By Anna Stupnytska, Global Macro Economist, Fidelity International
After five days of intense negotiations and uncharacteristically ahead of schedule for the EU, a deal has been reached on coronavirus recovery package. The key components were kept unchanged, including the total amount at EUR 750bn, with the grants component of EUR 390bn - while below the initial proposal of EUR 500bn, it nevertheless shows a significant commitment to the member states that have been the hardest hit by the crisis. And, there is no austerity conditionality embedded in the agreement.
Several compromises and ad-hoc solutions were required to help get the deal over the line, including boosting rebates for the 'frugal four' and reintroducing rebates for Austria, reducing a number of programmes such as the Just Transition Fund, cutting back spending on health, innovation and the solvency instrument to support the private sector.
Importantly, the governance of the Recovery Plan has been made more complex. While no member state has a veto power to stop the distribution of aid to another member state, the newly adopted ‘super emergency brake’ gives any member state the power to oppose a recovery plan, requiring a decision by EU finance ministers or EU leaders. This could result in delay to disbursements. In addition, a weighted majority of EU governments could decide to suspend disbursements altogether to a country in case of evidence of the rule of law violations.
Despite the compromises involved, the agreement on the Recovery Fund sends a strong political signal which could mark a new chapter in the Union's history. EU bond issuance will create a precedent which could become a permanent feature of the institutional framework going forward. With fiscal policy finally stepping up to facilitate the post-COVID recovery, the ECB is no longer 'the only game in town'. This powerful combination of monetary and fiscal policy, as well as the strong political will to not just ensure the union's survival but indeed its success on a number of dimensions, now has the potential - perhaps higher than ever - to lead to more superior economic outcomes in the years ahead.