Faced with the biggest economic crisis since World War II, the EU itself has decided to borrow to help its member states.

▲ Commission President Von der Layen and European committee President Charles Michel after announcing the agreement in Julycommittee Europeancommittee ].

ANALYSIS / Pablo Gurbindo Palomo

"Deal!With this "tweet" at 5:30 in the morning of July 21, the president of the European committee , Charles Michel, announced the achievement of an agreement after the longest meeting in its history (more than 90 hours of negotiations). 

After the failed summit in February, the European countries were aware of the importance of reaching an agreement, but certain countries saw it as more urgent than others to finalize the Multiannual Financial framework (MFF) for the next seven years. But as with everything else, the Covid-19 pandemic has overturned this lack of urgency, and has even forced the Member States to negotiate, in addition to the budget, aid to alleviate the effects of the pandemic on the 27.

The agreement consists of an MFF of 1.074 trillion euros. A figure lower than that demanded in February by the so-called friends of cohesion (a conglomerate of countries from southern and eastern Europe) and the Commission itself, but also higher than the figure that the frugals (the Netherlands, Austria, Denmark and Sweden) were willing to accept. But it was not this figure that was the subject of the discussion, but how much and how the post-pandemic recovery fund was to be set up to help the countries most affected by the pandemic. The agreed Fund was 750 billion, divided into 390 billion to be given to the Member States in the form of grants, and the remaining 360 billion to be given in the form of a 70% loan to be disbursed between 2021 and 2022.

The figures are dizzying, and based on the February negotiations, where some of the members preferred something more austere, one might ask: How did we reach this agreement?

The Hamilton moment

With the arrival of Covid-19 in Europe and a considerable paralysis of all the world's economies, the European capitals quickly realized that the blow was going to be significant and that a strong response was going to be necessary to soften the blow. Proposals at the European level were not long in coming. For example, the European Parliament proposed a recovery package of 2 trillion euros on May 15, to be included in the MFF 2021-2027.

The most noteworthyproposal was presented on May 18 by French President Emmanuel Macron and German Chancellor Angela Merkel. And not only because it was driven by the two main economies of the Union, but also because of its historic content.

There has been talk of Hamilton momentin allusion to Alexander Hamilton, one of the founding fathers of the United States and the first Secretary of the Treasury of the newly founded republic. In 1790 the thirteen states that made up the young American nation were heavily indebted due to the war effort of the Revolutionary War, which had ended only seven years earlier. To solve this problem, Hamilton, Secretary of the Treasury, succeeded in convincing the federal government to assume the states' debt by "mutualizing" it. This event marked the strengthening of the American federal government and served to create the instructions of the U.S. national identity. 

It seems that with the Franco-German proposal , the Hamilton moment has arrived. The proposal is based on four pillars: 

1. European health strategy, which may include a joint reservation of medical equipment and supplies, coordination in the acquisition of vaccines and treatments. In turn, epidemic prevention plans shared among the 27 and common methods for registering the sick.

2. A boost to the modernization of European industry, supported by an acceleration of the ecological and digital transition.

3. Strengthening the European industrial sector, supporting production in the Old Continent and diversification of supply chains to reduce global dependence on European Economics .

4. 500 billion reconstruction fund for the regions most affected by the pandemic based on EU budgetary programs.

It is this fourth pillar which we can call "Hamiltonian" and which is historic as it would allow for the first time in history the EU itself to issue debt to finance this fund. This proposal has broken years of a German stance against any subject collective indebtedness. "We are experiencing the biggest crisis in our history... Due to the unusual nature of the crisis we are choosing unusual solutions," Merkel said in the joint video conference with Macron.  

According to this proposal , the funds would not be reimbursed directly by the countries but by the Community funds in the long term, either through its usual resources or through new sources of income. It should also be pointed out that the proposal referred to the submission of this fund in the form of subsidies, i.e., without any subject of interest for the recipient countries.

Among the reactions to this proposal were those of the frugal, who rejected that the funds should be provided in the form of subsidies. "We will continue to show solidarity and support for the countries most affected by the coronavirus crisis, but this should be in the form of loans and not subsidies," said Austrian Chancellor Sebastian Kurz. The frugal proposal is that financial aid raised on the debt markets should be submit to the states at low interest rates, i.e. as a loan, and conditional on a reform program.

