This week, the European Commission unveiled its much-awaited recovery plan and multiannual financial framework (MFF) which proposes a new recovery instrument of €750bn, Next Generation EU, in addition to the MFF (EU budget) for 2021-2027. Total recovery funding amounts to €2.4tn comprising funding for the instrument and budget amounting to €1.85tn and €540bn in loans already agreed.
Under the Commission’s proposal to fund Next Generation EU, the EU will borrow €750bn from financial markets to be repaid through the EU budget between 2028-2058. The key takeaway is that €500bn is proposed in the form of grants and €250bn in loans promoting a more unified approach from Europe. Next Generation EU will target investments in common priorities through EU programmes in the budget. Commission President Ursula von der Leyen commented, “The recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future; the European Green Deal and digitalization will boost jobs and growth, the resilience of our societies and the health of our environment.” As she noted in another part of her speech “the EU budget has always comprised grants. This is nothing new. Grants for targeted investment and reforms, for more cohesion and for convergence of living standards in Europe.”
Italy and Spain, countries particularly impacted by Covid-19, are expected to be some of the greatest beneficiaries of the grants and loans. Given Italy’s already high debt levels and the Covid recession, signs of greater cohesion in the European approach is important and Italy’s Prime Minister Giuseppe Conte described the proposal as "an excellent sign from Brussels".
However, the Commission’s plan is still only a proposal requiring agreement and final sign off from the 27 member states so there is still likely to be a lot more negotiating to come. The mix of the funding in the form of grants versus loans is an area of contention with the ‘frugal four’ (Denmark, Netherlands, Austria and Sweden) favouring loans over grants. Conditionality and channeling the grants to productive use are also potential areas of contention. Importantly, France and Germany have supported the grant route with their own suggested plan last week. The matter is expected to be hotly debated at the 19 June EU leaders’ summit, and likely beyond, but with the fund coming in conjunction with the MFF there ought to be some scope to eke out an agreement. Importantly, Germany takes over the EU Council presidency in July.
Italy, one of the main expected beneficiaries, and with signs of greater European cohesion, has seen its bond spreads over bunds continue to compress. For example, at the time of writing the BTP 10 year yield is 1.45% and the spread has tightened to 187bps from 263bps at the April wide.