European Commission proposes €750B EU recovery package

‘Today we face our very own defining moment,’ Ursula von der Leyen says.

The European Commission called for a €750 billion recovery plan on Wednesday that would use an unprecedented scale of joint debt incurred by the bloc's 27 member countries in a bid to revive economies decimated by the coronavirus.

The rescue and recovery plan is bolted onto a revised seven-year budget proposal — the EU's Multiannual Financial Framework (MFF) — totaling €1.1 trillion for the years 2021 to 2027. The budget plan will now be subject to fierce negotiation among EU heads of state and government, and requires their unanimous approval. Top officials hope to reach a deal by summer.

“Today we face our very own defining moment,” Commission President Ursula von der Leyen told the European Parliament as she presented her plan. “What started with a virus so small your eyes couldn’t see it, has become an economic crisis so big you simply couldn’t miss it.”

Von der Leyen said the plan — called Next Generation EU — would provide €500 billion in grants to countries hit hardest by the pandemic, and make another €250 billion available as loans.

The grants portion largely tracks with a proposal put forward last week by German Chancellor Angela Merkel and French President Emmanuel Macron and would allow the Commission to borrow on the financial markets, using national commitments to the EU budget as a guarantee. It is a mechanism the EU has used before, but never on such a large scale.

The Commission proposal leaves some crucial decisions to be worked out in negotiations in the European Council — including the possibility of creating new revenue streams for the EU budget, such as a proposed digital tax, or a carbon border tax. The Commission also raised a new idea of a tax on operations of “large enterprises” but did not provide details of how it might work.

In its technical documents, the Commission said that “taken together, these new own resources” could theoretically cover the repayment and interest costs of the entire amount of money borrowed for the recovery plan. However, national governments have in the past resisted giving the Commission new sources of revenue.

Supporters of the recovery initiative say it would usher in a new, long-overdue era of greater fiscal solidarity and cooperation. Critics say it would set a dangerous precedent — putting taxpayers in all EU countries on the hook to repay loans that will benefit only some, along with a risk of wayward spending by national governments that often ignored the Commission's past calls for fiscal discipline.

Commission officials insisted that the scale and scope of the economic damage from the pandemic — financial contraction at levels unseen since the Great Depression — called for extraordinary measures. And they said that a key advantage of von der Leyen's proposal is that the money borrowed by the Commission would not add to the national debt load of countries struggling to recover.

But even before the details were known, four relatively wealthy EU countries — Austria, Denmark, the Netherlands and Sweden — with reputations for frugality and fiscal prudence, had come out against the idea of using grants. They insist that money borrowed by the EU should be passed through to individual nations as preferential loans, with each country obligated to repay what it takes.

The underlying, revised long-term budget proposal effectively seeks to pick up where European Council President Charles Michel and the 27 heads of state and government left off after a first negotiating summit in February failed to yield a deal.

The top-line number of roughly €1.1 trillion over seven years for the core budget was somewhat lower than the Commission's original proposal in 2018 but a little higher than a compromise proposal put forward by Michel.

The details of the proposal reflected some of the drastic shifts in priorities as a result of the pandemic — including cuts for spending on cohesion, defense, research and administration compared to the 2018 blueprint.

But the Commission appears to have sought to compensate for cuts in some areas by adding spending for similar programs as part of the recovery package. Commission officials sought to preserve the top goals of von der Leyen's team, including efforts to combat climate change and to promote digital transformation across the EU, by baking those into the recovery program.

Cohesion programs, for example, would be allocated €323 billion from the EU budget over seven years — less than the €330 billion proposed in 2018 — but would get a top-up of €50 billion from borrowed funding. Similarly, the Commission is proposing to reduce the EU budget allocation for the research and innovation program Horizon Europe, but add €13.5 billion of borrowed money.

Some programs would see cuts overall: planned spending for the European Defense Fund and military mobility, as well as the bloc’s administrative expenses, would be reduced, with no compensation from recovery funding.

Spending on the Common Agricultural Policy would be increased, however, as would funding for the environment and climate action.

One key change in the Commission’s proposal is its approach to rebates — reductions to the amount of money some member countries, such as the Netherlands, contribute to the bloc’s coffers. It has backed down on plans to phase them out in the near term.

The Recovery Instrument would be created by raising the so-called own resources ceiling — the maximum amount the EU can request from member countries to finance its expenditures. The Commission would use the raised ceiling to borrow on financial markets, with the debt to be repaid over 30 years — “after 2027 and by 2058 at the latest," according to technical documents.

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