What is in the €750bn EU coronavirus rescue package – and why is it such a big deal?

There’s much excitement among financial commentators about the new package proposed by the European Commission. But what exactly is in it? And what does it imply for the future of the EU? Ben Chu explains

Ursula von der Leyen: ‘We either all go it alone ... or we walk that road together, take that leap forward’ (Reuters)

The European Commission this week proposed a €750bn (£675bn) fiscal support package for the economics of the European Union which have been ravaged by coronavirus lockdowns.

Financial markets rose in response, signalling that investors think the move is economically significant.

And there’s much excitement among financial commentators about the development, with some describing it as a “Hamiltonian moment” for the EU, referencing a key stage in the history of the United States.

But what exactly is in the package?

What does it imply for the future of the EU?

And how confident can we be that anything will even materialise?

What is the plan?

The European Commission’s president, Ursula von der Leyen, on Wednesday unveiled a proposal for the EU to be given powers to raise a “one-off” sum of €750bn in additional debt from financial markets, with the funds used (as a mixture of grants and loans) to help especially hard-hit EU countries recover from this historic slump over the coming years.

The debt will be financed, according to the commission, by new taxes levied by member states, possibly on emissions, plastics or digital services. These would be funnelled back to the commission.

“We either all go it alone, leaving countries, regions and people behind, and accepting a union of haves and have-nots, or we walk that road together, take that leap forward, we pave that strong path for our people and the next generation,” said Ms von der Leyen.

This followed a joint proposal by the leaders of France and Germany for a €500bn EU “recovery fund” to make grants to member states.

How big is this in the scheme of things?

The size of the entire EU economy this year is around €18 trillion so this represents around 4 per cent of that.

That might not seem particularly impressive in the context of the US Congress’s coronavirus fiscal package, which adds up to around 15 per cent of US GDP.

Yet in the European institutional context this would be an unprecedented amount of money.

The proposed EU budget for 2020 was €168bn.

This single package would be five times that amount.

Why is it important?

Analysts say the principle of the EU issuing a substantial amount of new jointly guaranteed debt for the benefit of all member states is as important as the amount.

This is something that northern European states have long resisted.

During the eurozone crisis, the likes of Germany, the Netherlands, Austria and Finland fiercely fought proposals for joint bond issuance – “Eurobonds” – to help countries unable to borrow on decent terms from the financial markets.

The objection was that the costs of this borrowing would land on their citizens rather than the beneficiaries in stricken countries such as Spain, Italy and Greece.

Each state, it was said, must be responsible for its own borrowing.

But now it seems the objection could be overridden.

In the late 18th century, the US Treasury secretary Thomas Hamilton mutualised the debts accumulated by the 13 original US states in the War of Independence into a single US federal government debt security.

This “fiscal union” was a key moment in turning a federation of former colonies into a modern nation.

That’s why some are arguing this week’s moves by the European Union constitute Europe’s “Hamiltonian moment”.

It’s a remarkable boost to EU solidarity coming hard on the heels of a German constitutional court ruling which potentially gravely undermined it.

But isn’t it just a one-off?

Yes, but analysts point out that one-off innovations in Europe have historically proved permanent.

One of the emergency state lending innovations introduced in the eurozone crisis in 2012 – the European Stability Mechanism – has remained in place and is indeed now being used in this current crisis to support struggling sovereign borrowers.

“The experience of existing European fiscal instruments is that they always get adjusted to fit the political and economic circumstances of the day,” says Jacob Funk Kirkegaard of the Peterson Institute for International Economics.

He suggests this new EU mutual debt issuing mechanism could be used in future to deal with joint problems such as climate change and migration.

Will this plan actually materialise?

The new borrowing plan will need unanimous support from all 27 EU member states.

And there is likely to be resistance from northern European governments.

But the EU is currently also negotiating its next seven-year budget framework, to kick in next year, and this, say analysts, creates the possibility of the plan making it through, in some form, as a product of traditional political horse-trading between member states.

And the fact the big two states of the EU – France and Germany – have already made it clear they support more joint-EU borrowing is a strong sign that something will indeed happen.