EU Recovery Deal

Why in news?

The European Union (EU) signed an agreement to counter the effects of coronavirus on the region’s economies.

What are the chief elements of the agreement?

What is so special about the recovery package?

Its size roughly $2 trillion is 75% of India’s annual GDP.
Instead of individual countries raising funds, the EU as a whole will borrow Euro 750 billion (for grants and loans) from the markets.
This is an economically as well as politically radical departure from the past.
The EU could impose taxes in the region to partially pay for the fund.
This, along with the Budget details, will entail a fiscal coordination among the member states for the next seven years.
Almost a third of the overall package — Euro 500 billion — has been earmarked towards countering climate change.

What are the implications?

In terms of the EU’s GDP, this agreement’s size is roughly 5%.
Given that the economy is likely to contract by more, this deal is just the first step in terms of reviving the region’s ailing economies.

Even after the member states ratify the deal, implementation will be another kettle of fish.
This is because many countries may resist the reforms agenda that many of these grants and cheap loans might entail.
However, the political significance of the deal cannot be overemphasized.
EU has concluded the deal despite significant differences among a whole host of countries.
Germany, Austria, Denmark, the Netherlands and Sweden opposed to massive borrowings that would have the taxpayers paying back for decades.
Under the current arrangement, the borrowings would be done by 2023 and paid back by 2058.
On the other hand, economies such as Italy and Spain, which are severely hit, are urging for a less onerous recovery package.

How is this different from the EU response to the 2008 crisis?

In the aftermath of the 2008 crisis, there was high levels of national debt and their abysmal sovereign rating.
Several EU countries found that they could not raise loans from the markets at affordable interest rates.
So, the EU had created the European Financial Stability Facility (EFSF).
The EFSF worked as an intermediary between the investors and the heavily-indebted EU countries in such a way that,
1. Investors got more security for their investment,
2. EU countries got loans at lower rates.
The EFSF and the European Stability Mechanism, which succeeded it in 2013, together disbursed Euro 255 billion in loans.
The current structure is different in that it allocates nearly Euro 400 billion in grants, apart from Euro 360 billion in loans.
Moreover, the loans do not come stapled with demands of fiscal austerity.
However, they are likely to ask for certain basic rule of law to be adhered to.

How does this compare with what India is doing?

The key deficiency in India’s Covid relief package (roughly 10% of GDP) is the inadequate government spending (just 1% of GDP).
For spending more, Indian government would have to borrow more.
However, without substantially higher spending, the economy would struggle for longer.
The key component in the EU package is the Euro 390 billion of grants.
Cheap loans and credit guarantees are useful.
But, in a falling economy and with acute economic stress in the MSME sector, grants and wage subsidies might be more useful.

Source: The Indian Express