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July 14, 2020

EU: The biggest risks loom once the recovery money starts flowing

BY Carsten Nickel

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( 5 mins)
  • On 17-18 July, heads of state or government will convene for their first in-person summit since the outbreak of the pandemic.
  • The goal for the special European Council is to agree a new multiannual financial framework (MFF) for the period 2021-27, including the envisaged EUR 750bn recovery fund.
  • The German Council presidency keeps pushing for a deal during the first month of its tenure, but given the traditional trickiness of MFF talks, another meeting might still be required.

The two compromise proposals tabled so far address different issues that are currently still dividing the 27 member states. Council President Charles Michel’s “negotiation box” is mainly focused on the financial aspect, promising a continuation of rebates on the EU budget contributions of the biggest per capita net payers, including the self-declared “frugal four” (Austria, Denmark, Netherlands, Sweden) and Germany.

Merkel’s proposal

Meanwhile, Berlin’s proposal zooms in on the political problems of democratic oversight and the risk-liability nexus. The idea is to require a qualified majority among member state governments in the Council to sign-off on recovery disbursements (rather than leaving this largely in the hands of the Commission, merely to be vetoed by a qualified Council majority).

The German proposal is intended to address even more ambitious Dutch requests for Council unanimity and national parliamentary sign-off for recovery fund disbursements. The Dutch argue that even disbursements from the loans-only ESM rescue fund require such domestic parliamentary sign-off; the envisaged recovery fund with its 2:1 share of grants vs. loans would, therefore, warrant at least the same degree of scrutiny.

North-South debate

Since the outbreak of the virus, the public North-South debate about fiscal support has been heated. Accusations would likely only get stronger if there were to be no immediate deal this coming weekend. But the Dutch side keeps signaling that the fundamental political and technical questions at stake require proper preparation. This might mean that more time could indeed be required before a deal is reached.

If so, it will be important to counter the resulting noise with a realistic assessment of domestic politics. For instance, the Austrian government is already signaling its willingness to compromise, which might at least partially result from the domestic center-right coalition with the Greens. In the Netherlands, however, the structure of political competition is different, with far-right formations posing a formidable challenge to a predominantly center-right coalition ahead of the March 2021 elections. PM Mark Rutte has been flying high in the polls with an approach that insists on reform conditionality in exchange for joint EU debt issuances.

Negotiation positions

None of this will render a deal is impossible, however. Most importantly, maximalist demands by the Dutch side should also be seen as a negotiation stance now that Berlin has (temporarily) switched from the frugal to the solidaristic camp. It would, therefore, be premature to treat every single Dutch demand as a harbinger of an ultimately minimalist deal, and to lament this nosily.

Instead, recall how on the other, more solidaristic end of the debate, the Franco-German recovery proposal was also preceded by a much more ambitious Spanish non-paper. Key aspects of Madrid’s memorandum – but by no means the entire proposal including, for instance, perpetual bonds – survived in the comparably toned-down form of the compromise between Berlin and Paris. A similar logic can ultimately be expected to play out on the “frugal” pole of the debate.

Medium-term risks

Whether or not there will be deal already this weekend, the biggest risks probably loom over the medium to longer term. One is the previously discussed specter of an Italian application for ESM support in the interval between an MFF deal and its entry into force on 1 January 2021. Another risk is that considerations of rule of law may fall behind, given the need to reach agreement with the states of Central and Eastern Europe.

On a more structural level, the current recovery debate already demonstrates the long-discussed double meaning of closer integration: greater fiscal cooperation will inevitably come with greater scrutiny for recipient countries. But this might create new political tensions. The recent pilgrimage to The Hague where various EU leaders have tried to convince Rutte over recent days, is an example of this pattern. The potential for conflicts was reflected in reports about the French president being allegedly taken aback by Rutte’s detailed inquiries about the exact next steps towards French pension reform.

Political effectiveness

Once the money starts flowing, another key risk is the (political) effectiveness of the funds. One aspect is the previously discussed absorption capacity in many member states. But perhaps even more important is the ability to turn absorbed funds into investments that actually boost growth and employment – thus serving the political goal of shoring up the European project.

If and where the economic downturn persists despite EU support, governments can be expected to call for more funds, criticizing Brussels and the North for their lack of solidarity. That might have repercussions for the political debate about Europe in (southern) states. But the other factor to watch is whether at that stage, Merkel’s currently more benevolent line will still prevail, or whether Dutch outspokenness about national government track records again takes over in the North.

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