Shape of EU’s new political dynamic becomes clearer

When Charles Michel called a special European Council on February 20th and 21st to agree the EU’s future budget known as the Multi-Annual Financial Framework 2021-2027 (MFF), he did so with more hope than expectation and his hopes were dashed. It proved impossible to get the member states to agree. Fast forward to July 21st when, following the longest European Council in the history of the union, the member states agreed to a €1.82 trillion package including the seven-year MFF and a recovery fund of €750 billion. This was unimaginable in February but then Covid-19 intervened to put Europe’s economies into deep freeze. This is the most significant budgetary deal in the history of the union, not just because of the overall amount but due to agreement to collective borrowing.

The politics of getting to yes were tortuous but it offers us a fascinating lens into the dynamics of coalitions and cleavages in today’s EU. In February, Germany was aligned with the so-called “frugals” but moved decisively out of that camp. Chancellor Angela Merkel joined President Emmanuel Macron in pressing for a sizeable recovery fund and broke the German taboo on sharing debt. The significance of this to building EU fiscal capacity cannot be overstated. Without Merkel’s policy move and the power of the Franco-German engine, this agreement would not have been possible.

The €60-€75 billon hole that Brexit left in the EU budget simply did not matter. The small northern EU countries that traditionally want to contain the EU budget, usually by hiding behind the UK shield, were forced to argue in the open and expend a lot of political capital. The frugals were never prepared to veto a deal but they did extract concessions. The UK would most likely have used a veto, making this the first EU mega deal that benefited from the departure of the UK.

Italy as key player

The southern states, particularly Italy, became key players in the negotiations. Italy’s prime minister, Giuseppe Conte, extracted a deal that would have been impossible two months ago. He worked closely with Merkel and Macron throughout. The countries of east central Europe protected cohesion policy and both Hungary and Poland managed to water down the “rule of law” conditionality which is deeply regrettable and dangerous but they had a veto. The commission will have to revisit conditionality when it tables proposals on individual spending programmes and these proposals cannot be vetoed by the authoritarians who have benefited far too easily from EU largesse.

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Hungary and Poland managed to water down the 'rule of law' conditionality which is deeply regrettable and dangerous

The drama of the four-day European Council underlines the centrality of Europe’s top political leaders in making the big calls in the European Union. There is no way of getting around the member states, and domestic politics – especially money – matters to electorates. That said, this was a collective European response in which the commission played a central role – it did all of the homework and constructed the architecture of the agreement in May. Ursula von der Leyen, the new commission president, emerges with her authority enhanced. It was also a vital outcome for Michel as the new European Council president. Failure to reach agreement after four days would have been catastrophic for him and the union. The package will now have to be agreed by the European Parliament and party and national politics will resurface there, but it would be a brave parliament that turns down the largest financial package in the history of the EU during Covid-19 times.

Digital future

The recovery fund, which will be financed through borrowing on the markets, the big breakthrough, is aligned not just with the urgent need for recovery but with the EU’s key long-term goals of a Green Deal and preparing for Europe’s digital future. Used well, this funding can put Europe on a more sustainable economic and climate trajectory. That said, the key modernisation policies in the MFF – climate, digitalisation, health and research – received lower budgetary resources than the commission had proposed because the hardy perennials of agriculture and cohesion have powerful backers and cuts had to be found somewhere.

Funds will have to be well-spent or the legitimacy of the exercise and fiscal capacity of the union will be undermined

The agreement is only the beginning of lots more policymaking because there is still much to agree. Delivery will be everything. Given the historic nature of the deal, the funds will have to be well-spent or the legitimacy of the exercise and the future fiscal capacity of the union would be undermined. There will be tough negotiations on how the funds are spent including on the “rule of law”. How the shared borrowing is to be repaid by 2058 has yet to be worked out. Unless the EU gets additional sources of funding, repaying the recovery fund could swamp the annual EU budget. The deal offers only one additional resource, a plastic waste tax but the commission is going to propose carbon taxes and a digital levy next year which Ireland opposes.

Ireland, already a net contributor to the EU budget, rightly resisted the temptation to align itself with the “frugals”. The benefits of EU membership far outweigh budgetary contributions and the journey from “net beneficiary” to “net contributor” is a mark of success. Belgium and Ireland argued for and succeeded in getting a €5 billion Brexit fund that will support the countries worst-hit by Brexit. The fund is a reminder that the Brexit negotiations are not on track and there is no sign of real progress. Now that Europe’s leaders have sorted out this big budgetary negotiation, attention will turn to the future relationship with the UK in September.

Brigid Laffan is director of the Robert Schuman centre for advanced studies at the European University Institute, in Florence