After five-day marathon, EU leaders agree on €750 billion recovery plan

European Commission President Ursula von der Leyen and European Council President Charles Michel after Tuesday’s agreement on recovery plan and MFF.
Wednesday, July 22, 2020

On Friday, the European Council, the heads of state or government of the 27 EU member states, convened in Brussels for what was intended to be a two-day meeting to consider, and hopefully approve, the Commission’s €750 billion recovery plan and its €1.1 trillion Multiannual Fiscal Framework (MFF), the EU’s seven-year budget for 2021-27. Yesterday morning, after a five-day marathon of plenary meetings interspersed with bilateral and small-group meetings that stretched each day into the early hours of the next, the leaders finally agreed on a slightly-modified plan and the MFF. Despite the opposition of some leaders to the size of the proposed recovery fund, in the end the leaders agreed the Commission could, as it proposed, borrow up to €750 billion on the capital markets to assist member states in recovering from the effects of the coronavirus pandemic. But after the even-stronger opposition to the Commission’s proposal that two-thirds of the €750 billion be provided as grants, the leaders agreed to reduce the amount to be distributed as grants from €500 billion to €390 billion and increase the amount available as loans from €250 to €360 billion. They also agreed to a slight reduction in the MFF from the €1.1 trillion in spending the Commission proposed for 2021-27 to €1.074 trillion.

At their April 23 meeting, the leaders agreed to work toward establishing a recovery fund that would assist the sectors, regions and countries 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 MFF. On May 18, German Chancellor Angela Merkel and French President Emmanuel Macron proposed that the EU create a €500 billion recovery fund, financed by EU borrowings and disbursed through its budget, that would provide grants to the sectors, regions and member states hardest hit by the crisis. Building on the Merkel-Macron initiative, the Commission proposed creation of a new €750 billion recovery instrument, Next Generation EU (NGEU), that would be embedded within a revamped MFF that would include, in addition to the NGEU funds, €1.1 trillion of spending in 2021-27. The funds for NGEU would be raised by temporarily increasing the EU’s “own resources” ceiling to 2 percent of the EU’s Gross National Income, which would allow the Commission to borrow €750 billion in the capital markets. The borrowed funds would be repaid over 30 years beginning in 2028. In order to service the debt, the Commission proposed 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 funds be disbursed as grants 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 (RRF) that would provide €560 billion—€310 billion in grants and €250 in loans—to member states for investments and reforms essential for a sustainable recovery. The “pillar” would also include €50 billion more for the current cohesion policy programs through a new REACT-EU initiative to be allocated based on the severity of the crisis, including the extent of youth unemployment and the relative prosperity of the states; €30 billion to strengthen the Just Transition program that assists the states in accelerating the transition toward climate neutrality; and €15 billion more for the European Agricultural Fund for Rural Development to support structural changes in rural areas consistent with the EU’s Green Deal. The second “pillar” was  aimed at “kick-starting the EU economy by incentivizing private investments” and would include €26 billion for a new solvency support instrument to mobilize private resources to support European companies in the sectors and areas most affected by the pandemic; €15 billion for an upgrade of InvestEU, the EU’s investment program, to mobilize private investment in the EU; and €15 billion for a new strategic investment facility in InvestEU to generate investment in strategic sectors linked to the green and digital transition. The third “pillar” was aimed at “addressing the lessons of the crisis” and would include €94 billion for Horizon Europe to support research in health, resilience, and the green and digital transitions; €16 billion for external action including humanitarian aid; €8 billion for a new health program, EU4Health, to strengthen health security and prepare for future health crises; and €2 billion for RescEU, the EU’s civil protection mechanism.

The Commission’s plan immediately encountered a firestorm of opposition from the same states—most notably, the “Frugal Four” (Austria, Denmark, the Netherlands, and Sweden)—that had strenuously objected to the Merkel-Macron initiative and, prior to that, to a proposal by the Eurogroup, the finance ministers of the EU states that are members of the euro area, subsequently approved by the European Council, to use a credit line facility in the European Stability Mechanism to provide up to €240 billion in precautionary credit lines to euro area member states needing assistance. 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 op-ed 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 for the grants 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.   

The European Council discussed the Commission’s plan for several hours at its June 19 meeting. Not surprisingly, the states that would benefit most from the recovery fund—Italy, Spain, France, Greece, Portugal and others—strongly opposed the position of the “Frugal Four.” After the meeting, European Council President Charles Michel 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.” He said he would immediately start negotiations with the leaders and would prepare some “concrete proposals” that could be considered by them prior to a mid-July European Council meeting.

