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After an acrimonious four-day summit that nearly collapsed, European Union leaders early Tuesday signed off on an unprecedented stimulus package that will see the bloc issue €750-billion in joint debt to help member countries repair their pandemic-battered economies.

The agreement came at 5:30 a.m. in Brussels and was declared a landmark moment of unity by EU leaders and economists, who feared that failure to deliver the package would send the markets tumbling and delay the recovery of the EU economies, which are in deep recession.

The stimulus measures mark the first instance of massive borrowing in the EU’s history, and a big step toward issuing a common bond, a significant integration move.

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Giuseppe Conte, Prime Minister of Italy, the original epicentre of the European COVID-19 pandemic, called the recovery plan “an historic moment for Europe” at a press conference.

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The recovery package came alongside the approval of a €1-trillion budget that will cover the bloc between 2021 and 2027. “We are 27 around the table, and we managed to produce a budget,” French President Emmanuel Macron told reporters. “In which other political sphere in the world is that possible, is that done? None.”

The pandemic in the EU has killed 135,000 people so far, with Italy seeing more than 35,000 fatalities, the highest tally in the bloc (Britain, which is no longer a member of the EU, has recorded more than 45,000 fatalities). Unemployment rates have soared, and growth in some EU economies will fall by about 10 per cent this year.

The recovery fund is composed of two elements: €390-billion in grants and €360-billion in low-interest loans. The EU will borrow the funds in the capital markets through 2026, and 70 per cent of the grants will go out the door in 2021 and 2022.

But the first payments to EU states will probably not be delivered until mid-2021, meaning the hardest hit countries – notably Italy, Spain and France – will have to find their own fiscal measures to prevent their economies from deteriorating for another year.

In a note, the European economists at ING said “In terms of size, the fund is still relatively small given the severity of the economic crisis … Still, given that more than a year ago, a meager euro-zone budget was almost impossible, and given how far apart member states had been at the start of the discussion, this morning’s outcome is still remarkable.”

The stimulus package will be welcomed by the European Central Bank, which had been propping up the euro-zone countries pretty much single-handedly since the pandemic shut down almost the entire continent in March. The ECB’s emergency-response program will see the central bank buy €1.35-trillion in financial assets such as government bonds.

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The EU’s package of grants and loans was originally proposed by Mr. Macron and German Chancellor Angela Merkel in May, when it became apparent that the pandemic would not vanish quickly. Its success was far from assured because of resistance from the leaders of the “Frugal Four” countries – Austria, Denmark, Netherlands and Sweden – who opposed the idea of handing out grants to member countries. They were less opposed to the idea of repayable loans, which, they argued, would instill some economic discipline on the governments.

In the end, the Frugal Four managed to whittle down the grant component of the stimulus package from €500-billion to €390-billion, with the balance in the form of loans. As a sweetener to break the deadlock, they were given significant rebates on their annual EU budget contributions.

Dutch Prime Minister Mark Rutte also secured an “emergency brake” that would temporarily halt transfers to a member country if that country was not honouring its commitment to reform its economy in exchange for the funds.

Hungarian Prime Minister Viktor Orban threatened to kill the entire package, whose approval required unanimity, if it came with strict rule-of-law conditions such as guarantees for judicial independence. A compromise was worked out that would allow only a weighted majority of governments to block payments over rule-of-law violations.

Economists said that Italy and Spain, the EU’s third- and fourth-largest economies, will emerge as the biggest beneficiaries of the stimulus package. ING calculated that in the first two years, they will receive grants worth about 2.5 per cent and 3.5 per cent, respectively, of their GDP. France, Germany and the Netherlands will see payments worth less than 1 per cent of their GDP.

Almost a third of the stimulus package is to be devoted to fighting climate change, though details were scant as to what kinds of projects would be eligible for the funding. The EU agreed that all spending must be consistent with the carbon-reduction goals of the 2015 Paris climate agreement.

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European markets rose in reaction to the approval of the stimulus package. In morning trading Tuesday, Germany’s DAX index was up 1.7 per cent. Brent crude oil was up by almost 1 per cent. European equities have outperformed U.S. and global equities since mid-May, when the EU stimulus package negotiations were launched.

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