May 19, 2020 / 10:42 AM / 7 days ago

Factbox: France, Germany propose 500 billion euros in grants for post-COVID recovery

BRUSSELS (Reuters) - France and Germany have proposed a 500-billion-euro fund to make grants to European Union regions and sectors worst hit by the new coronavirus, helping them recover without taking on a mountain of new debt.

The deal does not mean that the proposal will be fully accepted by the 27-member EU, but its main elements will likely get through. Below are the main points of the idea that the European Commission is likely to draw on heavily when it proposes its own Recovery Fund scheme on May 27.

SIZE AND TIMELINE

Paris and Berlin want a clear final deadline for the fund to be accessed. The money would be raised in addition to the normal EU budget, which totals around 1 trillion euros over seven years, and come on top of its normal solidarity spending, called “cohesion” funds which come in the form of EU grants to equalise living standards across the Union.

WHERE WILL THE MONEY COME FROM?

It will be borrowed on the market by the European Commission, using its triple-A rating to obtain the lowest rate - probably close to zero interest.

WHY IS THIS UNPRECEDENTED?

This would be the first time the EU jointly borrows and then gives the money away. It is a step closer to a fiscal union and a fuller transfer union than now. Even at the height of the 2010-2015 sovereign debt crisis when the euro zone almost collapsed and the Commission borrowed on the market to bail out Ireland and Portugal, it disbursed loans, not grants. It also borrowed to lend, not grant, money to help Romania, Hungary and Latvia through the EU’s balance of payments facility.

HOW WILL IT BE SPENT?

The Commission will channel the money through the EU’s long-term budget for 2021-2027, front-loading it in the first years, mainly to fund investment in the EU’s transition to a “green” and digital economy and for research and innovation.

BENEFICIARIES

The fund is to be available to all EU countries, but the focus will be on countries, regions and industries that have been hardest hit by the pandemic. This means the main beneficiaries would be normally net contributors to the EU budget, like Italy or Spain, even though they could be more affluent than some of the less affected countries elsewhere in the bloc. This approach could be seen as unfair by some newer member countries in central and eastern Europe.

STRINGS ATTACHED

The grants require “a clear commitment of Member States to follow sound economic policies and an ambitious reform agenda”.

The Franco-German paper notes they want to introduce a minimum effective level of tax on the digital economy - affecting Google, Apple, Facebook or Amazon - in the EU, and to establish a Common Corporate Tax Base - rules on what to tax companies on, rather than how much.

HOW WILL THE MONEY BE PAID BACK?

Because the Commission will borrow the money, it will have to pay it back. The money will come out of future long-term EU budgets, after 2027. It is unclear if future budgets will get extra revenue from higher national contributions, or from new taxes imposed by governments and assigned to the EU, or a mix of both. National commitments to the EU budget, based on the size of each economy’s GNI (gross national income), are legally binding on governments, which is why agreements on EU budgets are reached by unanimity and take so long to clinch.

German Chancellor Angela Merkel holds a joint video news conference with French President Emmanuel Macron in Berlin, Germany, May 18, 2020. Kay Nietfeld/Pool via REUTERS

WHAT ARE THE IMPLICATIONS OF THE NEED FOR REPAYMENT?

If EU governments choose to pay more to future EU budgets to repay the Commission borrowing that was given as grants to some countries, it will mark an unprecedented one-off transfer of wealth symbolising European solidarity.

If EU governments decide to assign new revenue streams to future EU budgets to cover the maturing Commission bonds, that would be a big step towards closer integration and a fiscal union because nothing is more sovereign than taxes. It would most likely force EU countries to move closer politically too.

Reporting by Jan Strupczewski; Editing by Mark Heinrich

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