The largest EU money pot ever

After an unprecedented and grueling five-day summit meeting in Brussels, leaders of the 27 EU member states emerged, bleary-eyed and exhausted, in the morning of 21 July having finally reached agreement on the seven-year EU budget, and most importantly on a €750bn package to relaunch the European economy following the Covid-19 crisis that had put large swathes of the EU in lockdown for more than three months.

Former EU Council president Herman Van Rompuy had said before the start of the summit that what really mattered was to deliver on a deal: the nitty-gritty of the negotiations, infighting among government leaders, and alliances of groups of member states would soon be forgotten; the agreement and alignment of the EU Council for the common European weal would endure for years to come.

And boy, did the Council deliver. It has agreed a massive financial injection to mitigate the havoc wreaked by the virus and prevent the European economy from collapsing. An overall EU budget from 2021 to 2028 of €1.074tn was agreed,  plus a next-generation EU economic support facility of a further €750bn in EU loans and grants, to be spent for the most part before the end of 2023 and focusing on those regions and sectors most hit by the crisis.

Policy strings attached

But to get their hands on the recovery money, member states will now have to produce national resilience and recovery plans with a reform and investment agenda for 2021-2023. These plans must align with the EU’s major policy priorities: the European Green Deal, the digital revolution and the resilience of European industry. The idea is then that the aid will cater for the specific needs and interests of each member state. The European Commission will assess the merit of these plans by looking at their contribution to economic growth, job creation and effective contribution to the green and digital transformation.

Climate action remains the central policy advanced by EU financial support. The goal is to achieve a low-carbon EU economy that is climate neutral by 2050. The EU’s new 2030 climate targets should be decided by the end of this year, as an important intermediate step. And government leaders emphasised that all EU expenditure should accelerate and intensify the actions and investments needed for a sustainable low carbon future and be consistent with the Paris Climate Agreement adopted in 2015.

Polluter pays

The seven-year EU budget is financed by GDP-based member-state contributions, and some own resources from the likes of customs tariffs and VAT revenues. But further own resources will be explored in order to pay back the €750bn that the Commission will borrow on the financial markets. Ideas put forward include a levy on non-recyclable plastic to be introduced by 01 January 2021; a carbon border adjustment mechanism to prevent undercutting the EU’s robust carbon reduction standards; and a digital levy to be introduced by 01 January 2023. Other suggestions are a possible financial transaction tax, and an extension to the maritime and aviation sectors of the Emission Trading System that puts a cost on additional CO₂ emitted.

Since these new taxes would mostly require unanimity of the 27 member states, and unanimity in the EU is a rare bird, we can expect lengthy discussions before they become effective. Some see in the 27 member states allowing the Commission to borrow long-term loans on the financial markets an act of faith in the long-term durability of the Union. A union that borrows together sticks together. Other see this fiscal revolution (creating its own resources) as a major step towards more EU integration.

Not without a good fight

The EU’s decision process is notoriously cumbersome and convoluted. Aligning 27 government leaders who all have to face public opinion and political opposition at home is never a walk in the park. This time the EU Council acted very swiftly compared to past decisions.  In mid-May Angela Merkel and Emmanuel Macron had suggested the creation of a €500bn EU-level economic reconstruction fund.  By the end of May the Commission had already proposed the very wide-ranging package combining the Multiannual Financial Framework and the specific Recovery effort under Next Generation EU of €750bn for grants and loans to support the economy.

Soon member states formed clusters in response. The Frugal Four (Austria, Denmark, the Netherlands and Sweden) wanted to see more loans and fewer grants. They also wanted stricter structural reform conditions attached to any financial support. Mediterranean members complained that too large a chunk of aid would go to countries that suffered less than they had from the pandemic. Hungary and Poland objected to any link between receiving aid and addressing the rule-of-law concerns oft cited by other member states.

So it took five days and four nights of relentless negotiation to reach the honourable compromise. EU Council President Charles Michel had to deploy his full arsenal of diplomatic skills, and needed the strong backing of Merkel and Macron, both of whom insisted that a deal was absolutely essential for the EU. Each government leader could go home claiming they had achieved a good part of their demands. That is the true art of European decision-making: a solution for the whole of the EU in which each member state sees its interest reflected.

The power of the purse

But we’re not at the end of the budgetary decision-making process by any means yet. The Treaty at the basis of the EU clearly puts the power of the purse in the hands of the European Parliament, the directly-elected representatives of the peoples of Europe.  Without parliament’s approval, there is no EU budget. So we can expect lively debates in the coming weeks, in which all the weaknesses of the Council deal will be highlighted. Parliament will naturally seek additional funding for pet projects and political priorities. Voting is foreseen for September/October. But it’s hard to imagine that MEPs of the same political parties as heads of governments who, after tough negotiations proudly announced the careful compromise, would reject the deal agreed.

Until recently it was commonplace to hear in EU capitals that the EU just lurches from crisis to crisis, structurally and politically unable to take essential decisions at the right time. The Covid-19 pandemic may well have changed minds and refocused attention to the fundamental priorities. With great power of conviction and endless energy applied, especially by Merkel in tandem with Macron, the 27 demonstrated that the EU can find answers to the needs of their citizens and an economy in deep trouble. It may well be the start of a new era for the EU.  Of a Europe that delivers.