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European Union (EU) leaders reached an agreement on Tuesday morning on a landmark fiscal stimulus plan to rescue their economies from the economic fallouts of the COVID-19 pandemic. While the economic recovery plan will help to tackle the continent’s deepest recession since the Second World War, the leaders also earmarked large sums for green investments to help the continent become carbon neutral by 2050.   

The deal requires the European Commission, the executive arm of the EU, to raise €750 billion ($857 billion) on capital markets on behalf of all 27 member countries. The recovery fund comprises of €390 billion earmarked for grants and €360 billion allocated for loans. The original plan had proposed €500 billion of the total package in the form of grants to the less wealthy countries in the bloc most in need of economic stimulus.

An agreement on the stimulus plan, spearheaded by German Chancellor, Angela Merkel, and French President, Emmanuel Macron, was announced in the early hours of Tuesday after a summit that lasted nearly five days. The two leaders had earlier proposed a €500 billion recovery fund to enable the region to address the challenges caused by the pandemic.

"Europe has shown it is able to break new ground in a special situation. Exceptional situations require exceptional measures,” said Merkel during a news conference at dawn. "A very special construct of 27 countries of different backgrounds is actually able to act together, and it has proven it."

The fiscal stimulus, which Macron described as "truly historic," amounts to 5.5 per cent of the EU’s 2019 GDP. It is additional to the 2021-2027 EU budget of €1.074 trillion for 2021-27.

EU leaders said central to the recovery plan from COVID-19 pandemic is the fight against climate change. The entire spending plan is expected to contribute to EU emissions-cutting goals. Under the recovery plan, 30 per cent of the entire package is earmarked for climate protection. This means over €525 billion will be spent on the EU’s plan to reduce greenhouse gas (GHG) emissions over the 2021-27 period.

According to Reuters, €17.5 billion was also allocated to the EU’s Just Transition Fund (JTF), the fund that is driving the bloc’s transition to a green economy. The agreed sum is, however, less than half of what was originally proposed, amounting to a compromise deal.  

The EU says it aims to cut GHG emissions by 50-55 per cent by 2030 and achieve climate neutrality by 2050. According to the new deal, countries that have not signed up to green transition plan will only get half of their share of the JTF.

The EU will borrow the fund using its triple-A debt rating by selling bonds collectively as a bloc as opposed to individual countries in the union. It plans to generate cash from new taxes and repay the debt by 2058.