Over the past 2-3 weeks, announcements have been made in respect of European economic stimulus. A Macron-Merkel instigated recovery fund proposal of EUR 500bn, was quickly followed by the European Commission’s (EC) announcement of its own ‘Next Generation EU’ plan topping it up to EUR 750bn over four years. They attached it to the Commission’s standard 7 year budget proposal for 2021 to 2027 taking planned borrowing to EUR 1.85 trillion. Of the EUR 750bn announced, around EUR 560bn will be used as a recovery fund of which EUR 310bn would be grants and EUR 250bn would be loans.
The EC proposes to pay it back gradually via EU wide taxes between 2029 and 2058, with Germany paying about 3.9% of GDP, Austria and Sweden 3.5% of GDP whilst the biggest recipients will be countries like Hungary whose GDP could be boosted by 22%. Whilst looking like a wealth transfer from frugal northern states to their southern problematic neighbours, German political support looks assured as a better alternative to the single markets dissolution which would have far harsher impacts on German firms who rely on integrated supply chains for their exports. Austria and the Netherlands may be less enamoured with the plan but suffer the same issues as Germany and the EC’s proposed green spending and digital upgrades should appease Denmark and Sweden.
The plan requires unanimous backing from all 27 EU member states who are due to discuss the detail in mid to late June. Whilst it is not yet a done deal, it looks likely to pass in the second half of this year and in doing so will change the nature of financial risk in Europe. It has similarities to the eurozone’s reaction to the 2010 euro crisis which saw the European Financial Stability Facility created as a temporary bailout vehicle, before later being institutionalised as a permanent facility. In effect, they will have established a precedent of the EU itself issuing common debt to leverage its budget and for Brussels to adopt public-deficit spending policies. It introduces a degree of common fiscal policy in its cross border support for a pan European growth agenda.
As with any announcement of stimulus, the asset markets took it positively, albeit only a small part of the funding will be disseminated over the next 18 months, the time period over which the pandemic is expected to have its greatest impact. Nevertheless, in effect the EC has signalled a plan to hold the EU together and in doing so, is supporting euro risk assets.