Council brokers historic stimulus pact as budget cuts, rule of law retreat plague deal

Council President Charles Michel (L) talks with fellow EU leader Ursula von der Leyen (C) and Cypriot President Nicos Anastasiades. [Photo: European Council]

Leaders of the 27 EU countries finally compromised on a €1,074 billion long-term budget and recovery fund instrument early on Tuesday (21 July) morning, but it took one of the longest-lasting summits in European Council history and the final deal cut funding for some of the bloc’s key priorities.

Council President Charles Michel’s successful proposal hatched after marathon talks and reflected to some extent many of the demands made by the frugal countries – Austria, Denmark, the Netherlands and Sweden, as well as Finland.

While the size of the overall fund was preserved at €750 billion, the ratio between grants and loans was rebalanced with major consequences for key EU programmes, some of which form the bedrock of the current European Commission’s priorities.

However, considering the frugal countries had opposed outright the creation of the fund and, in particular, the inclusion of direct transfers, a final proposal worth €360 billion in loans and €390 billion in grants can still be hailed as a decent result.

Michel said during a dawn presser that “these were difficult negotiations during difficult times for all Europeans. This is a good deal, a strong deal, the right deal for Europeans now. I believe this will be seen as a pivotal moment on Europe’s journey.”

German Chancellor Angela Merkel – whose country is chairing the EU’s rotating presidency – said that “Europe has shown it is able to break new ground in such a special situation like this one. We have laid the financial foundations for the EU for the next seven years.”

French President Emmanuel Macron told the same press conference said that “this was a summit meeting where I trust the consequences of which will be historic.” He added that Franco-German cooperation was crucial in sealing the deal.

Spanish Prime Minister Pedro Sánchez said “one of the most brilliant pages in European history has been written” and lauded the agreement as “an authentic Marshall Plan”. But Dutch counterpart Mark Rutte refused to concur that it was a historic agreement.

The devil in the detail

Italy – hardest hit by the virus outbreak – emerges as the biggest beneficiary and is set to tap into €127 billion in loans and more than €82 billion in grants. All four frugal countries were also given larger rebates.

The original proposal by the Commission, which played a rather passive role in the summit, was split €500 billion to €250 billion in favour of grants. But as they were linked to key programmes funded through the EU budget, subsequent cuts will have an impact on their size too.

By pushing for a smaller allocation of grants, the frugal countries have undermined their own goal of modernising the budget as a whole.

One of the biggest losers is the Just Transition Fund, which was downgraded from the Commission’s €40 billion climate action war-chest to just €10 billion, illustrating how low down the pecking order environmental policies ultimately fell during the talks.

The final deal maintained the stipulation that only countries that have signed up to the EU-wide goal of climate neutrality by 2050 will be eligible for full funding.

Number crunching on expanded Just Transition Fund continues

The European Commission revealed on Thursday (28 May) how individual EU members stand to gain from the newly-fortified €40bn Just Transition Fund. Talks are still ongoing on widening the scope of the fund to more regions that might need green aid.

The recovery fund is meant to tackle the fallout of an unprecedented pandemic but the only instrument meant to support the health sector was scrapped entirely and Horizon Europe, designed to boost innovation, suffered severe cuts as well.

Funding for neighbourhood policy and the Solvency Support Instrument, a €26 billion fund aimed at supporting economically viable private companies, both fell by the wayside.

Commission President Ursula von der Leyen said it was “regrettable” that the solvency instrument had been scrapped but still hailed the whole agreement as “a big step towards recovery”.

Much of the diplomatic wrangling was geared around how to actually administer the funding, as a split developed over the course of the weekend on how best to address any concerns that might crop up when the cash starts to flow.

In order for countries to tap into funding, they will have to present a national plan on reforms based on the European semester recommendations, which will have to be assessed by the Commission then approved by the Council by qualified majority.

However, to accommodate the Netherlands’ demand for stronger control, Michel introduced the so-called ‘emergency brake’.

This would allow any government that believes another country is guilty of “a serious deviation” to bring the issue to the Council, freezing the payments until a final decision is made.

Michel gives control to member states to facilitate recovery fund deal

European Council President, Charles Michel, proposed on Friday (10 July) to give more control to member states over the recovery funds to overcome Northern member states’s opposition to the ambitious stimulus.

Rule of law hits back-burner

The idea of linking adherence to the rule of law with payments was heavily diluted in the final agreement after several rounds of negotiations.

According to diplomatic sources, Germany, France, the Visegrad Four group, Latvia and the frugal countries on Sunday poured over a proposal drafted by Latvian Prime Minister Krišjānis Kariņš. That text was adopted by acclamation.

Though there is a reference to Article 2 of the Treaties where the principles of the EU are embedded, it does so in a reference to “the protection of the EU’s financial interest”. The wording is also significantly vaguer than the already watered-down Michel proposal.

That original text referred to a system “to tackle manifest generalised deficiencies in the good governance of member state authorities as regards respect for the rule of law when necessary to protect the sound implementation of the EU budget, including NGEU, and the financial interests of the Union.”

The final compromise simply “underlines the importance of the protection of the EU’s financial interests” and the rule of law and propose a regime of conditionality “to protect the budget and Next GenerationEU”, to be introduced.

However, von der Leyen was adamant that the agreement has a sound footing. “It’s very clear in the document, a very clear commitment to the rule of law, and a very clear commitment to the protection of the financial interests of the Union.”

Pro-government media in Hungary were quick to hail what they said was Prime Minister Viktor Orbán’s victory at the summit in not allowing rule of law conditionality to feature more heavily in the final deal.

Picking up the tab

Under the Commission’s original proposal, debt repayments could be covered in their entirety by a raft of revenue-generating ‘own resources’, including a digital tax, a levy on non-recycled waste and a financial transaction tax (FTT).

The Council deal mentions most of the options suggested by the EU executive and it confirms that the Commission should work out the finer details over the course of the next three years. 

Commission President von der Leyen hailed this particular aspect of the deal and how “tight” the issue of repayments is now linked to own resources.

As additional own resources, the Commission will put forward in the first semester of 2021 proposals on a carbon border adjustment mechanism and on a digital levy with a view to their introduction at the latest by 1 January 2023,” the text stipulates.

Ships, planes could help EU pay for virus recovery

The European Commission’s €750 billion recovery fund could be covered financially by new sources of revenue, which include extending the EU’s carbon market to the aviation and shipping sectors, the bloc’s executive confirmed on Wednesday (27 May).

But the likelihood of those new charges getting unanimous backing is unlikely, meaning other avenues may have to be explored if politicians want to keep future long-term budgets free of debt repayment obligations.

According to an EU diplomat contacted by EURACTIV, some member states are considering triggering the enhanced cooperation mechanism offered by the EU treaties, which allow at least nine member states to pursue policies as part of a ‘coalition of the willing’.

Despite agreement at EU-27 level, the budget instruments will now have to secure the blessing of the MEPs. European Parliament President David Sassoli has reiterated his institution’s willingness to veto a deal if it falls below expectations.

[Edited by Sam Morgan/Zoran Radosavljevic]

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