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The European Commission has revealed it will outline a bold recovery plan to tackle the consequences of the coronavirus pandemic, which could exceed €1trn in the form of grants and loans to hard hit regions.

It followed France and Germany’s initial proposal on Monday (18 May) of a €500bn recovery fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

However, on Tuesday (19 May) executive vice president of the European Commission, Valdis Dombrovskis, said the EU aimed to be bolder, with an ambition to increase financing by a figure exceeding €1trn. The resulting loans and grants would be linked to economic policies and structural reforms.

The plans for the EU’s ‘recovery instrument’, which are expected to be unveiled next Wednesday (27 May), would be closely linked to the EU’s budget plans and is likely to include the creation of a recovery and resilience facility, which will concentrate on investments and structural reforms, said Dombrovskis.

The initial proposal from France and Germany signalled a step change in the eurozone’s attitude to sharing debt, by providing grants to harder hit regions, such as Italy and Spain, with the proposals pushing government bond yields from southern European countries lower, and the euro higher.

CJ Cowan, assistant portfolio manager at Quilter Investors, says: “The suggestion of grants rather than just loans is a positive but this is still some way from the sort of debt mutualisation often argued for by economists. The conditionality attached to access the funding will be a sticking point between northern and southern European states as well, but this is a notable step in the right direction and lessens the risk of a dramatic adverse move in Italian and Spanish government bond markets in the near term.”