July 21, 2020 / 10:34 AM / 23 days ago

Breakingviews - EU deal offers model for future crises

European Union flags flutter outside the European Commission headquarters, ahead of an EU leaders summit at the European Council headquarters, in Brussels, Belgium July 16, 2020.

MILAN (Reuters Breakingviews) - The European Union has moved on from its messy handling of the euro zone debt crisis. After intense talks, the bloc’s leaders agreed at dawn on Tuesday on a 750 billion euro stimulus plan backed by common funds to help countries fight the economic impact of the pandemic. Despite some concessions, the plan looks workable and creates positive incentives for reforms.

The deal was agreed after the longest ever meeting of EU leaders and involved some inevitable compromises. To appease rich nations led by the Netherlands, the bloc cut the amount to be disbursed as grants to 390 billion euros from the 500 billion euros originally proposed by the European Commission. Loans were hiked to 360 billion euros from 250 billion euros originally, potentially adding to the national debts of some hard-hit countries like Italy or Spain.

Yet, the agreement establishes some key precepts that will help the bloc better fight this and future crises. It endorses the principle of EU collective borrowing and allows for the transfer of funds, via grants, from rich to weaker nations. That helps countries most affected recover more quickly, reducing economic divergences within the EU. Most of the grants will be allocated using past unemployment rates as a reference, while a smaller portion will take the GDP hit from the pandemic into account. Goldman Sachs analysts estimate Italy and Spain will receive about 80 billion euros and 70 billion euros in grants respectively, equivalent to 4.4% and 5.5% of GDP.

Also, contrary to what happened during the debt crisis of 2010-2012, the funds won’t require harsh austerity demands like pension cuts or tax hikes, which deepened an economic recession in countries like Greece and Italy. The stimulus will instead be used to boost growth by investing in areas like the green and digital economy.

There will be collective oversight from the commission and other EU states to ensure the funds are well spent. But disbursements will be decided by qualified majority voting rather than by unanimity, reducing the likelihood of a stalemate. If one country objects to another’s spending, it can ask for a three-month review, slowing but not hindering the plan.

Despite some concessions, the EU has agreed on a good template for future crisis management. The result should be a stronger Europe.

Breakingviews

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