The mammoth European Council meeting agreed a diminished recovery package—yet one with still huge ramifications.

There is not much of a market just now for optimism about our economic, social, political or environmental future. In the wake of the Covid-19 pandemic, we face the worst economic crash in more than 100 years and potential climate-change disaster. But the outcome of the marathon Brussels summit heralds a strikingly encouraging new direction for the European Union.

The significance of the five-day European Council is not simply the sheer size of the €1.2 trillion stimulus to be given the EU economy but the unprecedented scale of the collective borrowing the union will undertake on world financial markets, to finance that recovery strategy. Of the €750 billion to be invested in post-pandemic economic recovery, an unprecedented €390 billion will be in grants, not repayable loans.

The heads of government also agreed a seven-year EU budget of over €1 trillion. Opposition from some richer, northern-European states meant the proposed envelope, though much bigger than the current budget, is a little smaller than the European Commission had originally proposed—something the European Parliament may be reluctant to accept.

To pay for the collective-borrowing programme, the summit also agreed—in principle—to new common taxes. These include levies on plastics and polluting imports and a digital tax. Although details remain to be agreed, this is a radical step towards an EU fiscal policy.

Remarkable revival

The success of the protracted council meeting reflects the remarkable revival of a recently dormant Franco-German alliance. It also indirectly reflects the political impact of ‘Brexit’. The opposition of the ‘frugal four’ (Netherlands, Denmark, Austria and Sweden) was massively weakened by the absence of the traditionally super-sceptical UK government.

There was also strong support from the Italian and Spanish governments for an ambitious new direction for EU economic strategy, in place of the discredited austerity obsessions of the past. The summit reflected growing public acceptance that the scale of the Covid-19 crisis demands a radically different response.

The EU still faces the backwash from a looming global slump in output, trade and employment. This can only exacerbate already-yawning wealth and income inequalities, with the worst impact being felt by the young. Authoritarian and/or unstable populist regimes—from China and Russia to the United States, Brazil and India—threaten a fragile global order with trade conflict and worse.

The next immediate challenge facing the EU is to act on the promise of a radical European Green New Deal. The proposals launched by the commission in December 2019 outline a comprehensive framework of regulations and legislation, aimed at achieving the EU’s targets of net-zero carbon emissions by 2050 and a 50-55 per cent cut from 1990 levels by 2030.

As the World Economic Forum has pointed out, ‘Achieving this transformative agenda and making Europe a leader in the global climate transition requires a massive mobilization of public and private investments. The Commission estimates that reaching the net-zero 2050 target requires at least €1 trillion of public and private investment over the next decade.’

Turbulence prefigured

Much of the present global turbulence was prefigured in the financial crisis and banking collapse in 2007-08. Only after much confusion and dithering were measures taken by the EU institutions—notably the European Central Bank—to avert a disastrous monetary fragmentation.

The strengthening of monetary union at that time was not however matched by greater economic or fiscal integration. Indeed the grip of market-fundamentalist economics and visceral opposition to fiscal transfers to poorer member states remained as strong as ever in some key capitals—notably Berlin. The scandalous imposition of an economic straitjacket on the Greek people shook the EU to its foundations.

A little over a decade later and the political and ideological mood across the union is changing radically. Austerity economics are discredited. Gross social inequality has been rendered intolerable. There is greater awareness of the fragility of the natural world and how its gradual destruction incubates life-threatening pandemics.

It is too soon to predict with any confidence how the EU will collectively respond to these wider global economic, social and climate challenges. But having taken the first significant steps towards an eventual system of EU economic governance since the era of Jacques Delors as commission president, some encouragement can be taken from the outcome of the Brussels summit.

The logic of what was agreed may, though, demand still further and more radical changes in future. The union will also have to decide whether the wind of change must sweep through the forthcoming Convention on the Future of Europe—and lead to major reforms of the EU constitution itself.