The European Commission’s proposal on the next seven-year budget and the accompanying recovery fund will this Wednesday (27 May) launch one of the most difficult negotiations in the EU history, as member states disagree over the size, the goals and conditions, and primarily whether to give grants or loans.
The proposal made by the ‘Frugal Four’ (Netherlands, Austria, Denmark and Sweden) over the weekend, and seen by EURACTIV, showed how divided national governments remain on how to finance the recovery from the coronavirus crisis.
Despite the Franco-German attempt to narrow the differences, Northern and Southern countries are still far apart on issues including the size, the shape, the scope and the conditionality of the ‘great stimulus’ to overcome the deepest recession in the EU history.
Eurogroup president, Mario Centeno, told German newspaper Welt am Sonntag over the weekend that it would be good to reach an agreement on the main features of the recovery fund before the summer.
But “it will be a very complicated negotiation”, he warned.
Size. The consensus is around putting together a €1.5 trillion stimulus. That figure has been also suggested by Commissioners Thierry Breton and Paolo Gentiloni, who have been assessing the impact of the pandemic across European sectors and industries over the past weeks.
France and Germany proposed €500 billion for the recovery fund. Added to the trillion euros that the MFF usually includes, the total amount would reach the financial needs flagged by many.
The “Frugal Four” did not include a specific amount, but asked for a “thorough needs assessment”. In addition, they noted that national contributions to the EU budget for 2021-2027 will be “limited.”
During the failed negotiations in February on the EU budget, also known as the multiannual financial framework (MFF), they wanted to cut around €80 billion from the first MFF proposal.
Instrument. The big debate is whether to use grants that member states won’t have to repay, or loans that will further fuel national debt of already ailing economies, including the bloc’s third and fourth-largest, Italy and Spain.
France and Germany offered half a trillion euros in grants, in a U-turn from Berlin’s past support for loans.
Furthermore, German Chancellor Angela Merkel accepted that the EU would borrow from the markets a record amount to overcome the downturn, a step compared with the US decision to pool the states’ debt in 1790, orchestrated by Alexander Hamilton.
The frugal countries opposed any measures “leading to debt mutualisation or significant increases in the EU budget”.
Instead, their proposal offered “favourable loans to those who have been most severely affected by the crisis.”
Scope. The discussion on how to use the recovery funds will be highly complex as Eastern countries will only add to the north-south division. They have been less affected by the pandemic and do not want to divert funds from big envelopes, such as Cohesion, to finance the recovery.
EU institutions and member states agree that Digital and Green agendas should be the priority of the stimulus. But there are nuances among the different proposals.
France and Germany defended supporting “the most affected sectors and regions” by the pandemic.
The frugal countries want to finance “activities that contribute most to the recovery such as research and innovation, enhanced resilience in the health sector and ensuring a green transition that underpins the EU’s ambitious climate, growth and digital agendas.”.
The Commission has said that these will be the priority areas, although the most affected regions will be privileged.
Conditionality. As money always comes with conditions in the EU, the question is how strict the requirements will be to access the new financial instrument.
France and Germany said that the recovery fund would be based on “a clear commitment of member states to follow sound economic policies and an ambitious reform agenda”.
The “Frugal Four” appeared to go one step further by calling for “a strong commitment to reforms and the fiscal framework” as part of the recovery fund.
The Commission said that there will be a “clear link” between the recovery funds and the country-specific recommendations published last week.
It remains to be seen how far this conditionality will go in the EU executive’s plans in order to access the bulk of the recovery funds.
[Edited by Zoran Radosavljevic]