The European Council has just finished the longest meeting that it has had since the Nice, France gathering in 2000 and agreed upon a €750 billion recovery package. The package consists of grants and loans to counter the economic impact that the coronavirus has inflicted on the bloc since March.

European Council (EC) President Charles Michel described it as a “pivotal” moment for Europe and this sum represents the largest joint borrowing the EU has ever undertaken so far. The deal focuses on a €390 billion program to member states hardest hit by the virus such as Italy and Spain. An extra €360 billion in low-interest loans will alsombe available to EU states.

The ‘Frugal Four’ Opposed Grants for Spain and Italy

The agreement followed 90 hours of talks that started on Friday, during which tempers were frayed. The “frugal four” (Sweden, Denmark, Austria and the Netherlands) alongside Finland had opposed extending €500 billion in grants.

At one stage, French President Emmanuel Macron accused the frugal four of placing the European project in danger.

The €390 billion sum was recommended as a compromise, and the frugal countries were won over by the guarantee of rebates on their EU budget contributions.

Dutch Prime Minister Mark Rutte, despite being the biggest opponent of the original package, welcomed the deal.

This agreement will no doubt provide both German Chancellor Angela Merkel and Italian Prime Minister Giuseppe Conte with relief as they were the biggest proponents of the package from the beginning. Merkel argued throughout the last five days that “exceptional situations also require exceptional efforts.” Italian borrowing costs are also set to fall to March levels as the stimulus cheers markets.

The Deal Will Only Provide Short-Term Relief

Nonetheless, this stimulus will only provide the eurozone with short-term relief. Now that the EU has been provided with a recovery fund, the bloc’s greatest challenges lie ahead. The economic impact of the coronavirus has tested the single currency’s survival in a way not witnessed since the 2008 recession. If European leaders are serious about preventing a pandemic or any other external threat from threatening European unity again, they must deal with the bloc’s existential problems that the coronavirus exposed.

This was the first European Council meeting without Britain at the table. In December, a UK-EU trade deal should be completed, but if that process fails, the UK will quit the EU without a deal. This outcome would be far worse for the EU as Germany exports 800,000 cars to Britain every year, which equals 14 percent of all vehicles it makes domestically. German car imports would be levied by a 10 percent tax under World Trade Organization (WTO) rules.

Brexit Remains a Problem

The IMF suggests Ireland would suffer an output loss of four percent in the event of a no-deal Brexit. Therefore, EU diplomats should focus all their energy on preventing a no-deal scenario if they want to stimulate economic growth.

The coronavirus has also increased the prospect of other countries leaving the EU, too. The Daily Express reports on one survey which suggests that 50 percent of Italians support an “Italexit,” or Italy’s exit from the EU, whilst 27 percent of Italians prefer to remain within the bloc. Earlier this year, the President of the European Commission Ursula von der Leyen had to apologize for the way the bloc treated Italy at the start of the pandemic. It is unlikely that Italians will forget this when it comes to the polls, and COVID-19 has increased the prospect of an anti-EU coalition government being formed in Italy in the future.

Will There Be More EU Integration in the Future?

Milton Friedman and Martin Feldstein warned in 1999 that the eurozone cannot succeed without a political union. The coronavirus may make EU leaders realize that there is a greater need for political integration to prevent this situation from happening again, but it is looking doubtful all nations will agree, particularly Poland which is about to enter its own battle with Brussels over the imposition of gay marriage.

The markets may be celebrating the outcome of this European Council meeting, but technically the party is already over. How the EU evolves now will be the ultimate test of its survival.

L'articolo Why Eurozone Recovery Depends on More Than a €750 billion Stimulus proviene da InsideOver.

Saudi Arabia has introduced a stimulus plan to counter worsening economic conditions. On Friday, it announced a $32 billion two-part emergency plan necessitated by low oil prices and the Covid-19 coronavirus global health crisis. 

Details of the Saudi Stimulus Package

The first part of the stimulus package includes 50 billion riyals ($13.32 billion USD) which will be disbursed from the state’s central bank. The measure is designed to keep banks and businesses afloat, according to Reuters. Saudi Finance Minister Mohammed al-Jadaan also unveiled an additional 70-billion riyal stimulus component for businesses that will help them defer the payment of government fees and taxes.

