'Defining moment': Brussels proposes $1.2trn EU rescue plan

London | The European Commission has proposed a €750 billion ($1.24 trillion) plan to drag the Continent out of its historic post-pandemic economic slump and revive its green agenda, with the largesse heavily favouring stricken Italy and Spain.

The EC expects the European Union's economies to plunge a collective 7.4 per cent this year, the sharpest recession in the bloc's history. Though the downturn may have bottomed out last month, a proper revival is seen as impossible without massive fiscal stimulus.

The bloc's Economics Commissioner Paolo Gentiloni described the so-called "Next Generation EU" blueprint as "a European turning point to confront an unprecedented crisis".

That underscores the extent to which the response to the COVID-19 pandemic and its economic consequences has become a near-existential litmus test of the EU's ability to act as a bloc and maintain unity.

The plan includes a mixture grants and loans and will be funded by Brussels-issued bonds, repayable over the 30 years from 2028. It's heavily focused on bankrolling the bloc's European Green Deal and its digital agenda.

EC President Ursula von der Leyen told the European Parliament that the EU faced a "defining moment", as she began promoting the package ahead of its approval in coming months by the 27 EU leaders.

"Our unique model built over 70 years is being challenged like never before in our lifetime or in our Union's history," she said. "The common European goods we have built together are being damaged. Things we take for granted are being questioned."

She said the package would address the Continent's widening "divergences and disparities", and the "complex questions of sovereignty and burden-sharing" - with the hope that it's enough of a compromise to satisfy all factions in a bitterly divided bloc.

Divided continent

The "frugals" - Austria, the Netherlands and some of the Nordic states - prefer conditional loans, which would impose fiscal discipline on the likes of Italy and Greece, and they're opposed to mutualised debt that would blot their own financial copybooks.

The southern states want more fiscal transfers and grants to rescue their economies and build European solidarity, which has shown signs of strain during the coronavirus crisis.

France has been a mouthpiece for the south and Germany for the frugals, but President Emmanuel Macron and Chancellor Angela Merkel came together last week to put forward a compromise blueprint that has evidently informed the Brussels plan.

French Finance Minister Bruno Le Maire tweeted that the EC's plan was "a rendez-vous with history ... at last, solidarity in Europe isn't simply words, but action".

All 27 EU leaders have to agree to the Brussels proposal, and the EC says this needs to happen by July if it's going to have any impact this year.

The Brussels plan would comprise €500 billion of grants and €250 billion of loans. Europe's COVID-19 epicentres would receive the biggest shares: Italy is reportedly in line for €82 billion and Spain €77 billion (although the net amounts, after what they have to pay into the fund, would be much lower).

France and Poland would be the only other countries to get more than €30 billion, and the economic behemoth of Germany has to settle for €28 billion.

Recovery and resilience

But in a nod to the frugals' concerns - and perhaps because it's the EC that is taking on the debt obligations - the money will be disbursed via the EU's extensive network of Brussels-run programs and projects, rather than dropped straight into the coffers of national governments.

Of the €750 billion, €560 billion will comprise a "Recovery and Resilience Facility", primarily aimed at "the green and digital transitions" and "the resilience of national economies".

The resilience agenda is partly code for an industrial strategy that aims to reshore supply chains and to build more powerful European companies which can compete with, and withstand takeover by, Chinese and American rivals.

Another €55 billion will top up the EU's "cohesion policy programs", tackling socio-economic impacts of the COVID-19 lockdowns such as youth unemployment. The remainder will top up spending on climate initiatives and agricultural support.

Separate programs will make strategic investments in key industries and bolster the bloc's health security and crisis preparedness.

European stockmarkets rallied, with most putting on at least 1.5 per cent. Italy's 10-year government bond yield dropped 5 basis points to 1.50 per cent, hovering around its lowest rate since the start of April.