EU leaders discuss Covid, budget veto and EU-UK talks continue

Yesterday the leaders of the 27 member states of the European Union, meeting via video conference as the European Council, discussed, as they had last month, the EU’s response to the Covid pandemic. With the daily number of new cases dropping a bit in several member states in the wake of the recently-announced new lockdowns and restrictions but still at high levels in all of the states, and with several states having no more available space in their hospitals’ intensive care units and the daily number of Covid-related deaths continuing to increase dramatically in many states, the leaders discussed what the EU is doing to coordinate the response to the pandemic.

Based on a report prepared by the German presidency of the Council of Ministers, the leaders considered what the EU has been doing to assist the member states in limiting the spread of the virus, ensuring that they have the necessary medical equipment, promoting research for treatments and vaccines, and supporting jobs, businesses and the economy. Following up on the discussion at their October meeting, they focused, in particular, on what is being done at the EU level to coordinate the member states’ responses in regard to testing strategies and the use of rapid antigen tests, the mutual recognition of tests, cross-border contact tracing, quarantine regulations, and the development, manufacturing and distribution, as soon as they are available, of the Covid vaccines that have already been or soon will be created.

The leaders agreed to further strengthen coordination against the pandemic by developing a common EU approach for the use of rapid antigen tests that complement PCR tests, working toward mutual recognition of tests and their results, and speeding up the preparations of national vaccination plans to ensure, once they’re authorized, they’re available and affordable to all EU citizens. In that regard, they noted that member states and the Commission have already finalized several advance purchase agreements with vaccine producers and recognized there will be logistical challenges involving the storage, transportation and distribution of the vaccines. Finally, in regard to the lifting of restrictive measures, the leaders agreed they need to learn from their recent past experience and be cautious in lifting restrictions and do so gradually.

In addition to considering the EU’s efforts to support and coordinate the response of the member states’ healthcare systems to the pandemic, the leaders discussed at some length the current state of play with regard to the €750 billion recovery plan, labeled Next Generation EU, and the €1.074 trillion Multiannual Fiscal Framework, the EU’s seven-year budget for 2021-27, they approve in their five-day marathon meeting in July. The recovery plan, which will be administered by the Commission through the MFF, consists of €390 billion in grants and €360 billion in loans to the member states to assist their recovery from the Covid-generated economic contractions that occurred in the first half of the year. While the €1.074 trillion seven-year budget will be financed, as usual, by the EU’s “own resources” – agricultural levies, customs duties, a Value- Added Tax and a Gross National Income-based “own resource” that covers the gap between expenditures and the other sources of revenue – the €750 billion recovery fund will be financed by borrowings in the capital markets that will, of course, have to be serviced by the EU. All of the €750 billion will be borrowed and allocated to the member states through grants or loans between 2021 and 2024 and repaid over 30 years beginning in 2028.

In September, the European Parliament quickly approved an Opinion supporting a new Own Resources Decision by the Council that would provide for new revenues to cover the annual financing costs of the €750 billion recovery plan. But for the better part of two months, the Parliament and negotiators for the members states haggled over provisions in the €1.074 trillion MFF. Given that the MFF covers all EU spending (aside from the €750 billion recovery plan) from 2021 through 2027, it’s hardly surprising there was a great deal of negotiation, and at times haggling, over the funding of specific programs within the MFF. But finally, after two months of discussion, last week the negotiators representing the member states and the Parliament agreed on an additional €15 billion of spending, to be funded by competition fines that normally go to the states, for a variety of programs involving health, university education, and science, and some cuts in other programs, and forwarded the final version of the MFF to the Parliament and the Council for their approval.

One of the provisions in the recovery plan agreed in July – and one of the reasons the meeting which approved it went on for five long days – was the stipulation that payments from the recovery fund be conditional on adherence to the rule of law. Proposed and advocated by the leaders of a number of member states in Western Europe who are concerned about the pervasive and continuing erosion of the rule of law, whether as the result of political interference in the judicial system, tolerance of political corruption, or politically-motivated interference with the media and educational institutions, in some of the member states in central and eastern Europe – most notably, but not exclusively, Hungary and Poland – the European Council agreed in July, after a heated debate and despite the strong and continuing opposition of Hungarian Prime Minister Viktor Orbán, Polish Prime Minister Mateusz Morawiecki and several others, that payments under the recovery plan could be suspended if there are “generalized deficiencies” in the rule of law that would directly affect the budget.