Additionally, Saudi King Salman authorized his ministers to raise the debt ceiling to 50% of the state’s GDP, an increase from 30%. Riyadh will use the breathing room to borrow money to help offset a growing deficit. Originally, it was forecast to grow 6.4%, but recent events have caused Jadaan to revise his estimate to 7 to 9%.

“We have huge reserves and very large investments, but we don’t want to liquidate any of these so we will borrow,” said Jadaan. Even with the authorization to borrow more, he expects to borrow a maximum of 100 billion riyals in 2020 and reach the 50% debt ceiling in 2022.

Disastrous Plunge in Oil Prices

Oil prices have fallen 60% since the beginning of the year and despite introducing a tourist visa last year, Riyadh has not yet established another major source of income for its oil-dependent economy. Crown Prince Mohammad bin Salman (MbS) created the Saudi Vision 2030 plan four years ago in an effort to reshape the kingdom’s economy. Notably, it calls for an increase of non-oil trade, and the development of an entertainment industry. 

However, all those plans have been called into question due to global scale of the coronavirus and the oil price war with Russia. Although Vision 2030 will most certainly carry on as planned, the kingdom’s focus now is on stopping the free-fall of its economy before it is forced to dip into reserve funds.

Riyadh’s Additional Emergency Resources

The $32 billion stimulus is only one of the tools available to Riyadh, according to Jadaan. It could cut spending or, in the worst case, take from its reserve fund. In December, he announced that the reserves totaled 500 billion riyals ($133 billion), but the Sovereign Wealth Fund Institute estimated it could be as high as $320 billion and CEIC Data pegged its sum at $490 billion in January. 

Riyadh also introduced an emergency budget to cover any future costs that may arise due to Covid-19. 

“Some budget appropriations will be reviewed and reallocated to the sectors most in need in the current situation, including allocating additional funds to the health sector as needed,” Jadaan said.

Saudi Arabia currently heads the G20 forum and as such, requested an emergency meeting of its members next week. Together, it hopes the G20 can find a solution to the economic problems that continue to plague global markets. Riyadh is not alone in introducing economic stimulus measures. Germany is devoting €550 billion, the UK £330 billion, and Italy £340 billion, Arab News reported.

American-Saudi Cooperation

The US is also likely to pass a $1 trillion relief package on top of a previous $100 billion measure. Washington and Riyadh have other business together beside the pending G20 meeting, which will take place virtually to avoid transmission of Covid-19: oil. The US is dispatching a delegate to Riyadh, officials announced Friday, to negate an end to the oil price war.

Although Russia set off the dispute by refusing OPEC demands to reduce production, Saudi could be easier to negotiate with as it is considered a strong US ally. Trump administration officials praised the kingdom for keeping the global oil market stable for the past few decades and expressed optimism that they can restore it once more. 

One possible solution is for production cuts on the US side, said Ryan Sitton, a member of the Texas Railroad Commission, a regulatory body overseeing the state’s energy industry. Texas has not cut production since the 1970s, a fact that underscores the severity of the measure. Due to the federalist nature of the US government, Washington does not set limits, instead leaving that up to individual states. While Texas may see some sense in cutting a deal with OPEC to reduce production, other industry executives aren’t convinced that is the right choice. 

“Our view is simple. Quotas are bad,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute. “They’ve been proven ineffective and harmful. There’s no reason during this time to try to imitate OPEC.”

Saudi Arabia needs a price of $82 per barrel to keep its budget steady, the International Monetary Fund said. Brent crude was $28.28 on Friday. Until the oil price begins to swing upward once again, Riyadh faces a financial predicament it is unaccustomed to experiencing. While it can unleash stimulus spending to cover some of the coronavirus effects, the solution is not a long-term strategy. For its economy to rebound Riyadh needs oil to recover — Covid-19 or not.

L'articolo Saudi Arabia Unveils $32 Billion Stimulus proviene da InsideOver.