How would Ursula von der Leyen’s coronavirus recovery fund work?

Ursula von der Leyen has made her big pitch for Brussels to be at the heart of the EU’s economic fightback against coronavirus, proposing the creation of a €750bn crisis fund and a rejigging of the bloc’s next seven-year budget. 

It is a landmark moment for the European Commission president, who began her five-year term of office in December. Her ambitions are soon to be tested, as EU leaders start to debate her proposals.

Ms von der Leyen argues that nothing short of the EU’s ability to prove its basic usefulness to its citizens is at stake. Having already said that the bloc owes Italy an apology for failing to come to its aid earlier in the pandemic, she and many others in Brussels fear a renewed populist backlash unless the bloc takes a bold step forward. 

France and Germany have already called for an initiative very similar to the one Ms von der Leyen has proposed, but the commission’s plans are much more detailed. There is plenty of potential opposition out there: the “frugal four” countries — the Netherlands, Sweden, Austria, and Denmark — are sceptical about big new EU spending plans, and officials in capitals across the continent will be poring over the detail to see how their countries are affected. 

What is Ms von der Leyen proposing?

That Brussels can borrow on the capital markets, and distribute money to member states. It wants permission to raise €750bn, €500bn of which would be distributed as grants and €250bn as loans. The fund would be branded “Next Generation EU”. 

Added to her other plans for the EU budget, Ms von der Leyen estimates a total recovery effort worth €1.85tn.

But the “next generation” money would come with conditions attached: it would flow through EU programmes intended to achieve specific goals such as boosting competitiveness, shifting away from declining heavy industry, supporting the bloc’s broader green agenda and building the digital economy. 

The bulk of it, €560bn, would be dedicated to a new “Recovery and Resilience Facility” to drive forward “investment and reform priorities” identified as part of the EU’s annual review of national budgets. 

Who pays?

A crucial question for the frugal governments. Brussels has never borrowed on anything like this scale before. It plans to establish a yield curve of debt issuance, with 30-year bonds as the longest maturity. Repayment would start no earlier than 2028 and would be completed by 2058. 

But the repayments threaten to be a major drain on future EU budgets, and few countries are in a rush to increase their contributions to the EU’s coffers. Ms von der Leyen’s way to square that circle is to propose creating levies or taxes that would create new sources of revenue.

Many of them are dusted-off versions of ideas previously shot down by national governments: a share of revenues from the EU’s emissions trading system, a plastics tax, a levy on digital giants. But Brussels will now come with the argument that, collectively, its plans would be enough to cover all interest on the debt and repayment of the principal. 

How is the money distributed between states? 

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This will depend on what they apply for and how their plans are assessed by Brussels, but the EU has sketched out how to divvy up much of the money. Italy would, for example, be eligible to apply for nearly €82bn of grants, according to a table seen by the Financial Times, while Spain could seek €77bn and France nearly €39bn, with further loans and other support available on top of this. 

Poland would be another leading potential beneficiary of the grants, with nearly €38bn pre-allocated, compared with almost €29bn for Germany. But a chunk of the borrowed money has not been allocated to individual member states yet, as it is designated for other EU programmes, including a mechanism to help support the solvency of viable companies and a programme of strategic investments.

Will Brussels manage to get everyone on board?

Ms von der Leyen’s plans require unanimous approval from governments, not least because they entail structural changes in the EU budget that demand ratification by national parliaments. 

The early reactions to her announcement were, at best, mixed. A Dutch diplomat told the FT that “the positions are far apart and this is a unanimity file, so negotiations will take time”, adding that it was difficult to imagine the proposal would represent the end-state of negotiations.

Frugal governments issued a joint paper only last week that rejected entirely the idea of grant-based financing. 

But Brussels officials see grounds for hope: the plans are tied up with the EU’s next multiannual budget, which is supposed to kick in on January 1 2021. That creates the scope for grand bargains in the negotiations to come, as the frugals have plenty at stake in the budget talks, not least their demand to retain national rebates. 

EU officials also argue that the plans have been designed in a way that takes concerns about fiscal prudence on board: for governments to access their envelopes under the “recovery and resilience instrument”, they will have to first convince the commission and the rest of the member states that their reform and investment projects are worthwhile. 

Urging governments to “leave old prejudices behind”, Ms von der Leyen said on Wednesday that failure to invest now would come back to haunt the EU in “manifold” ways down the line. But she knows that the final shape of her plans is out of her hands.

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