According to Articles 311 and 312 of the Treaty on the Functioning of the European Union, both the adoption of an Own Resources Decision and the adoption of the MFF require the unanimous approval of the Council after the Parliament has registered its approval. In September, in an effort to find some middle ground in regard to rule-of-law conditionality, the German presidency of the Council of Ministers – the presidency rotates among the member states every six months – introduced proposals for regulations that would, under certain circumstances, provide for the suspension of disbursements to member states that violate principles such as judicial independence, but only if the violations affected the spending of funds and if no other member state opposed the suspension. Not surprisingly, the proposals were rejected by the member states that had supported rule-of-law conditionality on the grounds that they weakened the likely effectiveness of conditionality, and they were rejected as well by a substantial portion of the European Parliament who regarded the proposals as too lenient and tolerant of breaches of the rule of law. And not surprisingly, the proposals were also rejected by the Hungarian and Polish governments and those of several other member states located in central and eastern Europe and by a large portion of the MEPs representing voters in those states who oppose the attachment of any rule-of-law conditionality to EU spending.

Eventually, after two months of discussion, two weeks ago the EU ambassadors and the negotiators for the Parliament agreed on a rule-of-law mechanism that would, while making the receipt of funds conditional on respect for EU values, including the independence of the judiciary, broaden the definition of “breaches” of the rule of law to include violations that don’t have a direct and immediate effect on the budget but involve a potential future risk for EU funds. The Commission would, in this compromise, have the power to identify breaches of the rule of law and propose a suspension or reduction of funds that would require approval by a majority of member states within a month in order to take effect.

The European Parliament declared the agreement to be “historic.” But both Orbán and Morawiecki said they would not support the MFF as long as it included the compromise rule-of-law mechanism and, to no one’s surprise, at a meeting of the EU ambassadors on Monday, the Hungarian and Polish ambassadors vetoed the MFF – which of course means that, less than two months from 2021, the EU still does not have a formally-approved budget for 2021-27 nor formal approval to borrow €750 billion to fund the €390 billion in grants and €360 billion in loans to the member states agreed by the European Council at its marathon meeting in July. And this despite the fact that the Commission’s Autumn European Economic Forecast released two weeks ago estimates that the rate of economic growth in 2021 will be significantly lower in all 27 member states than was predicted in its Spring Economic Forecast last April when the EU, like the rest of the world, naively believed the Covid pandemic would be over by late 2020. In the event Hungary and Poland continue to block approval of the MFF, the EU would not cease to function; it would instead have to resort to the rule of the “provisional twelfth,” under which, if at the beginning of a financial year, the budget has not yet been adopted, the Council may authorize on a month-by-month basis an amount of spending equivalent to no more than 1/12th of the appropriation for the preceding year. Given that the new MFF provides, apart from the €750 billion in new funds to be raised by borrowings and distributed as grants and loans, only a very modest increase in spending, resorting to the rule of the “provisional twelfth” would not significantly change the status quo in terms of EU spending. But it would mean the EU could not distribute any portion of the €750 billion.

German Chancellor Angela Merkel updated the leaders on the current state of play in regard to the MFF and the recovery package at yesterday’s meeting. But it was clear the leaders did not want to get into another long and heated argument that would go on for hours without resolution, and they spent less than a half-hour on the topic. After the meeting, European Council President Charles Michel reported that, “On the mechanism on conditionality, the vast majority of Member States agree with the compromise on the table. Some Member States have indicated that they are not able to support the majority. We will continue the discussions to find an acceptable solution to all.” He later said, “Nobody underestimates the difficulty of the situation. There is a determination in coming days to work in an intensive way to overcome difficulties, make progress, so we can get beyond this.” Merkel said, “We are obliged to try to find a way [to solve the issue]. It’s a serious problem that we have to solve and we will work hard and earnestly on it.” European Commission President Ursula von der Leyen likewise said, “Now we sit down, we negotiate, we listen to what the issues are and we try to solve them.” Whether they will in fact be able to solve the problem before the next European Council meeting on December 10-11 remains to be seen.

Meanwhile, as the European Council was considering the EU’s response to the Covid pandemic and, briefly, the rule-of-law issue, the EU and UK negotiating teams, led by Michel Barnier and Lord David Frost were at work in Brussels attempting to resolve their differences in regard to the key issues on which they remain divided – maintaining a level playing field for British and EU businesses competing with each other, providing access for EU fishermen and women to British territorial waters, and creating a governance mechanism that ensures that both sides adhere to the terms of the agreement – so they could conclude an agreement on their future relationship that could be approved in time to take effect when the UK leaves the EU’s internal market and customs union at midnight on December 31.

