The European Union’s (EU’s) EUR 750 billion coronavirus recovery plan is a bold and historic move that will facilitate fiscal transfers from richer to poorer members—a possible first step toward fiscal integration for the bloc. It is not, however, a magic formula for conjuring up long‑term growth or making the debt burdens of cash‑strapped southern European countries disappear—those are challenges that will require longer‑term solutions.

When the EU’s 27 leaders signed off on the Next Generation EU (NGEU) fund to help countries recover from the coronavirus recession, they agreed to something that would have been unimaginable prior to the pandemic. The agreement gives Brussels the power to borrow huge sums from capital markets and hand it out as budgetary support to member countries. Significantly, EUR 390 billion of the EUR 750 billion will be distributed as grants and will therefore not add to governments’ debt burdens—enabling the EU to target the money at the countries that need it most. While the grants will be made available to the countries most affected by the pandemic, the liability for the repayment of the EUR 750 billion NGEU will be shared by all member states. This will be the first time that some member states benefit more than others from commonly borrowed funds.

The grants are not “free money,” however. They will be linked to national recovery plans, which will be assessed by the European Commission based on criteria including the growth potential, job creation, and economic and social resilience of the member state. Payments of grants will be conditional on recipient countries hitting key targets and can be temporarily held back if any government in the bloc believes those targets are not being met, although the final decision will be left up to the European Commission. 

Finally, this was the one of the first major EU summits to be held without UK participation. The UK’s absence has shifted political power from northern to southern European countries, making it more difficult for the “Frugal Four”—Sweden, the Netherlands, Austria, and Denmark—to impose tight spending constraints on EU policies. It remains to be seen whether this latter factor becomes a permanent feature.

From a budgetary and political perspective, the NGEU fund makes sense. The symmetry of the coronavirus shock across countries with uneven fiscal positions, but which are members of a currency union, meant that a coordinated policy response was always the best solution. A strong, synchronized fiscal response will help to support the eurozone economy and limit the size of future fiscal deficits through a stronger overall tax take. Moreover, assuming that the more fiscally conservative northern European countries would have to bail out members with future unsustainable deficits, there is clear logic in helping heavily indebted southern European countries before they reach that tipping point.