This EU Won't Work

A rescue fund has been agreed but will the citizens (voters) of the giving and receiving nations be satisfied?

‘If we can just heave past this covid crisis we’ll be a lot further on the path to a properly-functioning state at EU level’. We imagine this is the thinking of Commission members after the national leaders were held hostage for four days and nights until they agreed a rescue package. And they’re right, if you agree with them about what constitutes a proper state.

Some leaders will be unhappy, worried about the reception in their own countries. With his government facing an election in six months time Dutch Prime Minister Rutte will be amongst those worried, that’s around the time his voters will start providing cash for the recovery. But the cash is needed today by those states that were already in greatest difficulty and are now in dire straights because of covid-19.

The spending will be spread over several years and not apportioned entirely in relation to the damage caused by the virus, even Germany will receive some funding though the largest amounts will go to Italy (€208bn: €81bn in grants, €127bn in loans) and Spain (€140bn, just over half in grants). Even Poland, which like other East European beneficiaries has not been amongst the worst hit, gets a good wad. Rutte meanwhile, with the support of his frugal friends, did get some changes to the Commission’s proposals which he hopes will mask its worst aspects and provide protection from the protest crowds back home.

What has all this to do with covid-19 relief? Is it a pretext for beginning the fiscal union required to save the euro? Sweden and Denmark must also contribute despite not being part of the monetary union; so would Britain if it were still a member, and possibly if the Government were to change its mind about extending the Transition. The Recovery Fund is of course temporary and will last only until the pandemic emergency is over. At least that is how the Finns, Danes, Swedes, Dutch, Germans and others will hear it; the French, Italian, Spanish and the rest will understand that a line has been crossed and a precedent set.

Chancellor Merkel is in her final term of office and with her popularity restored after a better outcome than most from the pandemic she is ready to face another risk to her party’s future, nearly wrecked by her immigration policy. It’s a radical departure from traditional German policy and won’t be popular with a lot of voters.

The scheme’s cost overall is €750 billion including €450 billion in loans plus €390 billion in grants, which will not add to the individual debts of the recipient nations but be met from central EU borrowing. This is a reduction from the Commission’s proposal of €500 billion of grants and therefore a small victory for Rutte and his allies. Of course the debt must still be repaid eventually and this is to be achieved by 2058, presumably from increased contributions to successive, seven-year EU budgets (the Multi-annual Financial Frameworks or MMFs).

National rebates during the 2021 – 2028 MMF will still apply, another victory for the delinquent Dutchman (he was accused by an angry Macron of “acting like Britain” and of “taking Cameron’s place at the table”, the ultimate reprimand).

On top of the €1.1 trillion MMF also agreed during the lockdown meeting for the next seven-year period the EU will borrow €0.75 trillion in the financial markets. This extra amount is appropriately named the Next Generation EU because it is a major change to the EU’s powers and because it will affect (or disaffect) the next generation of citizens across the Continent who will still be paying for it.

To share in this pot of gold a state must undertake to reform its economy. This is another victory for the frugals; any nation can complain if it believes the funds are being misapplied by a receiving nation. “Countries will know that there is an extra set of eyes, all of us in the EU sitting at that table, watching whether you are doing what you have committed to do,” said Rutte. However the matter will be decided by the Commission (transparently?) so it’s more a fig leaf than a mask – no protection, nothing to see here.

80 per cent of the grants component is dubbed the Recovery and Resilience Facility, the other 20 per cent will top up existing programmes including science research, the green transition, rural development and humanitarian aid. It will prove a major challenge to front load the spending when it is most needed; project commitments might be rushed through but the majority of actual funding is likely to occur after 2023.

Another condition that the Commission wanted to apply was that recipients must meet its standards on the “rule of law”. Hungary’s leader Victor Orban put the kibosh on that too by making it apply only to the loans and grants rather than the overall behaviour of a government.

Not everything is settled yet. National parliaments must first agree to allow the EU to raise its spending above what the members will contribute to the MMF. Finally the EU Parliament has to ratify the total budget and many MEPs will want to challenge Orban’s undemocratic behaviour. This is why the deal cannot operate until well into next year.

Clearly the EU does want to help and also to prove its case by showing it can successfully pool resources to improve the lives of its citizens. It has done as much as could be expected but they will demand even more in future until federation is achieved

We can’t imagine many voters will be happy with what their leaders have agreed.