Arriving in Brussels early Sunday morning after a full week of intensified negotiation in London, Frost tweeted, “Arriving once again in Brussels shortly for another round of negotiations with EU and Michel Barnier this afternoon. I and our British team have been in talks almost every day since 22 October. We are working to get a deal, but the only one that’s possible is one that is compatible with our sovereignty and takes back control of our laws, our trade, and our waters. That has been our consistent position from the start and I will not be changing it. There has been some progress in a positive direction in recent days. We also now largely have common draft treaty texts, though significant elements are of course not yet agreed. We will work to build on these and get an overall agreement if we can. But we may not succeed. Either way, as the Prime Minister Boris Johnson made clear on 16 October, people and businesses must prepare for the change that is coming on 31 December, most of which happens whether there is a deal or not.” Barnier for his part tweeted more succinctly, “The EU Commission negotiating team is continuing negotiations in Brussels this week w/David Frost & team. With the European Parliament & all Member States, we remain determined, patient, respectful. We want our future cooperation to be open but fair in all areas.”

As Barnier and Frost and their teams worked this week, they were of course mindful that time is running out for reaching agreement. In order for an agreement to take effect at midnight on December 31, it will have to be approved by the British and European Parliaments and the British and EU member state governments. That can’t happen until the text and annexes are completed, checked by the lawyers, translated into the 24 official languages of the EU and reviewed by the British and EU parliaments and governments. That is no small task considering the likely length of the text and annexes; the EU-Canada Comprehensive Economic and Trade Agreement.(CETA) is 1600 pages of text and 600 pages of annexes, and the text and annexes of the EU-UK agreement that have already been agreed and drafted are reported to total about 1800 pages. When the negotiation began, it was widely assumed that, in order for an agreement to be approved by all parties in time for it to take effect at midnight on December 31, it would have to be completed by mid-October at the latest. But as the negotiation continued and progress on the most difficult issues proved to be elusive, the target date shifted to the end of October and then to early-to-mid November. It’s probably the case that if there is no agreement by the end of this month, it will be very difficult to complete all the steps needed in order to have an agreement that can take effect at midnight on December 31. But it could, of course, go down to the wire; big decisions usually do in the EU. With that possibility in mind, another European Council meeting has been scheduled for December 10-11 and sources in the European Parliament say there has been discussion about scheduling an extraordinary session to approve the agreement on December 28.

The EU and UK negotiators have reportedly been making progress on a number of issues in recent weeks, but they appear to remain divided on several – most notably, the level playing field and fishing. In regard to the first, the EU insists that the UK maintain a level playing field for EU and British firms by adhering to EU rules pertaining to state subsidies and labor, health, and environmental standards while the UK insists that it not be prevented from lowering its rules and standards through “non-regression” clauses and not be required to match increases in EU rules and standards through “evolution” or “ratchet” clauses. In regard to the second, the EU insists that the UK allow continued access by EU fishermen and women to British territorial waters and agree to negotiate multi-year quotas for their catches in those waters while the UK insists that it be able to limit the access of EU fishermen and women to its waters, negotiate the quotas for EU catches in its waters on an annual basis, and be able to reduce EU quotas if the stocks of fish or livelihoods of British fishermen and women are threatened.

Several weeks ago in comments to a House of Lords committee, Frost indicated the UK might be willing to go further in regard to limitations on state subsidies – the most contentious aspect of the level playing field issue – than it had in the recent trade deal it agreed with Japan. He said, “We are beginning, and we are only just beginning, a discussion on ‘is it possible to go further than you normally do in a free trade agreement’ and agree some provisions that, as it were, shape and condition the subsidy policy on both sides.” Later, in a separate hearing with MPs, he suggested progress was being made on that issue and that, of the two issues, fishing was the more difficult one: “Fisheries is the most difficult issue remaining for us….but I wouldn’t want to say that any issue can’t be solved.” That still seems to be the case, notwithstanding the fact that fishing constitutes a miniscule portion of the British economy. But there may be some movement by the UK on that issue as well; this week the UK proposed a transitional arrangement during which the EU quotas on catches would, depending on the fish and the location, remain in effect or be reduced only slightly for some time.

The negotiating teams appeared to be making progress on the most difficult issues this week—until yesterday, when Barnier announced that a high-level member of the EU negotiating team had tested positive for Covid-19. As a result, he said he and other high-level members of the EU team were going to go into self-isolation and high-level talks would be suspended “for a short period,” although the negotiating teams “will continue their work in full respect of guidelines.” Soon thereafter, a UK spokesperson said the teams had agreed to continue to negotiate remotely for the time being and the UK team would return to London. The talks are scheduled to continue there next week although it’s not clear at this point which members of the EU team will be able to attend and whether the talks will be in person or remote. Today, von der Leyen said, “after difficult weeks with very, very slow progress, now we have seen in the last days better progress, more movement on important files” – most notably, in regard to rules on state subsidies. But, she said, “there are still quite some meters to the finish line so there is still a lot of work to do. Time pressure is high without any question.” She’s certainly right about that.

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