EU Announces Historic Relief Fund

European Commission Proposes Massive Funding Scheme

On Wednesday, European Central Bank President Christine Lagarde painted a dire picture for the post-coronavirus eurozone economy. Lagarde warned that growth for the block may contract between 8% and 12% in 2020, more than earlier estimates, necessitating increased spending as EU countries grapple with the fallout of COVID-19.

As if on cue, the European Commission also unveiled a massive spending scheme yesterday, announcing plans for a 750 billion euro ($826.5 billion) relief fund. The European Commission’s plan proposes borrowing the funds and then distributing them through the communal European budget to countries as both loans and grants. The 750 billion euros will be paid back between 2028 and 2058.

It’s important to note that Germany pivoted from its long-held stance against issuing mutual debt by partnering with France to spearhead the proposal on behalf of the European Commission. That said, this was just the initial hurdle. Member countries and the commission will now enter into negotiations that could last weeks, if not months.

Potential Stumbling Blocks

The European Commission requires unanimity from member states on sensitive proposals. Given the sheer size of the relief package, all countries will likely want to weigh in about how the funds are administered and distributed. This could give rise to tense debates. For example, Sweden, Denmark, Austria, and the Netherlands are opposed to using grants to support the economy. Instead, these four countries prefer to use loans tied to economic reforms.

In an attempt to appeal to all 27 countries, the European Commission is proposing a combination of grants (500 billion euros) and loans (250 billion euros). Regardless, one Dutch official acknowledged , “negotiations will take time… it’s difficult to imagine this proposal will be the end-state of those negotiations.”

In terms of next steps, the leaders of each member state are planning to meet June 18—most likely on video conference—to hash out the details of the proposal and hopefully come to an agreement about funding. The European Parliament also has to approve the funding before it is distributed.

In the meantime, countries across Europe that are struggling with the aftermath of the coronavirus will have to rely on the European Central Bank. In March the ECB established what’s called the Pandemic Emergency Purchase Program (PEPP) through which it will purchase assets like bonds and private securities. Similar to the Federal Reserve’s actions in the United States, the ECB is aiming to be a backstop for countries that have been battered by coronavirus.

New Taxes Proposed to Help Offset Economic Disaster

In order to help fund some of the potential borrowing costs associated with the loans, the European Commission is suggesting a few new ideas. Conversations among EU countries about a digital tax, which were tabled back in 2019, are now resurfacing as a potential way to generate revenue.

If pursued, this plan would require tech companies, like Apple (AAPL) and Google (GOOGL), to pay higher taxes for providing goods and services to European countries. While this initiative could provide a much-needed cash infusion, some worry that it could upset the US, which reacted negatively last year when France began charging a digital tax.

Other suggestions include implementing a carbon duty tax for importers of foreign goods who don’t adhere to the EU’s carbon goals or even a common consolidated corporate tax base.

The takeaway here is that if negotiations are successful and there is a shared plan to help every member state, it would intertwine the finances of all 27 EU countries. Not every state is on board with being woven into such a complex fabric. The United Kingdom, for example, voted for more autonomy and to “take back control,” which led Britain to leave the EU. Keep an eye out for more of this sentiment as talks progress.

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