July 21, 2020 / 12:40 PM / 25 days ago

Political capital from EU recovery deal dwarfs cash prize

BRUSSELS (Reuters) - The economic recovery package agreed on Tuesday after a marathon EU summit ticks most of the political boxes sketched out by the bloc’s jubilant leaders - but its financial achievements appear far less substantial.

Greece's Prime Minister Kyriakos Mitsotakis, Spanish Prime Minister Pedro Sanchez, Portugal's Prime Minister Antonio Costa, Germany's Chancellor Angela Merkel and Romanian President Klaus Iohannis interact while wearing face masks during the last roundtable discussion following a four-day European summit at the European Council in Brussels, Belgium, July 21, 2020. Stephanie Lecocq/Pool via REUTERS

After 90 hours of quarrelling and haggling between richer northern and poorer southern states over the deal’s scope, the big prize for countries worst-hit by the coronavirus pandemic was a package of 312 billion euros ($357 billion) in non-repayable grants.

But this amounts to only some 0.75% of European Union GDP a year over 2021-23, when the funds are meant to be allocated - at a time when its economies are shrinking at more than ten times that rate.

The actual value of disbursals over the next two-and-a-half years, when recovery needs will be greatest, is likely to be lower still.

Because the 27-nation club is a slow-moving machine, less than a quarter of the grants will be allocated then, the Bruegel Brussels think tank estimates.

Carsten Brzeski, euro zone economist at ING Bank, called the deal’s likely economic impact “marginal.”

“Plus, given that the fund will only become effective on January 1, the money will probably not reach any economy before mid-2021. Pretty late,” he said.

However, there is justification in summit chairman Charles Michel calling the accord “a pivotal moment” for Europe and a “concrete signal” of its unity.

Brzeski said underestimating its political symbolism would be a mistake, as failure could have sown “another seed” for the eventual break-up of the euro zone’s monetary union.

CROSSING THE RUBICON

The EU has been buffeted over the past decade by debt and migration crises and, more recently, the turbulent exit of core member Britain and a lack of solidarity and coordination over its response to COVID-19.

The worry was that, with repeated disputes over policy and direction, the EU would only become more exposed to eurosceptic, nationalist and protectionist forces.

The accord, however, carries a weighty message of cooperative intent in marking the EU’s greatest stride towards closer economic integration in decades. Under it, funds will for the first time be raised from markets by the executive European Commission on behalf of them all to disburse as grants, not loans.

For many, crossing that Rubicon was huge.

Daniel Gros, head of the Centre for European Policy Studies in Brussels said the overall recovery fund of 750 billion euros in grants and loans may look small spread over many years, but it will come close to the total fiscal stimulus measures member states are making themselves.

He said that government spending will increase national debt, sooner or later generating taxes that will have to be paid by consumers. EU debt won’t have the same effect, and so it will have a stronger impact on demand than national deficit spending.

Amid the summit triumph over the hard-won deal on the recovery fund and the EU’s next seven-year budget, there were also concerns that the leaders had watered down their climate change and digitalisation ambitions.

Climate advocates said the final agreement was a mixed bag, with large sums earmarked for green investments, but cuts to key climate programmes and insufficient rules to ensure cash does not support polluting investments.

The package also scaled back significantly the digital budget crafted to help the EU catch up with the United States and China in key technologies, and navigate their escalating conflict.

Money is of course needed for the immediate economic meltdown, argued Erik Nielsen, chief economist of UniCredit Bank, but so is creating an environmentally and technologically sustainable economy.

“It seems that a number of political leaders may be missing the view of the forest here as they focus ...on the branches of the trees,” he said.

($1 = 0.8743 euros)

Additional reporting by Kate Abnett and Yun Chee Foo; Editing by John Chalmers and John Stonestreet

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