After four days of negotiations, EU27 leaders have agreed a landmark deal on a European recovery fund and the next seven-year budget. The recovery fund remains unchanged at the proposed €750bn, but with grants cut back to €390bn from the original €500bn. The remaining €360bn is in loans. A more coordinated fiscal response across Europe, including for the first time EC borrowing to finance grants, marks an important commitment to achieving a more cohesive recovery across Europe. The agreement should support the EUR, yields and the economic recovery; but with disbursements unlikely to start for quite some time ahead, this is medium- rather than near-term economic support.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
After four days of negotiations, EU27 leaders have agreed a landmark deal on a European recovery fund and the next seven-year budget. The recovery fund remains unchanged at the proposed €750bn, but with grants cut back to €390bn from the original €500bn. The remaining €360bn is in loans. A more coordinated fiscal response across Europe, including for the first time EC borrowing to finance grants, marks an important commitment to achieving a more cohesive recovery across Europe. The agreement should support the EUR, yields and the economic recovery; but with disbursements unlikely to start for quite some time ahead, this is medium- rather than near-term economic support.
Compromises Include an Emergency Break and Budget Rebates
Europe’s new recovery fund comprises several components: Recovery and Resilience Facility (RRF), ReactEU, Horizon Europe, InvestEU, Rural Development, Just Transition Fund, and RescEU – with the RRF being the main tool. RRF allocations are to remain unchanged from earlier proposals with 70% between 2021-22 and the remaining 30% in 2023. But while the allocation for the first two years will still be based on the unemployment criteria, the 2023 allocation will be calculated on the basis of the GDP decline in the two years prior.
RRF plans must be submitted to the European Commission and approved by a qualified majority on the Council. But the emergency brake component discussed over the weekend (and pushed by the Dutch) was agreed with any country permitted to refer concerns to the European Council, albeit with a three-month period to address complaints.
Given the initial stance of the frugal countries (the Netherlands, Denmark, Austria and Sweden) against the idea of grants, the agreed €390bn figure is an important compromise. This, however, came at the cost of a fairly significant increase in budgetary rebates. Countries can now also keep a larger share of EU customs duties, which again benefits the Netherlands.
The €1.074tn seven-year budget (multiannual financial framework) was also agreed during the summit, unchanged from the figure going into the summit but lower than the initial €1.1tn, bringing total financing to €1.82tn.