Key Takeaways

  • EU leaders agree to €750 billion ($860 billion) coronavirus recovery fund
  • Includes €390 billion in grants and €360 billion in low interest loans for countries badly affected by the COVID-19 outbreak
  • European leaders also finalized the €1.07 trillion budget for 2021-2027 to rebuild the economies and launch the green and digital transitions

After successfully flattening the curve, the European Union has moved to the next order of business – collective recovery and rebuilding with a focus on the environment. Leaders of member states agreed upon a historic €750 billion ($860 billion) coronavirus recovery fund after almost five days of tense debates. It includes €390 billion in grants and €360 billion in low interest loans for countries badly affected by the COVID-19 outbreak like Italy, Spain and France. It will need to be ratified by the European Parliament next. The STOXX Europe 600 Index was over 1% higher, and Germany's DAX benchmark index turned positive for the year on the news.

The grants amount is lower than the originally proposed €500 billion, and the "frugal four" countries also won rebates and an "emergency brake" system that lets a single country halt transfers from the fund if they don't approve of spending plans. No conditions have been set for recipients to abide by democratic values, as was being suggested. The fund will become effective on January 1, 2021, and money is expected to reach the real economy only by the middle of next year. Real GDP in the euro area is expected to fall 8.7% this year and rebound 5.2% in 2021 and 3.3% in 2022, according to the European Central Bank.

This marks the first time the bloc will jointly take on debt by issuing bonds and repay funds from its budget, moving it towards being a proper fiscal union and strengthening ties after Brexit, despite several disagreements. "Extraordinary events, and this is the pandemic that has reached us all, also require extraordinary new methods,” said German Chancellor Angela Merkel, whose shift away from the frugal camp played a big role in this pivotal moment.

European leaders also finalized the €1.07 trillion budget for 2021-2027 to rebuild the economies and launch the green and digital transitions. Put together, spending worth €1.8 trillion ($2.1 trillion) was decided upon today, and 30% of it will go toward climate-related projects. All spending as a general principle will be consistent with Paris Agreement objectives. Leaders have also agreed to introduce a new plastic levy in 2021 to raise money to repay the funds borrowed. The executive arm is expected to put forward a proposal for a carbon adjustment measure and a digital levy, both of which would be introduced by the end of 2022. The bloc is also setting aside €5 billion for member states and economic sectors hardest hit by Brexit.