Italian borrowing costs back to pre-virus levels after EU rescue
ITALY emerged as the biggest beneficiary of the European Union’s deal to create a €750bn (£680bn) Covid-19 rescue fund as its borrowing costs sank to pre-pandemic levels.
The agreement, struck by European leaders after five-day talks, will see €390bn in grants – less than the targeted €500bn – and €360bn of cheap loans to support the EU’s strugglers.
Negotiations stretched relations among the 27-member bloc almost to breaking point as Mark Rutte, the Dutch prime minister, proved the biggest roadblock to a deal.
Guiseppe Conte, his Italian counterpart, warned that a failure to agree a collective response threatened the very existence of the EU.
Italy has been among the hardest-hit countries, with more than 35,000 deaths due to its older and more dense population. Major lockdowns in the industrial north triggered an economic contraction of more than 5pc in the first quarter, with the Bank of Italy forecasting a 9.5pc slump for 2020.
But its cost of borrowing for 10 years fell to 1.063pc at one stage following the deal, the lowest since the first week of March, as more upbeat European investors switched out of safer sovereign debt from France and Germany.
Brent crude also hit a four-month high and shares rose on cheer over the agreement.
The rescue deal will see the European Commission borrow the funds in financial markets and pay it back over the next 38 years through EU budgets.
This falls short of the original proposals, pushed by Italy, for fully mutualised EU debt known as “coronabonds”. Experts said joint-borrowing marked a departure for the EU after years of caution from members such as Germany.
Christoph Weil, economist at Commerzbank, said: “For the first time in its history, the EU is allowed to run up its own debts on a larger scale. This is the first decisive step towards the mutualisation of debt. In future crises, the hurdle for the EU to take on further debt will be much lower.
“The EU is moving further in the direction of a transfer union. Whether all EU states are prepared to go down this path is doubtful, in view of the resistance of the ‘North’.”
European leaders hope the funds will help support the recovery of an economic bloc facing an 8.7pc hit to growth this year, according to Commission forecasts.
But Holger Schmieding, chief economist at Berenberg, said: “The EU can use disbursements from the recovery fund as a carrot to goad Italy and other countries towards growth reforms.”