EU Reaches Agreement On Landmark COVID-19 Recovery Fund After Contentious Talks In Brussels

The 27-member European Union reached a deal on a historic 750-billion euro ($858 billion) stimulus plan to fight the impact of the COVID-19 pandemic

After four days of often contentious negotiations in Brussels, the landmark fund will be distributed in grants and loans. However, the amount that will be offered in grants -- 390 billion euros ($446 billion) was far below the 500-billion euro figure ($572 billion) initially proposed by France and Germany in May. These grants will be issued to nations hardest hit by the virus, particularly Spain and Italy.

The other 360 billion euros ($412 billion) will be payable in low-interest loans to members of the bloc.

The bloc will pay for the huge program by borrowing on international markets.

The recovery fund, which remains subject to ratification by the European Parliament, will be available starting in January 2021.

The EU also determined that net debt issuance will end in 2026 and that all the new debt will be repaid by 2058.

The next step will involve the individual member states outlining how they will spend these new funds, subject to approval by a qualified majority of their peers. (The Netherlands had earlier called for unanimous approval, but backed off)

“I am very relieved,” said German Chancellor Angela Merkel. “We have come up with a response to the biggest crisis the EU has faced.”

European Council President Charles Michel said on Tuesday that the deal will be viewed as a “pivotal moment” for Europe.

“Never before did the EU invest in the future like this," tweeted Belgian Prime Minister Sophie Wilmes.

“Europe, as a whole, has now a big chance to come out stronger from the crisis,” said Ursula von der Leyen, president of the European Commission, the executive branch of the EU. "Today we've taken a historic step, we all can be proud of. But other important steps remain. First and most important: to gain the support of the European Parliament. Nobody should take our European Union for granted."

Even Dutch Prime Minister Mark Rutte, who led the hawkish "frugal group" of states that wanted tighter controls on spending, praised the agreement, but admitted the talks were not always pleasant.

"We are all professionals, we can take a few punches," he said.

Portuguese Prime Minister Antonio Costa said: "While it's true that [the grants portion of the fund] could have had a slightly bigger dimension, the recovery plan is robust enough to respond to the current estimates of the coronavirus crisis."

The landmark agreement was generally praised by analysts.

“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,” said analysts at Berenberg Bank of Germany. “The EU and the euro zone are not en route towards fiscal union. But they are taking a significant step towards stronger fiscal coordination when it matters. The deal sets a precedent. The EU issues debt in a crisis. Expect some common fiscal response to play a greater role in future crises as well.”

Goldman Sachs analysts said they were “encouraged that [EU] 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.”

Separately from the recovery fund, the EU also set its next budget, which will total 1.074 trillion euros ($1.23 trillion).

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

The bloc also committed 30% of the combined recovery fund and the next EU budget to tackling climate change concerns. The EU has said it wants the region to be climate-neutral by 2050.

However, to pay for some of these new spending initiatives, European capitals will have to impose new taxes – some which will be linked to climate goals -- including a non-recycled plastic waste levy to be introduced on Jan. 1, 2021.