What are the implications of the EU’s €750bn deal on the euro?

At the end of July, the European Union announced – after almost four days of talks – that it had agreed a huge €750bn deal to help its member states in the wake of the Coronavirus crisis. However, despite the deal’s large size, is it enough to help all the economies within the bloc? And, ultimately, what will the implications be on the Euro? 

What exactly is the European Union’s €750bn deal?

Before it is possible to ascertain what the implications of the deal will be on the Euro, it’s first necessary to understand it fully. 

The agreement comprises of a €390bn programme of grants and €360bn in low interest rate loans. The grants are for those member states that were hit hardest by Coronavirus lockdowns. As a result, Spain and Italy are likely to be the biggest recipients of those grants. The low interest rate loans are available to members of the EU as well. This money will come from the European Commission borrowing €750bn on the international markets. 

For those that want to apply for a portion of the grants or loans, they do so with spending plans to the European Commission. Applications can be blocked by states if they are not deemed acceptable. 

Finally, the coronavirus pandemic recovery fund differs from previous financial stimulus packages agreed by the bloc, in that the liabilities will be spread across all of the member states. This is perhaps why the negotiations were so long and fractured. 

Political Significance of the European Union’s Recovery Fund

In addition to looking at what exactly the plan is and the implications it can therefore have on the Euro, it is also important to look at the political significance behind the agreement. Bringing 27 nations together to thrash out one of the largest financial packages the region has seen was never going to be easy. However, the talks for this package took 90 hours. Only one more EU summit has taken longer and that was regarding the enlargement of the EU itself. 

However, despite the tensions that must have been at play in almost four days of talks, it is important to note that an agreement was actually made. It also demonstrates how important the region sees its own response to the havoc the pandemic has wreaked on all of its economies. Perhaps this comes from learning from past mistakes that limited the EU’s ability to help its member states in a meaningful way during economic troubles. Either way, even the summit chairman, Charles Michel, deemed the joint borrowing agreed by the EU as “pivotal moment”.

It displays a willingness – however slow – to work together. For example, the Frugal four (Sweden, Denmark, Austria and the Netherlands) as well as Finland were not initially happy with the proposed figure of €500bn as the amount to be made available for grants, which may never be repaid. However, through negotiations they were appeased with the final figure of €390bn and the chance of rebates on EU budget contributions. It was reported that France’s Macron raised the issue that not agreeing to a big enough package would risk the very ideological notion behind the EU.

Plus, interestingly, France and Germany seemed to come to an accord even before attending the summit. It could be argued that markets were pricing in the agreement before it had even been successfully announced. In a joint press conference with Angela Merkel, the German chancellor, Macron stated that the agreement was a ‘historic change and a historic step for Europe’. Arguably, the final size of the agreement is not the biggest factor at play here. Instead, it is that the once slow to act EU was able to come together and thrash out their individual wants and needs to reach an agreement at all. 

What are the implications of the European Union’s €750bn deal on the euro?

The monumental size of the relief package has undeniably improved the region’s financial outlook. Couple this with the fact that the EU worked together despite high political tensions to come to a resolution, it should follow the Euro looks set to gain in value. This is particularly true when considering the fact that previously the EU’s political tensions seemed to dampen the region’s ability to move quickly enough with respect to its one currency. 

In fact, this also goes to dampen down worries that the Euro could even break up if countries, their politics and their corresponding economies continued to deviate from one another. On the day the deal was announced and confirmed, the Euro rose against the Dollar to $1.145 and continued to rise to highs of $1.19 on the 30th July.  

Ultimately, the deal is good for the Euro. While it may not have been as sizable as it could have been, the willingness to work together by all member states is what sets this fund apart from previous aid. That cannot be underplayed or underestimated. Skeptics may argue that placating the Frugal Four meant reducing the package by a over €100billion, which will materially diminish the package’s ability to support the European economy. 

However, that reduction was the result of all countries working together to come to a mutually beneficial agreement which could prove far more financially advantageous in months and years to come. For, if the countries want to work together so that they stay together, this means that there is hope in the Euro and the European project as a whole for the future.