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EU unveils plan to borrow €750 billion to aid economic recovery

The European Commission has unveiled plans for a €750 billion ($826.5 billion) recovery fund as the region faces the worst economic crisis since the 1930s.

It will borrow these funds and then disburse them via the European budget — the EU’s common basket of cash that supports programs such as Erasmus. They will be repaid between 2028 and 2058.

The €750 billion includes €500 billion in grants and €250 billion in loans to member states. Out of the €500 billion in loans, €310 billion will be invested in the green and digital transitions.

Germany and France opened the door to issuing mutual EU debt last week, suggesting that the Commission, the EU’s executive arm, should raise €500 billion on the public markets to be distributed as grants.

The initiative was described as a “breakthrough” and a “historic” step as Germany had always opposed the idea of jointly-issued debt, even during previous crises.

Not the end-state

However, there are four European countries that still broadly oppose issuing grants as a way to mitigate the economic fallout from the Covid-19 crisis, preferring instead loans that will be repaid. Austria, the Netherlands, Sweden, and Denmark also want strong economic reform commitments in return for any financial help.

By including a component of grants and loans, the Commission is seeking to bridge these differences among the 27 EU countries.

A Dutch official, who didn’t want to be named due to the sensitivity of the negotiations, told CNBC Wednesday that “the positions are far apart and this is a unanimity file, so negotiations will take time. It’s difficult to imagine this proposal will be the end-state of those negotiations.”

Wednesday’s proposal kicks off a discussion among the 27 EU member states. The leaders will meet, likely via video call, on June 18 in the hope of finding a consensus over the exact details of the recovery fund. 

The European Parliament, the only directly-elected EU institution, will also have to approve any new financial aid as well.

In the meantime, there are other short-term measures available across Europe. The European Central Bank is buying government bonds as part of its €750 billion programs and there are €540 billion available in unemployment schemes, business investments, and loans to governments.

New Taxes

In order to fund some of the additional costs, the European Commission suggested implementing a carbon border duty, a common consolidated corporate tax base, and a digital tax.

European Commission President Ursula von der Leyen said in a statement that “the recovery plan turns the immense challenge we face into an opportunity.”

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