In the EU's long and complicated history, a common financial policy is one of the most sensitive issues as its member states have different agendas and interests to defend.

When the EU Special Summit started in Brussels on July 17 to establish a recovery fund to address the socio-economic fallout from the novel coronavirus disease (COVID-19) pandemic as well as the bloc's long-term budget for 2021-27, the divide between the "frugal four"—the Netherlands, Austria, Sweden and Denmark—and the Southern European countries, was huge as usual. To narrow it down, the meeting, instead of ending the next day, had to be prolonged to July 21, making it one of the longest summits in the EU's history.

However, efforts and concessions finally led to an agreement on the fund and a 1.07-trillion-euro ($1.23-trillion) budget, hailed as a landmark moment in European integration, especially during the COVID-19 response.

A critical moment

Since the pandemic emerged in Europe, the EU faced differences among member states on issues like border management, fighting the pandemic and economic assistance. The response measures proposed didn't meet some member states' urgent needs.

Southern European countries like Italy and Spain felt frustrated and helpless as they were the hardest hit by the epidemic. They appealed for the issuance of a common COVID-19 bond for their economic recovery but the proposal was rejected by the Netherlands and Germany.

The divergence continued to increase, testing the unity and cooperation among EU members and leading to European Commission President Ursula von der Leyen apologizing for the EU's slow action.

The pandemic has created the darkest moment for the European economy since World War II. The European Commission has projected that the eurozone economy would fall by 8.7 percent in 2020. France, Italy and Spain could see their economies drop by 10.6 percent, 11.2 percent and 10.9 percent, respectively. Unemployment, government debts and financial deficits are predicted to go up dramatically in many EU members.

The economic problems will also spill over into society and politics. For instance, people affected by the pandemic may become dissatisfied with their government and EU institutions, thus promoting political fragmentation and more divergences.

Therefore, economic recovery is essential for the EU.

A waiter sets tables at an outdoor restaurant in Brussels, Belgium, on July 7. The EU Summer 2020 Economic Forecast predicted a deeper recession with wider divergences due to the novel coronavirus pandemic (XINHUA)

Momentum gained

The summit agreed that a fund of 750 billion euros ($882 billion) will be created for post-pandemic recovery and resilience, pandemic response, research and innovation, as well as public investment and rural development. From this fund, 390 billion euros ($457 billion) will be given to member states as grants and the rest in loans.

The agreement signals progress in the EU's common financial policy. The grant fund means there will be direct financial transfers between member states, meeting the demand of Southern and Central Eastern European countries and bridging the economic divergence caused by COVID-19. A similar economic divergence triggered the eurozone sovereign debt crisis a decade ago.

During the debt crisis, some European organizations and politicians proposed issuing eurobonds jointly by the 19 eurozone states to stabilize the economy. This time, there were similar proposals such as a COVID-19 bond but the proposals were strongly opposed by the Netherlands, Austria and Germany on the ground that they would hurt their own sovereign credit in financial markets and encourage the southern countries to stimulate their economies through unlimited borrowing rather than undertaking structural reforms.

The launch of the recovery fund means the EU is undertaking a common debt to prop up the economy for its collective interest for the first time in history. Besides, it will lead to more euro-denominated high credit assets, expanding the euro's international role.

So some analysts have called the recovery fund Europe's "Hamiltonian moment," a reference to the 1790 move by then U.S. Treasury Secretary Alexander Hamilton to persuade 13 American states to agree on public borrowing, which enhanced their unity.

Key players

The fund also reflects that the France-Germany axis has strengthened during the pandemic. As the powerhouses of European integration since the establishment of the European Coal and Steel Community in 1952, France and Germany have strived to strengthen the EU's power and unity in order to address the bloc's dynamics and the international environment.

In January 2019, French President Emmanuel Macron and German Chancellor Angela Merkel issued a joint statement on cooperation and integration. But Merkel didn't respond positively to France's proposal on reform of the eurozone due to the domestic reluctance toward a common EU financial policy.

However, the COVID-19 crisis taught Germany that it should contribute more to the EU for its own interests since its economy is highly dependent on the EU single market, and the EU's stability and prosperity are at the root of its development and international role. Hence Germany has begun to channel more political resources for the EU's integration and economic recovery.

On May 18, France and Germany jointly released an EU economic recovery initiative, the core of which was the creation of a recovery fund, demonstrating Germany had changed its position on a common EU financial policy due to the seriousness of the pandemic. The France-Germany proposal is the prototype of the European Commission's recovery fund.

Germany did more for the recovery fund as the rotating presidency of the EU for the second half of 2020. Merkel coordinated between the northern and southern members of the EU before and during the July summit and the meeting's achievements mean France and Germany now have closer cooperation and are the leading powers in the EU.

However, the recovery fund is the result of concessions between member states. The EU had to accept special conditions on structural reforms of member states and decrease the money for the grant.

In the future, the EU is going to have less concessional space between its member states and it will be more difficult to reach a big agreement. However, stability and unity of the bloc, which were improved at the summit, have important positive implications, both for the EU and the rest of the world in the time of pandemic.

The author is an assistant research fellow with China Institutes of Contemporary International Relations

Copyedited by Sudeshna Sarkar

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