Why EU’s historic breakthrough is a major milestone

Why EU’s historic breakthrough is a major milestone

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European Union leaders take part in the first face-to-face EU summit since the COVID-19 outbreak, in Brussels, Belgium, July 17, 2020. (Reuters)

European presidents and prime ministers on Tuesday secured a breakthrough agreement on an approximately €1 trillion ($1.15 trillion) long-term budget and a €750 billion coronavirus recovery fund. While these matters are primarily economic in nature, they may ultimately be seen more as a major political milestone in the postwar history of European integration.

The historic deal follows the longest summit of EU leaders for two decades, as the continent recovers from the devastating coronavirus pandemic that has resulted in at least 135,000 deaths and an estimated economic contraction of more than 8 percent this year. The summit was such a milestone not just because of the mammoth size of the overall agreement, but also for the fact the coronavirus recovery package element is the first time EU leaders have ever committed to the principle of mutualized debt as a funding tool, potentially paving the way for greater future EU supranational powers of taxation. 

Ultimately, the pandemic recovery deal will see €390 billion in non-repayable grants for the worst-hit countries and €360 billion in loans, with the money raised partially through jointly issued debt. There is even talk about a “Hamiltonian moment” for Brussels in reference to Alexander Hamilton, the first treasury secretary of the newly created United States of America, who in 1790 convinced Congress of the benefits of common debt. 

Tuesday’s success has buoyed financial markets and is a major feather in the cap for the new political leadership in Brussels, specifically European Commission President Ursula von der Leyen and European Council President Charles Michel, who showed they can get big political deals over the line. It was also a key legacy-building moment for German Chancellor Angela Merkel. This is because Germany assumed the six-month presidency of the EU on July 1, in what is the twilight of Merkel’s long period in power. She views the half-year between now and Christmas as perhaps the last big moment for her to cap off what has been a remarkable era.

Merkel has long been the most important political leader in continental Europe, having been in power since 2005 — a political eternity ago. To put this longevity into perspective, three US presidents (George W. Bush, Barack Obama and Donald Trump), four French presidents (Jacques Chirac, Nicolas Sarkozy, Francois Hollande and Emmanuel Macron), and five UK prime ministers (Tony Blair, Gordon Brown, David Cameron, Theresa May and Boris Johnson) have already served during her long tenure. And Merkel has also broken Margaret Thatcher’s record as Europe’s longest-serving female leader. 

Merkel not only has a substantial track record of domestic political achievement in Germany, but also in EU affairs too. Her influence has been critical in helping the continent navigate the political and economic tumult of the last decade-and-a-half, including the euro zone crisis, an influx of migrants, and growing Euroskepticism, including the UK’s departure from the EU.

Merkel’s big concern right now is that the pandemic has intensified the political fault lines across Europe. In her sights now, following the two deals this week, is a post-Brexit UK-EU trade agreement in the autumn, which she and the other European leaders hope can lead to a constructive new partnership with the UK after years of conflict following the June 2016 Brexit referendum. 

While Brexit and the proposed EU-UK trade deal were not officially on the summit agenda, they were a key topic of informal discussion in Brussels, as the Brexit talks continue to make no major progress. UK Prime Minister Boris Johnson continues to insist that a trade agreement can be reached this month, but that assessment is fanciful, even with both sides meeting on an expedited, weekly basis to try to make progress. 

The danger, with deadlines closing in fast, is that the likelihood of a hard, potentially disorderly end to the transition period with no UK-EU agreement is growing. And this prospect was used by Merkel to warn the EU-27 that it is vital the continent comes together, especially in the face of its worst economic shock for decades. 

Her arguments were pivotal in securing Tuesday’s agreement, especially in corralling other European leaders. The main divisions on display were between the wealthier, thrifty north of Europe (especially the Netherlands, Austria, Denmark, Sweden and Finland) and the more indebted south (including Italy and Spain), which have been hit hardest by the pandemic. 

The more fiscally conservative nations pushed for a lower overall level of funding in the long-term budget and a higher ratio of loans to grants in the recovery fund. While they did not get everything they wanted, they secured enough concessions to sign off on the deal, including significant increases to the rebates they receive on their budget contributions — a throwback to 1984, when Thatcher secured discounts on the UK’s budget contributions.

However, the disagreements at the summit were not just north-south in nature. Another dimension of dispute was east-west, with Eastern European states like Hungary and Poland pushing back on Michel’s warning that future funding should be conditional on respect for the rule of law and wider governance.

Merkel argued that it is vital for the bloc to come together in the face of its worst shock for decades.

Andrew Hammond

To get a deal on Tuesday, this principle was eroded during the summit. For instance, Poland watered down the proposed link between the post-pandemic recovery fund and the 2050 climate neutrality goal. Poland, which stands to gain €37 billion in grants, plus potentially several billion more from a “just energy transition fund” to move away from coal, is the only EU state not to have made the 2050 pledge. 

The compromises on display underline how much the EU-27 took on board Merkel’s argument that Brexit is a warning, in the midst of their divisions, that it is vital for the bloc to come together in the face of its worst shock for decades. It is now likely that the package will spur not just economic recovery, but potentially also social solidarity, given that support for Brussels in some southern nations had fallen due to the lack of EU support at the beginning of the crisis. This underlined the need to regain public trust in states like Italy and Spain, not just rejuvenate growth.

  • Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.
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