S&P Global Ratings revised its outlook on the European Union to positive from stable after member states agreed on a €750 billion coronavirus pandemic recovery fund and a new long-term budget.
The rating agency said the recovery fund, called Next Generation EU, or NGEU, is indicative of the bloc's improved political cohesion.
"We think the NGEU shows increased solidarity among member states, and we consider the NGEU a key step toward becoming a fiscal union," S&P Global Ratings said. "Ultimately, we think it could strengthen the EU's governance."
S&P Global Ratings affirmed the long- and short-term issuer credit ratings of the EU and the European Atomic Energy Community, or Euratom, at AA/A-1+. It also raised Euratom's outlook to positive from stable.
In a separate report, S&P Global Ratings said eurozone GDP is projected to contract by 7.8% in 2020 due to the coronavirus pandemic and bounce back in 2021 with growth of 5.5%, unchanged from previous forecasts.
Germany and the Netherlands are expected to recover relatively quickly, with GDP returning to pre-pandemic levels in early 2022, according to the rating agency. Italy, France and Spain are forecast to mount a slower recovery.
S&P Global Ratings said European sovereigns' future creditworthiness would depend on the pace of economic recovery, which relies on the pandemic's evolution.
"If, as we expect, governments are able to channel their resources such that economic activity picks up and recovers the ground it will lose this year, we should see many of our ratings remain at the current levels in 2021-2022," the rating agency said.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.