EU leaders managed to agree upon a plan to inject billions of euros of emergency aid into Europe’s damaged economies during a virtual meeting on Thursday afternoon. The recovery fund will be closely tied to the bloc’s seven-year budget.
They also clarified that £470 billion of financial support would be released through existing mechanisms from June. The European Commission’s (EC) President, Ursula von der Leyen said the package would mobilize €1 trillion of investment. On the face of it, EU leaders managed to display a sense of solidarity at a time when the coronavirus was testing the limits of the bloc’s unity.
‘Great Progress’ Was Made on Thursday
Even Italian Prime Minister Giuseppe Conte said that “great progress” had been made on Thursday, even though he urged his northern European counterparts to demonstrate more solidarity prior to the meeting. The success of this conference depended upon the Italian Prime Minister’s behavior.
German Chancellor Angela Merkel has been persuaded of the need to contribute more toward the EU budget as she told Germany’s Bundestag that they must be prepared for this necessary step.
EU Observer reported that von der Leyen believes that more firepower is necessary if the EU intends to generate necessary investments across the whole bloc and that an own-resources ceiling of around two percent of gross national income (GNI) for two or three years instead of the original 1.2 percent GNI figure will be required.
Deep Divisions Remain Within the EU
But the conclusion of Thursday’s meeting should come as no surprise to anyone. EU leaders were always expected to agree to a stimulus of this size. Conte did not storm out of the meeting and the Dutch did not protest against coronabonds. Guidelines on lifting COVID-19 restrictions were also agreed to.
Yet deeper divisions remain within the EU and many of its challenges are yet to begin. French President Emmanuel Macron urged his European counterparts to reconsider raising debt to loan to others as he viewed this measure as an inadequate response to the bloc’s problems.
The EC will now be provided with the unenviable task of proposing a recovery plan that will be acceptable to all EU member states. The bloc was already divided over the 2021-27 EU budget prior to the COVID-19 pandemic, and those divisions were exasperated once the coronavirus crippled Europe’s economy. This crucial topic will be saved for another meeting on 6th May.
Italian Borrowing Costs are Skyrocketing
Member states are yet to negotiate on von der Leyen’s call for a “sound balance” between loans and grants for the countries most in need of help. France and Spain claim that the recovery should be funded by grants so that it does not contribute toward the debt pile, while the Dutch and the Austrians are arguing for loans. The Austrian Government reiterated its opposition to coronabonds being used to finance a southern European recovery.
Furthermore, Italian borrowing costs are skyrocketing as its large public debt pile is likely to increase further because of the virus. The yield on the 10-year Italian bond rose to 2.101 percent shortly after markets opened in Europe on Friday, from 2 percent at Thursday’s close. This is significant because yields are representative of a nation’s borrowing costs and used to measure investors’ risk appetite.
For the time being, the European Central Bank (ECB) is buying government bonds at a pace of approximately $6.46 billion a day, on top of other stimulus measures to aid bank lending. ECB President Christine Lagarde pressured EU leaders by warning them “to avoid doing too little too late.”
Thursday’s meeting was only a temporary display of the EU’s solidarity. It is still unclear how the bloc intends to move forward until all of its members can agree upon an adequate recovery plan that satisfies the north and the south. It feels like the EU’s most fundamental problems have been swept under the rug for another day.