Factbox: EU recovery fund - the battle lines

BRUSSELS (Reuters) - The European Commission will issue on Wednesday a new proposal for a long-term European Union budget and a coronavirus recovery fund to help economies in the bloc rebound from recession.

Both measures are controversial because they entail transfers of wealth across the 27-nation bloc, and views differ widely on how that should happen. The recovery package is also creating new faultlines because it entails financing through debt issued in the bloc’s name.

Below are key points of contention that the Commission will have to address and on which EU leaders must find a compromise.

SIZE

The recovery package is to be a mix of grants, loans and guarantees that together add up to 1-2 trillion euros over the next few years. Most likely only part of this will be real cash: the rest is likely to entail financial engineering such as leveraging.

THE MIX

A key sticking point is likely to be how much of the money comes in the form of grants and how much in loans. France and Germany want 500 billion euros in grants. The Netherlands, Austria, Sweden and Denmark want no grants, only loans. The Commission will propose a mix of both, but it is unclear in what proportion.

STRINGS ATTACHED

Access to the recovery money is to be linked to “sound economic policies and structural reforms”. This could become a friction point with Italy and Spain, worst-affected by the epidemic, which are wary of northern fiscal hawks dictating their policies.

HOW TO SPEND IT

The recovery money would have to be spent on what the EU sees as long-term priorities: making the bloc climate-neutral by 2050, digitalising the economy, investing in research and innovation.

WHERE WILL IT COME FROM?

The Commission would borrow money cheaply on the market thanks to its triple-A rating, using government guarantees for the joint EU long-term budget as security.

WHEN WILL IT BE AVAILABLE?

The funds will be front-loaded over the next two-three years when they are needed the most, but because of the complex legal process required it is not clear if any will be disbursed before 2021.

FINANCING THE RECOVERY

Loans from the recovery package will be repaid by the governments that take them. Grants don’t need to be paid back, but there’s a hitch: The EU would have to borrow the money for grants, and some doubt whether this is legal because EU law prohibits the EU budget from running a deficit.

One solution could be to allot future revenues from some new tax assigned to the EU in budgets after 2027 to repay the Commission’s borrowing now. This would be a milestone in further EU integration and a major step towards fiscal union, which is also why some governments will oppose it.

If there is no new tax, the Commission borrowing could also be repaid through higher national contributions of governments to the long-term budget in the future - also an unprecedented sign of EU solidarity.

LINK TO LONG-TERM BUDGET

The recovery fund will be linked to the EU’s 2021-2027 budget, which operates on the basis of grants and is itself a highly divisive issue. Governments and EU institutions are at odds over the overall size of the budget, which is around 1 trillion euros over seven years, and what to spend it on.