Europe’s €750bn rescue package sets a welcome precedent

WHEN THEEUEUEUGDPEUEUEU leaders of the European Union agreed this week on a €750bn ($869bn) package to help members’ economies recover from covid-19, they answered a looming question: whether Europe was too divided to handle the pandemic. As in earlier crises, the virus’s economic ravages split the ’s members. Rich countries with low government debt and fewer infections (such as Germany and the Netherlands) can cope on their own. Some of the heavily indebted and infected countries (such as Italy and Spain) cannot. Without fiscal aid, they face recessions deep enough to drag down the whole of the .The programme agreed to in Brussels does not just avert that danger. It does more to strengthen the union than anyone would have imagined a few months ago (see ). The total is equivalent to nearly 5% of the ’s annual , to be spent over several years, much of it in grants rather than loans. More important is how the money will be raised: through bonds issued by the European Commission. For the first time, the will collectively borrow large sums, piggybacking on the creditworthiness of stronger members to help weak ones. By raising total spending by the itself (as opposed to member states), from nearly €1.1trn to €1.8trn over seven years, it gives the club a potent fiscal weapon against recession to complement the monetary tools of the European Central Bank. This is especially important when near-zero interest rates are forcing a shift in emphasis from monetary to fiscal policy. To pay the debts back, and avoid direct responsibility, countries may be tempted to grant the European Commission more taxing authority.