonian moment. Yet in just a few months the EU has embraced emergency fiscal transfers. They will help counter strains in the single market by allowing all governments to support workers and businesses through the recovery. More importantly, they will help underpin monetary union. In terms of market perceptions about the long-term viability of the euro, this deal is a game-changer.
After strong opposition from the “Frugal Four” of the Netherlands, Austria, Sweden and Denmark, the fund’s grant element was scaled back from €500bn to €390bn, which amounts to 3 per cent of EU gross domestic product. But the pot to be allocated to national capitals was preserved, so the fund retains its redistributive character. Spain and Italy could receive about 5 per cent of their GDP over three years.