After a busy week in the EU, all eyes turn to Friday’s European Council meeting

After a busy week that featured another round in the EU-UK negotiation of their future relationship, German Chancellor Angela Merkel’s address to the European Parliament setting out her government’s ambitions for its six-month Council presidency, the election of a new president of the Eurogroup, European Council President Charles Michel’s proposed modifications in the Commission’s €750 billion recovery plan and multiannual budget, and a flurry of bilateral meetings of EU leaders about the plan, the focus in the EU this week is on Friday’s European Council meeting at which the leaders will discuss the plan.

Last week’s round in the EU-UK negotiation got off to a good start Tuesday evening when Michel Barnier and David Frost, the chief negotiators, met for a working dinner at 10 Downing St. But the round, which focused on some of the key issues—how to maintain a “level playing field” after the UK leaves the Single Market and Customs Union on Dec. 31, limits on EU fishing in UK territorial waters, governance of the agreement, and dispute resolution—ended early, before lunch on Thursday, after both sides agreed there was no point in continuing in the sessions scheduled for that afternoon. Later, Barnier tweeted, “This week’s discussions confirm that significant divergences remain between the EU and UK. We will continue working with patience, respect and determination.” Under the intensified schedule for the negotiation agreed last month, there’s another restricted round in Brussels this week, beginning today and running through Friday, and then a full week-long round of negotiation in London next week.

Last Thursday, the Eurogroup, the finance ministers of the 19 EU member states that constitute the euro area, met to elect a new president. In early June, Mário Centeno, Portugal’s minister of finance and, since early 2018, the president of the Eurogroup, announced he would resign as minister and hence as president, and last Tuesday Prime Minister António Costa nominated him to be the next governor of the Bank of Portugal. After Centeno announced his plans to step down, three euro area finance ministers immediately made their interest in the position known—Nadia Calviño of Spain, Paschal Donohoe of Ireland and Pierre Gramegna of Luxembourg. Calviño, an economist who spent more than a dozen years in the Commission, including as Director-General of the Budget, before joining the Socialist government headed by Pedro Sánchez in 2018, was an early frontrunner, having received public expressions of support from the Portuguese and Italian governments as well as from Bruno Le Maire, the French finance minister; Olaf Scholz, the German finance minister and a leader of the SPD; and, perhaps most importantly, Merkel. But Donohoe, a member of Ireland’s center-right Fine Gael party that belongs to the European People’s Party group in the European Parliament, also had significant support from a number of governments.

In order to be elected president of the Eurogroup, a candidate must receive a simple majority of the votes of the euro area finance ministers. Given that there are currently 19 member states in the euro area, that means 10 votes were needed in order to win. With more than two candidates running, if no candidate wins a majority on the first ballot, the candidate with the fewest votes is expected to drop out. Last Thursday, the 19 ministers voted by secret electronic ballot. No candidate won 10 votes, so Gramegna dropped out. Donohoe won a majority on the second ballot, presumably—the breakdown of the vote wasn’t made public—because, as the finance minister of a small state that, like some others, had been forced to take a painful dose of austerity after a bailout in the eurozone debt crisis; as a minister whose party is, like those of some of the other ministers, affiliated with the EPP; and as someone who, in regard to the recovery plan, has supported some of the positions advocated by ministers of the  “Frugal Four” (the Netherlands, Austria, Denmark and Sweden), he was able to assemble a majority that included ministers of some of the smaller member states, or are members of EPP-affiliated parties, or were, notwithstanding her experience in the Commission with the EU budget, opposed to Calviño because she had supported creation of a new EU debt instrument to finance the recovery and the proposal put forward on May 18 by Merkel and French President Emmanuel Macron to create a €500 billion recovery fund, financed by the Commission borrowing on the financial markets, from which funds would be disbursed through the Commission budget as grants rather than as loans. Donohoe’s two and a half-year term began on Monday. 

At its April 23 meeting, the European Council agreed to work toward establishing a recovery fund that would target the sectors and areas most affected by the pandemic and tasked the Commission with analyzing what would be needed, proposing a recovery plan commensurate with the challenge, and clarifying its link with the EU’s 2021-27 Multiannual Fiscal Framework (MFF). On May 27, von der Leyen, building upon the Merkel-Macron initiative, presented the Commission’s plan to the European Parliament and the EU leaders discussed it at the June 19 European Council meeting. The Commission’s plan has two components—a new €750 billion recovery instrument, called Next Generation EU, that would be embedded within a revamped MFF that would include, in addition to the Next Generation EU funds, €1.1 trillion of spending over the seven years. The funds for Next Generation EU would be raised by temporarily increasing the EU’s “own resources” ceiling to 2 percent of EU Gross National Income, which would allow the Commission to borrow €750 billion on the financial markets. The borrowed funds would be repaid through future EU budgets over 30 years beginning in 2028. In order to service the debt, the Commission proposed creating several new sources of revenue, including one based on the emissions trading scheme, a carbon border adjustment mechanism, a tax on the operations of large companies, a new digital tax, and a tax on non-recycled plastics.

