Athens, Greece – Many Greeks awoke pleasantly surprised to the news that Europe’s leaders had agreed on a 750-billion-euro ($860bn) stimulus package for the continent’s coronavirus-battered economies.
With newspapers having gone to bed hours before the Tuesday dawn deal in Brussels, most people heard about it on their radio and television sets.
“Will I be able to finance the new shop windows?” asked Jenny, a butcher’s wife in central Athens who wants to remodel her husband’s shop so that customers can sit down and sample the cold cuts.
Greece’s economy is forecast to shrink by as much as 9 percent this year, as the coronavirus pandemic hits the key industries of tourism and merchant shipping. Entrepreneurs like Jenny’s husband are feeling the pinch.
“It’s a good thing on the whole,” she said of the emergency fund, dubbed NextGenerationEU.
The European Commission will raise the money through borrowing on the capital markets – a historic step for Europe’s executive.
France and Germany, who pushed for the fund against the objections of a “frugal” lobby comprising Sweden, Denmark, Austria and the Netherlands, declared victory.
The so-called Frugal Four did achieve a compromise in the balance of loans to grants – 360 billion euros ($412bn) of the fund will have to be repaid by governments, more than the one-third originally proposed by the Commission.
But the overall size of the fund remained intact, and the European Council of heads of government also approved the next seven-year EU budget of about 1.1 trillion euros ($1.3 trillion).
“We’re returning to Athens with an overall package that surpasses 70 billion euros ($80bn), an unheard-of sum for our country,” declared Greek Prime Minister Kyriakos Mitsotakis in the early hours of Tuesday.
Almost half of this, 32 billion euros ($36bn), comes from NextGenerationEU, with some 19 billion euros ($21bn) in the form of grants and more than 12 billion euros ($13bn) in the form of loans. Over a five-year period, the grants alone amount to a boost of about 2 percent of Gross Domestic Product (GDP) per year.
“We shall soon present a detailed plan for the reorganisation of our productivity that will transform our country,” the elated Mitsotakis said. “This is a great, unique opportunity for Greece and for Europe.”
The pandemic is set to claim 8.3 percent of the EU economy, but other countries in the European south stand to lose even more than Greece. Spain, Italy and France are expected to see recessions to the tune of 11 percent.
Yet, it is in Greece where Europe first developed its financial reflexes and where such leaps forward resonate most.
When the post-2008 global financial crisis bankrupted Greece a decade ago, the eurozone area created a fund to bail it out – eventually bailing out Ireland, Spain, Portugal and Cyprus, too.
But distressed sovereigns had to accept emergency loans at their own risk, and Europe’s “frugals”, who then included Germany, staunchly refused to issue so-called Eurobonds together with the heavily indebted south.
NextGenerationEU marks the first time all 27 EU members are selling debt together, and it is the first time the Commission is to be given powers to levy taxes and raise resources of its own to service that debt.
“The single greatest thing about this fund is that it advances fiscal union and paves the way to Eurobonds,” said Panayotis Ioakeimidis, a political scientist at Athens University.
A great relief
The International Monetary Fund estimates that the post-2008 financial crisis cost the world roughly one-tenth of its GDP. The pandemic, it believes, will cause a recession almost twice as deep.
The combination of recession and higher borrowing means countries’ debt levels will rise – in the case of the EU from an average of 75 percent of GDP to 95 percent – just because of COVID-19.
The European south, already heavily indebted by the last crisis, lacks the ability to borrow its way out of the current one without building up unsustainable levels of debt.
The emergence of the Commission as a new debt-issuing entity is a great relief to these countries because the Commission’s debt does not appear on their balance sheets.
Italian Prime Minister Giuseppe Conte said Rome expects to receive 28 percent of the fund, comprising 81 billion euros ($93bn) in grants and 127 billion euros ($146bn) in loans.
The political importance of Tuesday’s deal is even greater than the economic, said political economist George Pagoulatos, who heads the Hellenic Foundation for European and Foreign Policy.
“Italy has growing Eurosceptic momentum. We’ve seen that with [former Interior Minister Matteo] Salvini,” Pagoulatos said.
“Conte is probably the last thing separating Italy from sliding to a new wave of anti-Europeanism that could be fatal, not just for Italy’s participation in the euro, but for the entire European integration project and the single market,” he said.
“So it’s extremely important for Europe to signal to Italian public opinion that it’s there to show solidarity.”
Speaking in Athens on Tuesday, German Foreign Minister Heiko Maas hailed the deal as “a restart of Europe on the basis of solidarity”.
The battle for European solidarity has not been definitively won, however.
“[The Frugals] do not want to be sidelined by the Franco-German alliance,” said Pagoulatos, who sees a new cleavage within the EU. “What this group of countries is trying to prevent is [NextGenerationEU] becoming a structural feature of the EU – cross-border transfers in the form of grants resulting from EU borrowing.”
“They don’t want this to happen again. They want this to be a one-off thing.”