EU floats €2tn recovery plan to tackle economic woes

The bloc is looking at forming a €300 billion recovery fund and is planning to borrow €320bn euros to resuscitate the economy

The European Council headquarters in Brussels, Belgium. The European countries are looking at a $2.2 trillion recovery plan to lift the economies from a recession triggered by the virus. EPA

The European Commission is floating a €2 trillion($2.2tn/Dh7.9tn) plan for economic recovery ahead of leaders’ talks on Thursday as it seeks a way past the divisions of recent weeks.

The European Union’s 27 heads of government will hold a video conference to discuss the next steps in tackling the coronavirus pandemic after stringent lockdowns shuttered factories and halted travel, pitching the world’s largest trading bloc into the worst recession in living memory. The EU expects output to contract by as much as 10 per cent this year, according to an official.

As the losses mount, the richer northern EU members have been resisting pressure for new financing structures to help reconstruction in the southern countries hardest hit by the virus. The compromise proposal, set out in an internal commission document seen by Bloomberg News, would partially use the EU’s existing seven-year budget and also establish a new financing mechanism.

Under the plan, the EU would integrate a €300 billion recovery fund into the 2021-2027 budget and borrow €320bn euros on the capital markets. The document doesn’t say how the commission reached its €2tn total.

With more than 100,000 fatalities in the region, Europe has been hard hit by Covid-19 and the fallout from the crisis is tearing at the fabric that holds the disparate group of nations together.

France, Spain and Italy have called for the EU to introduce joint debt sales but governments such as Germany and the Netherlands have rejected so-called coronabonds over fear that they’d be stuck with the bill. The pressure to act is increasing as the costs of halting large swathes of the economy become clearer.

Germany’s public-sector deficit will widen to more than 7 per cent of gross domestic product this year due to extra spending to tackle the crisis, according to the government’s latest fiscal report for the EU. Public debt will also increase after several years of declines, rising to around 75 per cent of output with almost a third of the companies requesting wage-support aid.

Italy’s deficit could be more than 10 per cent of national output, pushing its debt-to-GDP ratio to more than 150 per cent, according to officials familiar with the government’s latest projections. Prime Minister Giuseppe Conte’s cabinet is expected to seek parliamentary approval to broaden the deficit by about €55bn, the officials said.

Spain is also considering additional pledges - to help companies pay their suppliers on time and stave off the collapse of smaller firms. The government already vowed to guarantee as much as €100bn in bank loans to help companies tackle cash-flow problems but there are concerns it won’t be enough with Prime Minister Pedro Sanchez looking to prolong a state of emergency through May 9.

Amid the contentious debate over financing a euro-area rescue package, the European Central Bank may emerge as a back door to burden sharing by absorbing the massive debt build up. Economists say that if done gradually the ECB could get around the legal ban on the central bank directly funding governments and be more palatable than the alternatives for countries such as Germany and the Netherlands.

Their concerns over how the costs of the crisis will be shared out have hampered EU efforts to organise a swift response.

The “roadmap” EU Council President Charles Michel distributed to national delegations ahead of the video conference contained no details on the amount, the specific objectives, the time frame or the nature of the investment needed to get the bloc back on track. Leaders aren’t expected to reach a decision this week and a final package may not be ready for at least six months, according to a French official.

Under the commission’s proposal, half of the funding would be given out as loans to countries while the rest would remain in the EU’s budget to cover the annual interest of about €500 million.

Other components of the proposal include:

• a temporary €300bn recovery fund in the bloc's long-term budget
• a €200bn recovery and resilience facility, retooled from an old convergence instrument
• €50bn in cohesion funds will be repurposed and front-loaded in 2021 and 2022
• two €200bn funds to protect the EU's internal markets