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July 21, 2020

Europe

EU: A politically transformative deal, but unlikely to be the last word

BY Carsten Nickel

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( 4 mins)
  • After lengthy talks, EU leaders have agreed on a new budget and a recovery fund, demonstrating member states’ continued commitment in a moment of severe crisis.
  • The deal is politically transformative in that it sets a powerful precedent, allowing the Commission to issue joint debt, part of which will be passed on to crisis-hit economies in the form of grants.
  • But the value of this leap forward will only become clear over the years ahead, as members’ resolve to further build on this precedent will likely be severely tested.

The size of available funds has been agreed politically and upfront, but the amounts actually required will only become clear over the coming years. They will crucially depend on the future trajectory of the pandemic and the resulting economic recovery. To discuss scenarios for the latter, commentators have introduced multiple synonyms so far. But in reality, there is little clarity about second waves, vaccine availability, and the shape and duration of the “new normal”. The amount of funding agreed now strikes a balance between what is deemed necessary and what is politically feasible today, but that does by no means guarantee that it will be enough in the future.

Moreover, the economic (and ultimately, political) impact of the pandemic has been amplified by underlying, structural challenges. This counts for the economic and institutional weaknesses in some of those countries that have been worst hit by the virus, but also for the structural imbalances fostered by surplus countries less affected by the pandemic. Yet, the initial idea of focusing EU funds on some of these structural challenges has been weakened. Initial proposals for spending on research and development, climate change, but also migration and foreign policy, were all cut back during the talks. These structural issues will therefore continue to challenge the European project, increasing the odds that more support will be required in the (near) future.

Parliamentary sign-off and rule of law

As so often with high-stakes Council deals, the European Parliament has been handed several defeats. Union-level programs have been reduced in size, national rebates for the biggest per capita contributors have been preserved, member states retain a say in assessing national recovery plans, and the overall amount of grants has been cut. Parliament’s approval is required, but meaningful opposition is still unlikely. Given the severity of the crisis, it seems improbable that directly elected MEPs would dare to block the carefully crafted deal, thus jeopardizing a timely start of the still unprecedented solidarity fund.

Within Western Europe, North and South seem to have focused entirely on striking a deal on the recovery fund, thus dodging a frank conversation with Central and Eastern Europe about the rule of law. Respective references were greatly diluted in the summit statement. With Hungary eager to achieve a quick termination of its current Article 7 procedure, there is speculation that the German Council presidency might offer its support – on the condition that a draft regulation be finally passed, linking budget transfers to the rule of law going forward. That draft regulation could be adopted by qualified majority (rather than the unanimity required for the summit communique).

Filling commitments with life

Looking ahead, the short-term risk is that between now and the start of the new budget and recovery fund, the only lifeline available to countries with immediate difficulties is a politically difficult loan from the ESM rescue fund. But as discussed in the past, the real risks loom once the money starts flowing. Much will depend on the degree to which the new funds can be absorbed and, if so, turned into investments actually boosting local economies.

If that is not the case quickly everywhere, it will likely set the stage for further rounds of high-stakes debates, in Europe and its member states, about everything from recovery funds, domestic economic reforms and minimum tax standards to potential rescue programs and the role of monetary policy. It will be in these debates that the political commitments expressed in today’s transformative deal will ultimately have to be filled with life.

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