“The goals of our recovery can be summarised in three words: first convergence, second resilience and transformation. Concretely, this means: repairing the damage caused by Covid-19, reforming our economies, remodelling our societies.” Charles Michel, President of the European Council.
As we've said before, politicians will never let a good crisis go to waste. Now, after a few tense days of negotiations the EU has come up with a recovery plan. While rather smaller in scope than the UK’s, it is in addition to the various countries’ own recovery plans. 
The €750bn amounts to a huge expansion of the EU central budget and therefore, in effect moves the power more towards the European Council and away from local governments. This money will take the form of loans and grants, in many cases to favoured industries.
One key element will be the support via grants and loans for the support of economic recovery. Investment in renewables and the digital economy forms a key element of the recovery package. This is highly supportive of the major themes we hold within our equity portfolios.
Perhaps the most important element of the package is the creation of EU bonds. This has been a key element that has been missing regarding the Euro and the EU. Now the EU can borrow directly on financial markets, it becomes a government issuer in its own right. Rating agencies regard it as AAA, as it is implicitly supported by the member states, in practice meaning the most solvent of the member states. This is a massive step in the direction of full EU federalisation. These bonds are anticipated to trade on slightly higher yields than German bonds for the time being.
Another key element is the EU’s expanded taxation powers, largely in the form of carbon taxes and import duties but including a digital tax on the biggest tech companies. These taxation revenues might be sufficient to service the interest on the debt but clearly repayment of principle will depend on expanding the transfers from individual member states.
It now looks clear that the size of the EU’s budget, its borrowings and taxation powers will only increase over time. Shrinking the debt will involve a permanent transfer of wealth from the contributor states to the beneficiaries, which is politically unpalatable. The regional transfers can remain hidden, so long as taxation increases over time and borrowings grow.
Ultimately, in a short space of time it will become clear that the EU is a fully federal, sovereign issuer with taxation and borrowing powers, yet guaranteed by its strongest members. This could never have happened if the UK was still a member, and with it gone, the balance tips in favour of integration. Again, in the fullness of time this will put the EU on a similar level as the US, although undoubtedly in true EU style there will be further massive hurdles to cross.
A key question remains as to how this will play out in terms of currencies. On balance we feel the increased certainty will lead to strength of the euro, at least versus sterling, over time. Many of the big barriers to integration have now been addressed under the cover of the Covid-19 crisis. As we’ve said before, never let a good crisis go to waste.
David Jane is a multi-asset fund manager at Premier Miton Investors. The views expressed above are his own and should not be taken as investment advice.