Budget Talk Complications: Old Problems for Next Generation

Blog Post by Kamila Potočárová

The European Council will meet on 17 and 18 July 2020 to discuss about the Multiannual Financial Framework.

The EU Heads of State or Government will be reconvening on an in-person summit on 17-18 July in Brussels after five months of video conferences to continue the debate on the new multiannual financial framework (2021-2027) and the recovery fund responding to the COVID-19 crisis. Shifting attention from loans and grants, the point of contingency is likely to emerge over the conditions attached to the funds to gain control over the EUR 750 billion worth recovery fund branded by the Commission as the “Next Generation”.

The stakes have considerably increased for the member states ever since their last in-person summit on MFF back in February. Now, former issues related to net transfers seem less relevant, as the European leaders are discussing allowing the European Commission to increase the resources ceiling and to borrow on capital markets to establish a new recovery instrument. Consisting out of a mix of loans and grants, the recovery funds’ resources supposed to focus on driving economic reconstruction of Europe in line with the twin transition towards a digital and greener economy. However, aid should not come for free. Leaders of the Netherlands and Austria, representing the so-called “frugal four” (in addition to Denmark and Sweden) have voiced the concern and need for attachment of conditionalities to the use of the funds which have been until now overshadowed most likely due to post-pandemic circumstances.

“We want to see follow through and deep reforms to pensions, labour markets, judicial systems, and taxation. We want to help others, but the others have to make sure they get their houses in order,” Mark Rutte, Prime Minister of the Netherlands as well as the longest-serving European leader after German Chancellor Angela Merkel, stated in the aftermath of the last European Council’s teleconference on 19 June 2020. Opposing fiscal transfers, such as the Netherlands and Austria, have been repeatedly arguing for tougher conditions on financial aid, especially when it comes in the form of grants.

Though the Franco-German proposal for the European recovery has anticipated such concerns, it remained very vague in its formulation of conditionality only stating that the recovery support fund “will be based on a clear commitment of member states to follow sound economic policies and an ambitious reform agenda.” Given this, the concerns over the conditionality such as rule of law issues are re-emerging. It has been reported by The Guardian that Mette Frederiksen, Danish Prime Minister “lobbied” the European Council President, Charles Michel, to “toughen the conditions on funding”. Similarly, other news has started to report statements from senior diplomats emphasizing that “the rule of law conditionality is almost a precondition to getting a deal,” if they do not want to lose face in front of their voters back home.

When it comes to rule of law, Poland and Hungary, are traditionally at the centre of attention as both countries used the pandemic to strengthen their grip on power. In this regard, Poland has become a thorn in the eye as it is expected to benefit largely from the recovery fund despite being one of the least affected countries and its continuous attack on the judiciary and LGBT community. Under the current redistribution model based on unemployment indicator, Poland is set to receive EUR 37 billion in Covid-19 from the emergency fund while contributing only EUR 21 billion to the common budget.

The idea of conditionality is equally haunting for Southern states that have been facing unpopular austerity measures. Trying to avoid similar scenarios and persuade other EU leaders about their ability to undergo much needed reforms, Italian Prime Minister, Giuseppe Conte, presented that Italy is preparing “an investment and reform plan that allows us not to restore the pre-COVID-19 situation but to improve the level of productivity and economic growth.” But, remembering eurozone’s sovereign debt crisis a decade ago and unpopular bailouts, it is unlikely that the wealthier member states would let the aid money come for free.

Facing an unprecedented complexity and urgency of negotiations, European leaders are expected to deliver a strong response to the pandemic. Given this, some leaders, including Angela Merkel, are urging for a “swift agreement” on the bloc’s long-term budget together with the emergency fund. The sense of urgency is intensified by the upcoming German presidency, which Merkel could use to set to drive the policy directions for EU economic recovery, instead of dragging on with the budget talks.
Yet, not all heads of member states feel the same pressure: “I see no particular reason for the great hurry… It is also not like something is going to go terribly amiss if we are not done with it by mid-July,” Rutte said.

The timing of the agreement over the massive multibillion recovery fund is crucial since the final deal may even be endangered by the improving European economic outlook as the lockdowns are being lifted across EU member states. The IHS Markit’s Purchasing Managers Index documents it as the index rose just from 13.6 in April to 31.9 in May for eurozone countries.

Therefore, all eyes are now on Charles Michel, who is supposed to prepare a negotiating box in the coming weeks to accelerate the discussion between member states leaders who will be prioritizing also between economic coherence and ideational coherence.

Kamila Potočárová is a graduate of International Relations at the Central European University.

This article is produced in cooperation with Visegrad Insight.

Similar News