The Commission proposed that €500 billion of the €750 billion be disbursed as grants or guarantees and €250 billion as loans through three “pillars.” The first “pillar” would involve support for investments and reforms to address the crisis and would include a new Recovery and Resilience Facility with a budget of €560 billion that would provide grants or loans to member states for investments and reforms essential for a sustainable recovery. The second “pillar” would involve incentives for private investment and would include €31 billion for a new Solvency Support Instrument, a doubling of the funding for InvestEU investment program, and €15 billion for a new Strategic Investment Facility within InvestEU. The third “pillar” would include €9 billion for a new EU health program to invest in prevention, crisis preparedness and procurement of vital medicines and equipment as well as a substantial increase in support for the EU’s Neighborhood, Development and International Cooperation Instrument and its pre-accession partners in the Western Balkans. Bruegel, the Brussels-based economic think-tank, estimates the Commission’s proposal would provide the 27 EU members a total of €433 billion in grants and €250 billion in loans, with the remainder in loan guarantees. Italy would receive €86 billion in grants, Spain €81 billion, France €43 billion, Poland €38 billion, Germany €34 billion, Greece €23 billion, Romania €20 billion and Portugal €16 billion, with lesser amounts for the remaining 20 member states.

The Commission’s plan was immediately and strongly opposed by the same states—most notably, the “Frugal Four”—that had objected to the Merkel-Macron initiative. Indeed, several days before the June 19 meeting of the European Council, the leaders of the “Frugal Four”—Chancellor Sebastian Kurz of Austria and Prime Ministers Mette Frederiksen of Denmark, Mark Rutte of the Netherlands, and Stefan Löfven of Sweden—wrote an oped in the Financial Times in which they objected to the size of the recovery fund; the substantial delay in repaying the borrowings; the disbursement of a substantial portion of the funds as grants rather than as loans; the allocation key that consisted of total population, GDP per capita in 2019, and unemployment in 2015-19; the lack of conditions in regard to reforms that would be required in exchange for grants; and the lack of any oversight in regard to the use of the grants.

After the June European Council meeting, von der Leyen said the discussion, which went on for four hours, was “very positive” and the leaders unanimously agreed that “the severity of the crisis justifies an ambitious common response.” She noted that many leaders emphasized the need to reach an agreement in the European Council before the summer break—meaning at this Friday’s meeting. But there were, she noted diplomatically, “differences of opinion on various issues, for example on the overall size of Next Generation EU, on the balance between grants and loans, on the allocation key, and on own new resources and rebates.” Michel, for his part, said that, while there was “an emerging consensus on some points, we don’t underestimate the difficulties. And on different topics we observe that it is necessary to continue to discuss.” Looking forward, he said, “I am totally committed to start immediately real negotiations with the Member States. We intend to have a physical summit [i.e., in person rather than by video conference] around the middle of July in Brussels. We will have the occasion to focus on some concrete proposals. Before this summit, I will put on the table some concrete proposals in order to try to take a decision. We are aware that it is essential to take a decision as soon as possible.”

After many bilateral discussions with members of the European Council and others, on Friday Michel put forward his “concrete proposals.” In a bow to the “Frugal Four,” he proposed that the size of the MFF, the EU’s seven-year budget, be reduced slightly to €1.074 trillion and that the five member states that are net contributors to the budget—the “Frugal Four” and Germany—retain their rebates in real terms, on the basis of their 2020 contributions, and receive them in a lump sum. He retained the Commission’s proposal that it borrow up to €750 billion through an “own resource” decision with the understanding that it is “an exceptional and one-off tool for an exceptional situation.” But in regard to new “own resources,” he proposed a more gradual and limited increase, with a new EU tax on unrecycled single-use plastics starting in 2021, a digital levy to be introduced by the end of 2021, an invitation to the Commission to propose a carbon adjustment measure in early 2021 and a revised proposal on the emissions trading scheme, all of which would, taken together, reduce and stretch out the additional budgetary payments via new “own resources.” He also proposed eliminating the Commission’s proposed tax on the operations of large companies and beginning the repayment of the borrowings in 2026 rather than in 2028.

