EU leaders meet on Thursday (23 April) for the fourth time in seven weeks to narrow their differences on how to set up a recovery fund to counter the economic fallout of the COVID-19 crisis.
The goal is to provide the European Commission with guidance so that it can come up with an instrument “agreeable” by member states for a recovery plan and rubber-stamp the deal on an Economic Response Package reached by the Eurogroup a fortnight ago
However, countries are divided on almost every issue, from the nature of the tool to its size and ways to finance it.
“The idea of having a special instrument to deal with the crisis is beginning to be consensual. One way or the other, we need an instrument to respond to the crisis,” an EU source said.
At the moment, the most concrete proposal on the table comes from Spain. Pedro Sánchez’s government has circulated a non-paper calling for the establishment of a €1.5 trillion fund based on grants to be financed through new EU debt instruments.
Spanish diplomatic sources insisted on the need for a powerful investment tool to tackle the economic fallout of the pandemic as relying only on national budgets could jeopardize the functioning of the EU’s Single Market.
EU sources welcomed Madrid’s proposal as “innovative” and stressed the importance of setting up a recovery instrument that would ensure a similar impact across the continent to avoid political and economic risks.
Debt, loans and grants
While the Spanish initiative has been praised by experts, an EU source warned that the idea of perpetual debt or debt mutualisation would be “difficult to swallow” for some member states, “but long term loans have a good chance.”
However, the usual suspects in the North have repeatedly expressed their reservations on the matter. Diplomatic sources have argued that the EU has done a lot on the economic front and now is not the right time to give further powers to the Commission.
Chancellor Angela Merkel said Germany could go beyond the €540 billion package agreed by EU finance ministers and increase the country’s contribution to the EU budget too. Berlin would also be ready to explore further ways of leveraging money issuing common debt, as long as the instrument is temporary and within the existing treaties, and always in the form of loans.
“There are countries thinking about the recovery fund in terms of the SURE solution [only loans], others in terms of grants,” an EU source explained, “the combination of the MFF and the recovery fund could lead to a solution.”
A stronger budget for recovery
European Commission President Ursula von der Leyen has argued in favour of using the EU’s next seven-year budget as the basis for recovery in the aftermath of the coronavirus outbreak.
Before the pandemic, EU countries were unable to reach a compromise on a new budget and the challenge is now even greater.
Luxembourg Finance Minister Pierre Gramegna recently warned against linking the negotiations over the recovery fund to the MFF, as it would be politically risky. However, some voices believe the two debates are indivisible.
“We can hardly negotiate one part and then come back to the other,” an EU source said.
While the economic situation has changed significantly and the European Commission is expected to come up with an updated MFF proposal next week, EU sources downplayed rumours that its size would be severely affected and said figures should be in line with those floated in discussions in February.
“Don’t expect a huge revolution,” they warned.
There is no precise calendar for the proposal, though EU leaders will ask the Eurogroup to finalise the economic package to be fully functional in June, while the new EU budget should be in place by January 2021, ideally, together with the recovery instrument.
“If leaders decide on a solution that will take time, in between we will have a transitional solution quickly enough,” an EU source pointed out.
There will be no conclusions after the summit but a letter from Council President Charles Michel. First, because this has facilitated the debate on previous occasions and “because we don’t think that this is a time for a drafting session,” EU sources said.
The institutions admit teleconferencing makes drafting harder and a source flagged that leaders might need to have a physical meeting to close a deal on the next MFF.
Lockdown measures to contain the spread of the COVID-19 have led to an unprecedented economic slowdown in Europe. The Commission calculates the economic impact of the coronavirus crisis could be greater than the shock provoked by the 2008 financial crisis.
[Edited by Zoran Radosavljevic/Benjamin Fox]