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17 Dec 2020

A Changing EU

Belgium is, rightly, renowned for its delicious chocolates, but if you prefer fudge, nowhere beats Brussels. The quality of the fudge-making was demonstrated by the European Council at its meeting on 10 December 2020, with the much-delayed approval of the future EU budget.

Five months ago, after a fractious and unusually lengthy meeting, Europe’s leaders agreed on a package of measures to respond to the pandemic-induced economic downturn. The deal covered both the multi-annual financial framework (MFF) for 2021-27 – setting ceilings for EU spending under broad policy headings – and the ‘Next Generation EU’ (NGEU) combination of grants and loans aimed at stimulating economic recovery.

In line with EU practice, ratification of both components was expected to be completed rapidly after a deal was struck on 10 November between the EU institutions to accommodate certain demands from the European Parliament. The EP had insisted on reversing cuts in budgets for research and student exchanges (ERASMUS) and other areas, and having a roadmap for introducing new EU taxes.

However, the process was thrown into turmoil just days later when two member states, Hungary and Poland, dug in their heels about ‘rule of law’ conditions to be attached to the disbursement of funds. They then resisted all blandishments to back down, to the increasing irritation of their peers. Speculation even arose about whether the 25 would go ahead without them.

The row over rule of law has been rumbling on for some time. Hungary and Poland are accused of backsliding on commitments towards respecting democratic norms, such as avoiding undue political interference in how judges are appointed or freedom of the press. Despite much huffing and puffing in other capitals, the EU has been unable to resolve matters.

Money talks, or so we have been led to believe. Several European leaders and many members of the EP, well aware that Hungary and Poland enjoy sizeable net inflows of cash from Brussels, thought that making future payments conditional on redressing their alleged lapses would rapidly bring them to heel.

Prime Ministers Orbán and Morawiecki, though, had an easy way to push back: the MFF has to be agreed unanimously – something the UK always understood very well – and knew that if they said ‘nem’ and ‘nie’, it was the others who would be in trouble. Although NGEU could, in principle, have been approved without them, it is too closely linked with the MFF for that to have been viable.

Without a deal, EU spending beyond the end of 2020 would be constrained by a complex formula to follow the pattern of 2020 spending. Similarly, plans to use the massive Recovery and Resolution Facility (the main component of NGEU), designed to boost public investment in countries reeling from the economic effects of the pandemic, would have had to be put on hold.

Impasse consequently became a major headache for the German Presidency of the EU. Then, opportunely, someone alighted on the recipe book for fudge, kept inside a locked safe in a heavily guarded strong-room in the Europa building on the Rue de la Loi. A compromise was found in a form of words allowing both sides to feel they had prevailed.

The formal European Council conclusions are far from easy reading, but in essence what was agreed was that the provisions Hungary and Poland had objected to so vehemently would remain. However, before they can be used, the two countries can ask the European Court of Justice for a ruling on whether they are legal. Immediate problem solved, even if it means the issue is not.

Savouring the fudge, the various leaders expressed their satisfaction, no doubt tinged with great relief. Indeed, Angela Merkel is quoted in the German Presidency press release as saying precisely this: ‘I am very relieved. It was a huge amount of work’. A more tart reaction to the deal came from Janez Janša, the Slovenian PM (who had expressed some sympathy with Hungary and Poland), as quoted by Politico: ‘not good, not bad. As good as possible’.

In one respect, the delay could prove fortuitous. In July, when the NGEU package was being negotiated, there were fond hopes that the sharp economic downturn would give rise to a quick rebound – the so-called ‘v-shaped’ trajectory. The subsequent second wave of infections is bound to lead to further economic damage – at best a ‘W-shape’ with a renewed downturn stretching well into 2021. Hence a support package arriving later than planned may be better timed.

However, the funding in question was never conceived of as an immediate macroeconomic stimulus, on a par with the extensive fiscal measures introduced throughout the EU. Rather, it is about investment designed, yes, to support recovery, but also to strengthen the capacity of member states to deal with future economic shocks.

In addition, its focus on the ‘green deal’ and the digital economy reflects the broader, transformative aims of the von der Leyen Commission, with a minimum of 37% of the planned outlays to go to climate and 20% to ‘digital investments and reforms’. These imply medium or longer term initiatives and will require member states to identify suitable projects.

This may be difficult, bearing in mind that some of those who are due to benefit most from the new funds already struggle to spend their allocations under the EU Structural and Investment Funds. This problem of ‘absorption’ is well known, but exposes NGEU to risks of yielding disappointing results. As Jean Pisani-Ferry asserts, ‘It is a high-risk gamble’ for an EU seeking to develop its capabilities.

Nevertheless, two conclusions can be drawn. First, it may have been a long and painful exercise, but the EU can now play a crucial role in economic recovery. Second, the fudge chefs have shown their creativity. Anyone for fudged scallops?

By Iain Begg, Professor at the European Institute, London School of Economics and Political Science. 

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