It may have taken four days and four nights and was just 35 minutes shorter than the longest summit in EU history but, in the end, there was a compromise. The heads of government of the bloc’s 27 member countries negotiated long and hard, and at times acrimoniously, before they agreed on €1.074 trillion ($1.2 trillion) for the bloc’s multi-annual financial framework (its 2021-2027 budget) and a coronavirus rescue package (recovery fund) worth €750 billion. The amounts were historic in size, as is the European Commission’s ability to raise the €750 billion in debt on its own account. It is a de facto mutualization of debt. However, it is a one-time event responding to the largest crisis in the EU’s history, which is a far cry from the previously proposed Eurobonds or “coronabonds.”
German Chancellor Angela Merkel, whose country holds the six-month rotating EU presidency, summed it up nicely: “Extraordinary events demand extraordinary measures and the negotiations lasted extraordinarily long.”
The build-up to this summit was long too. It started when French President Emmanuel Macron gave an interview to the Financial Times in April, when he asked for European solidarity in the face of the coronavirus crisis. He highlighted that magnanimity and generosity had a better chance of bearing fruit in the long run than acrimony and stinginess.
Merkel geared up to assuming the presidency by making a U-turn on her country’s frugal position, agreeing with Macron that the commission should raise €500 billion for a rescue package. This was the foundation of the proposal for a recovery fund amounting to €750 billion.
The haggling during this week’s summit was about the weighting of the split between grants and loans. The countries known as the “frugal four” — Holland, Austria, Denmark and Sweden — were joined by Finland. They were skeptical of grants and wanted to see conditions attached. The Southern European nations, namely Italy and Spain, which were hardest hit by the virus and whose debt-to-gross domestic product (GDP) ratios hover at about 135 and 96 percent, respectively, need grants. France was their biggest ally. It was also badly hit by the pandemic and its government debt-to-GDP ratio stands at 98 percent. The EU allows for a debt-to-GDP ratio of 60 percent, which Germany meets and Holland beats with 49 percent. Dutch Prime Minister Mark Rutte led the frugal camp.
We can argue that there is a place for the fiscally conservative in any negotiation, although there is more to the frugal four alliance. Germany and France are the EU’s two largest economies and biggest countries and they seemed to dominate the agenda, which brought the smaller countries to the fore. Brexit has left a power vacuum, especially as the UK was known for taking a conservative position when it came to the EU’s finances. This was promptly filled, but the frugal nations are strange bedfellows: Rutte’s People’s Party for Freedom and Democracy is in a bloc with Macron’s En Marche in the European Parliament, while the Scandinavian leaders, as social democrats, are to the left and Austria’s Sebastian Kurz is to the right.
A compromise was reached at €390 billion of grants and €360 billion of loans, as opposed to the initial proposal of €500 billion and €250 billion. The biggest beneficiaries are Italy and Spain, with each receiving €193 billion in grants and €159 as loans. France only gets €40 billion in the form of loans. The frugal countries, especially the Netherlands, won a victory in the form of rebates and tariff collections that they are allowed to keep.
Gabriel Felbermayr, president of the respected Kiel Institute for the World Economy, told German television that the compromise was necessary and possible because the pandemic caused economic hardship in the southern states through no fault of their own. That is true, but we should not forget that open trading nations like Germany and the Netherlands also need a functioning common market for their exports. Therefore, there is a good deal of self-interest in helping the southern rim over the hump.
The second rift during the summit was between Rutte and the Visegrad Group of Poland, Hungary, the Czech Republic and Slovakia on limiting funds from the budget to countries that were lax in observing the rule of law and democratic principles. Rutte locked horns with Hungary’s Viktor Orban and Poland’s Mateusz Morawiecki. The wording in the end was soft and the Visegrad states will still receive funds from the EU’s coffers.
Ultimately, everybody was able to go home claiming success of sorts. The heads of governments are not negotiating in a vacuum. They have electorates back home, which they must also satisfy. The European Commission might be the loser when looking at the budget. Last year, its president, Ursula von der Leyen, had laid out her priorities, which were digitization and a green deal. But the biggest items in the budget remain cohesion and agriculture.
Ultimately, everybody was able to go home claiming success of sorts.
Cornelia Meyer
Much was written about the rifts that the summit laid bare. They are there for sure, but this was a make-or-break summit. The fact the leaders could get to a compromise without a second summit at the end of the month shows that everyone understood the importance of solidarity and cohesion at this time. Firstly, the pandemic is the biggest crisis in the history of the EU and, secondly, the leaders also needed to demonstrate their will to cooperate after the UK decided to leave.
The summit also showed how powerful a Franco-German alliance can be. While it does not guarantee success, a deal would not have been possible without it.
It is in the nature of democracies that they seek consensus and that no one wins it all amid the give and take of negotiations.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