Last Friday, Michel put forward his proposals. In a bow to the “Frugal Four,” he proposed that the MFF 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 but proposed a more gradual introduction of new “own resources,” 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. He also dropped the Commission’s proposal of a new tax on the operations of large companies and proposed that it begin repaying the borrowings in 2026 rather than 2028.

Michel retained the Commission’s allocation of the €750 billion to grants and loans. 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. 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 generated by the European Semester annual review of their fiscal policies and that the 2023 plans be reviewed in 2022, taking into account the modified allocation key, and be subject to approval by the Council by a qualified majority. He also proposed that 30 percent of the funding be for climate-related projects. And he proposed that there be a “strong link between funding and respect for governance and rule of law” which, not surprisingly, immediately incurred the wrath of Poland and Hungary, both of which are currently subjects of Article 7 proceedings in regard to alleged rule of law violations.

The European Council meeting was preceded by more than a week of bilateral discussions among the leaders, but it was clear, as it began, that the strong disagreements among the leaders in regard to the size of the fund, the amount that would be disbursed as grants, the allocation criteria, conditions that would accompany grants, and subsequent oversight over the use made by the recipients of the grants remained. Entering the meeting Friday, Merkel no doubt spoke for many when she said, “I have to say the differences are still very, very great. And therefore I cannot say whether we will come to a result this time. …I expect very, very difficult negotiations.” She was right; the negotiations were indeed very difficult.

The press coverage of the meeting largely focused on the lengthy meetings that ran each day into the early morning hours of the next and the arguments between the leaders of the “Frugal Four”—in particular, Rutte, their de facto chief negotiator—and those of the countries that would be the largest beneficiaries of the Commission’s plan—most notably, Italian Prime Minister Giuseppe Conte and Spanish Prime Minister Pedro Sánchez, but also Greek Prime Minister Kyriakos Mitsotakis, Portuguese Prime Minister António Costa and, of course, Macron and Merkel. At various points over the five days, the arguments concerned the size of the fund, the amount of grants vs. loans, the allocation key, the process and criteria to be used in approving grants and loans, and subsequent oversight, including possible termination, of the use of the funding, supplemented from time to time by threats from Hungarian Prime Minister Viktor Orbán, supported by Polish Prime Minister Mateusz Morawiecki, to block approval if Michel’s proposal to link funding to respect for the rule of law was included in the deal. (Evidently the other leaders took the threat seriously; the Conclusions contain only a single sentence in that regard: “The European Council underlines the importance of the respect of the rule of law.”)

But what the press coverage missed amid all the drama of the disagreements, arguments, and long-running meetings, and what became apparent only after the Conclusions were published yesterday, is that, while they changed the amounts of grants and loans, the leaders also substantially increased the funding available to the member states to assist their recovery from the economic consequences of the coronavirus pandemic. As a result, the plan that emerged from the European Council meeting is focused to a much greater extent than the Commission’s proposal was on its essential purpose—facilitating a recovery.

As noted above, the Commission proposed creation of a new €560 billion Recovery and Resilience Facility (RRF), consisting of a grant facility of €310 billion and €250 billion in loans, as the principal means by which the EU would support the recovery of the member states’ economies. The RRF approved yesterday will be substantially larger, €672.5 billion, and will consist of €312.5 billion in grants and €360 billion in loans. The leaders also approved €65 billion of grants for other uses under the Commission’s first “pillar”—€47.5 billion for ReactEU (the cohesion policy programs), €10 billion for the Just Transition Fund (to accelerate the transition toward climate neutrality), and €7.5 billion for the Agricultural Fund for Rural Development (to support rural areas in making structural changes). But they approved only €5.6 billion in grants for uses under the second “pillar” (for InvestEU) and €6.9 billion in grants for uses under the third “pillar” (€5 billion for Horizon Europe-funded research on health, resilience, and the green and digital transitions, and €1.9 billion for RescEU, the EU’s civil protection mechanism). Evidently, they weren’t taken with the Commission’s proposal to “kick-start” the EU economy by “incentivizing” private investments; they dropped its proposals for a new Solvency Support Instrument and a new Strategic Investment Facility. Nor were they persuaded that almost €40 billion of grants should be used to “address the lessons of the crisis.”

In reducing the NGEU-funded grants from €500 billion to €390 billion and increasing the loans from €250 billion to €360 billion, the leaders in effect dropped €110 billion of grants for other purposes—largely from the Commission’s proposed second and third “pillars”—and added €110 billion of loans available under the RRF. The states receiving funds obviously would have preferred to receive grants rather than loans. And obviously there were many worthwhile uses in the Commission’s second and third “pillars” that might, at some other moment, have warranted funding. But from the perspective of facilitating a recovery from the economic consequences of the pandemic, the leaders did the right thing; they put first things first—the recovery.

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