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Will $500 billion help the EU economy?

Will $500 billion help the EU economy?

France and Germany lend a helping hand to countries affected by the pandemic.

Europe's biggest economies have decided to work together to help the less fortunate sectors and European regions fight the pandemic's effects. Yesterday, in a mutual statement, Angela Merkel and Emmanuel Macron announced the monetary measure, consisting of a $545 billion debt-backed plan that can allow the European Commission to borrow money on behalf of the EU. It is considered to be a grant and not a loan.

The European Union expects a recession of historic proportions due to the pandemic, with an economic contraction of 7.5% in 2020. The silver lining comes next year, as a growth of 6% is in sight.

Countries like Spain and Italy – whose economies are tourism-based – will suffer more than others, and this plan can mean hope for them. They already tried to convince their European counterparts to be more supportive by sharing debt payable by all EU nations.

The plan was received with open arms by the majority. Vitor Constancio, former ECB Vice-President, believes that it is a "great proposal," and he encourages the idea that countries should receive funds depending on how badly they have been affected, and not according to GDP. The grants will be paid through annual budget contributions.

ECB President Christine Lagarde characterized the plan as "ambitious, targeted, and welcome."

Austrian Chancellor is opposing the idea of grants, marching on the concept of loans: "We expect the updated [EU budget] to reflect the new priorities rather than raising the ceiling."

Although this is a way of helping others, specialists see this as a political move from both countries. French President Emmanuel Macron needs to improve his image in the country and be more European-driven. At the same time, the German Chancellor must protect her political legacy, this being her last term of office.

Markets opened lower today, with France40 losing 0.9%, and Europe50 shedding 0.8%. Italy40 dropped by 1.2%, while Germany30 traded lower by 0.5%.

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Sources: bbc.com, marketwatch.com, investing.com


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