EU Delivers Comprehensive Fiscal Rescue Package

The European Commission has unveiled a sweeping new €750 billion coronavirus fiscal rescue package, including the issuance of new bonds. David Zahn, our Head of European Fixed Income, calls it groundbreaking.

The European Union (EU) seems to have finally come together to deliver a comprehensive fiscal rescue package to help member states battle the devasting economic impacts of COVID-19. In her speech to the European Parliament (May 27) announcing the €750 billion package, European Commission (EC) President Ursula von der Leyen said it was “Europe’s moment.”

While the 27 EU member states still need to approve the deal, it appears to have garnered support from Germany and France, which should help cement it. In my view, the package, dubbed “Next Generation EU,” represents a significant step to bolster Europe’s economy and show unity.

It’s clear the coronavirus has devasted Europe’s economy. Estimates suggest EU gross domestic product (GDP) declined significantly in the second quarter of 2020 versus 2019. Overall, the EU economy is expected to shrink by high single digits this year, but a second wave of infections and further lockdown measures could see GDP drop in the double digits this year.1

The EC stated that Next Generation EU will boost the EU budget with new financing raised on the financial markets for 2021-2024, would be rolled out across three pillars:2

  • Supporting member states to recover
  • Kickstarting the economy and helping private investment
  • Learning lessons from the crisis, which includes a new health program (EU4Health), strengthening a key support program to cope with future crises (rescEU), and spurring research and innovation

Historically, the EU budget was not allowed to go above 1% of EU GDP, but this plan temporarily lifts the ceiling to 2%, which is a big step. The Commission will use its strong credit rating to borrow €750 billion on the financial markets, to be repaid through future EU budgets over a 30-year span starting in 2028 and ending in 2058. It is quite a lot of money, with a long horizon to pay the bonds back.

Significantly, the fund would be comprised of €500 billion in grants and €250 billion in loans. Italy and Spain, the two countries most impacted by the coronavirus, will receive €81.8 billion and €77.3 billion in grants, respectively. Italy has a particularly high debt burden, so the grants are important.