Michel retained the balance between loans, guarantees and grants in the Commission’s plan. But in order to ensure that the Recovery and Resilience Facility is used to assist the countries and sectors most affected by the crisis, he proposed that 70 percent of the funds be committed in 2021 and 2022 according to the Commission’s allocation criteria, with the remainder committed in 2023, taking into account the drop in GDP in 2020 and 2021, and with all of the funds disbursed by 2026. In regard to governance and conditionality, he proposed that member states prepare national recovery and resilience plans for 2021-23 in line with the country-specific recommendations that come out of the European Semester process. The plans would be reviewed in 2022, taking into account the final allocation key and the assessment of the plans would be subject to approval of the Council by a qualified majority vote on a proposal by the Commission.

No doubt the “Frugal Four” and their friends (e.g., Finland) will focus in Friday’s meeting on Michel’s retention of the Commission’s original proposal in regard to the amount of grants, his retention of the Commission’s allocation key for distribution of the 70 percent of funds to be committed in 2021 and 2022, his silence with respect to conditions pertaining to reforms in exchange for the grants and subsequent oversight to ensure that the reforms are implemented, and his imprecise language with regard to governance and conditionality. One modification that will probably win broad support is his proposal that 30 percent of the funding be for climate-related projects, although some may question whether the best and most efficient way to fuel a recovery is to require that 30 percent of the funds be allocated to such projects. But another modification—his proposal that there be “a strong link between funding and respect for governance and rule of law” and, specifically, that the Commission and Court of Auditors report on deficiencies in the rule of law that affect the implementation of the budget and, if need be, propose corrective measures that could be approved by the Council by qualified majority—is likely to incur the wrath of the leaders of Hungary and Poland, both of which are currently the subjects of Article 7 rule of law proceedings, and indeed cause them block approval of the entire plan unless that modification is eliminated.

As Michel was preparing and then presenting his modifications of the Commission’s recovery plan last week, a series of bilateral meetings of EU leaders took place and continued earlier this week in advance of Friday’s meeting. Last Monday, Sánchez and Costa met in Lisbon; last Tuesday, Italian Prime Minister Giuseppe Conte and Costa met in Lisbon; last Wednesday, Conte and Sánchez met in Madrid; last Thursday, Rutte, who has been the de facto negotiator for the “Frugal Four,” and Merkel met in Berlin; and last Friday, Conte and Rutte met in The Hague. Two days ago, Costa and Rutte met in The Hague for a working lunch, Sánchez and Rutte met in the Hague for a working dinner, and Conte and Merkel met in Berlin. Yesterday, Sánchez and Merkel met in Berlin.

On Friday, the 27 EU leaders will meet in person for the first time since March to discuss again, as they did on June 19, the Commission’s recovery plan—this time with the various modifications proposed by Michel. Will they agree to the plan as modified by Michel? Based on what Rutte told the Dutch parliament yesterday, that seems unlikely. He said he remains opposed to the fact that a large portion of the fund would be disbursed as grants rather than loans. Grants, he said, should come with “very strict conditions, that is the only way.” And grants should be given only if the recipients promise to make “serious reforms” and there are ways to ensure that the promised reforms actually happen. He said he was “quite gloomy about how things will go…I can assure you that we are doing everything we can behind the scenes, but that given how things are going, I am not hopeful.”

On the other hand, while the leaders continue to debate grants vs. loans, allocation criteria and conditions, the European economy continues to deteriorate. Last week, the EU issued its interim Summer Economic Forecast which estimates that GDP will drop by 8.7 percent in the euro area this year; its Spring Forecast, issued two months ago, estimated GDP would drop by 7.7 percent. It now estimates GDP will drop this year by 11 percent in Italy, Spain and France and by 8-10 percent in Belgium, Ireland, Greece, and Portugal, and by more than 6 percent in Germany.

The Commission’s plan certainly isn’t perfect, and Michel’s modifications haven’t addressed all of its shortcomings and have added some new ones as well. But Europe needs a recovery plan and needs it now. Perhaps before they meet on Friday, the leaders will recall what Angela Merkel said in her powerful and eloquent speech in the European Parliament last week: “Europe will only emerge strengthened from this crisis if we are willing, in spite of all our differences, to find joint solutions, and if we are willing to see the world through each other’s eyes and to be understanding of each other’s perspectives…Nobody will get through this crisis on their own. We are all vulnerable. European solidarity is not just a humane gesture, but a lasting investment. European cohesion is not just a political imperative, but also something that will pay off.”

David R. Cameron is a professor of political science and the director of the European Union Studies Program at the MacMillan Center.