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Economic Watch: EU ready to finance landmark recovery plan

Jun 09, 2021

Frankfurt (Germany), June 9: The European Union (EU) announced last week that it would issue around 80 billion euros (97 billion U.S. dollars) in long-term bonds this year, an important step to finance its landmark recovery plan after the pandemic.
It is also the first time that the EU is borrowing on such a large scale. The European Commission, the bloc's executive arm, said earlier in April that it would borrow a total of 800 billion euros (974 billion dollars) from the capital market until 2026 to finance its recovery plan, officially known as the NextGenerationEU.
EU RECOVERY PLAN
The European Commission also announced earlier that the issuing of long-term bonds, to start later in June, would be topped up by tens of billions of euros of short-term EU-Bills to cover the remaining financing requirements.
The scheme would translate into borrowing volumes of roughly 150 billion euros (183 billion dollars) per year on average between mid-2021 and 2026, which will make the EU one of the largest issuers in euros, the commission said.
The announcement came one day after the Council of the EU said it had received the green light from all 27 member states for EU recovery spending. Only with national ratification can the commission start raising resources to finance the recovery plan.
In July 2020, following an intense marathon summit, European leaders agreed on the 750-billion-euro (914-billion-dollar) NextGenerationEU package to tackle the economic fallout of the pandemic and achieve a greener and more digital recovery in the coming years.
The centerpiece of the package, called Recovery and Resilience Facility, comprises both loans and non-repayable grants to be distributed to all member states.
According to an analysis of the European Central Bank staff, the NextGenerationEU's loans and grants to be earmarked for euro area countries amount to almost five percent of euro area gross domestic product (GDP), with a higher share of the funds earmarked for vulnerable countries.
The agreement was hailed as a "historic moment" for Europe and widely deemed a major move forward in terms of European solidarity and integration, analysts said.
Reiner Hoffmann, head of the German Trade Union Confederation, told German newspaper The Handelsblatt last week that the recovery plan is "an important step towards deepening EU fiscal policy," highlighting in particular the financing of the fund through the issuance of joint bonds.
CALLING FOR APPROVAL
The commission had received 23 recovery and resilience plans as of early June, and it takes about two months' time for the assessment to be completed.
European Commission President Ursula von der Leyen said in a tweet last week that the national recovery plans should be approved fast so that the NextGenerationEU funds will start "as of this summer."
The time table is generally in line with previous estimates. In a report published in April, S&P Global Ratings, an American credit rating agency, analyzed that the NextGenerationEU plan could add 1.5 percent to the EU's GDP under a low-impact scenario by 2026 and 4.1 percent under a high-impact scenario, while assuming the funds will be spent from mid-2021.
The novel approach of having the EU issue debt securities to finance the recovery plan could boost the international role of the euro as a green, safe asset, and help reduce the financial fragmentation of the public-sector bond market denominated in euros, the agency also pointed out.
The first funding plan, which covers the period between June and December 2021, was outlined last week with the bond estimates.
However, the plan would be subject to an update in September, when the commission would have a more precise overview of the funding needs of the member states.
On the part of the member states, a pre-financing of 13 percent of the total amount allocated to each member state will not be disbursed until their own recovery and resilience plan gets approved by the commission.
The rest of the funds will be handed out taking into account the achievements of the milestones and targets set in the plans.
Source: Xinhua