On May 27, the Commission announced its proposalproposal, very similar to the Franco-German one, but extended. The proposal consists of a 1.1 trillion euro MFF and a 750 billion euro recovery plan called Next Generation EU. This recovery plan is based on three pillars financed with new instruments but within pre-existing headings:

The first pillar covers 80% of the recovery plan. It deals with support to Member States in their investments and reforms following the Commission's recommendations. For this purpose, the pillar has the following instruments:

• Recovery and Resilience Mechanism (the most important part of the proposal): financial support for investments and reforms of the States, especially those related to the ecological and digital transition and the resilience of national economies, linking them to EU priorities. This mechanism would be composed of 310 billion in grants and 250 billion in loans.

• React-EU Fund within the cohesion policy with 55 billion. 

• Increase in the Just Transition Fund: this fund is intended to support States in undertaking the energy and ecological transition, to move towards a policy of climate neutrality. It would be increased to 40 billion.

• Increase in the European Agricultural Fund for Rural development : to support rural areas to comply with the European Green agreement . It would be increased by 15 billion.

The second pillar covers 15% of the plan. It focuses on boosting private investment, and its funds would be managed by the European Investment Bank (EIB):

• 31 billion Solvency Support Facility

• EU-Invest program increased to $15.3 billion

• New Strategic Investment Fund to promote investment in European strategic sectors 

The third pillar comprises the remaining 5%. It includes investments in aspects that have result key to the coronavirus crisis:

• EU4Health program to strengthen health cooperation. With a budget of 9.4 billion.

• Strengthening of rescEU, the European Union's Civil Protection Mechanism, by 2 billion.

• Horizon Europe project for the promotion of research and innovation worth 94.4 billion.

• 16.5 billion in support for foreign humanitarian financial aid .

To obtain the financing, the Commission would issue its own debt on the market and introduce new taxes of its own, such as a border carbon tax, emission rights, a digital tax or a tax on large corporations.

It should also be noted that both access to MFF and Next Generation EU aid would be conditional on compliance with the rule of law. Something that did not please countries such as Hungary or Poland, which, among others, consider that it is not clear and that it is a form of interference by the EU in their internal affairs.

Negotiation at the European Summit

With this proposal on the table, the heads of state and government of the 27 met on July 17 in Brussels amid great uncertainty. They did not know how long the summit would last and were pessimistic that an agreement would be reached.

The hot points of the negotiation were mainly the amount and form of the Reconstruction Fund. Countries such as Spain, Italy and Portugal wanted the aid to come in the form of subsidies in full and without any subject . On the other hand, the frugal countries, led at the summit by Mark Rutte of the Netherlands, wanted the reconstruction fund to be reduced as much as possible, and in any case to be provided in the form of loans to be refund and as an "absolute precondition". "Any financial aid from the North means reforms in the South. There is no other option," said Rutte at a press conference in The Hague.

As in any negotiation, positions were loosening. It was already clear that neither of the two positions was going to remain unscathed and that a mixed solution with both subsidies and loans was going to be the solution. But in what percentage? And with reform conditionality?

For Spain, Italy and Portugal, the subsidies could not be less than 400 billion, which was already a concession of the 500 billion from which they had started. For the frugal, who were joined by Finland, this figure could not exceed 350 billion, which would reduce the total Fund to 700 billion. This was a major concession by the frugal members, who went from talking about zero subsidies to accepting them as 50% of the amount. Michel's final proposal was 390 billion in subsidies and 360 billion in loans to try to convince all parties.

The big stumbling block, apart from the percentage, was the conditionality of reforms for the submission aid defended by the frugal. The ghost of the Troika imposed after the 2008 crisis was beginning to appear, to the disgrace of countries such as Spain and Italy. Rutte demanded that the national plans that countries had to submit to the Commission in order to receive the Fund should also pass through the committee of the 27 and that unanimous approval was necessary. This formula basically allowed any country to veto the national plans. Germany, for its part, did not go as far as the required unanimity, but did ask for some control by the committee.

Rutte's stance angered many countries that saw the proposal as a way to force reforms that have nothing to do with economic recovery.

The president of the committee presented a proposal to bring the parties closer together: the "emergency brake". According to Michel's proposal , countries will have to submit their reform plan to the committee and it will have to be approved C qualified majority. After its approval, any country is allowed to submit to the committee its doubts about the fulfillment of the plans presented by a State; in this case, the committee would have a maximum period of three months to make a pronouncement. The country would not receive aid until a decision is received.

For those who may be surprised by the large concessions of the frugal, we must mention the figure of the "rebates" or compensatory checks. These are rebates on a country's contribution to the budget and were introduced in 1984 for the United Kingdom. The British were one of the main net contributors to the European budget , but they hardly benefited from its aid, 70% of which was earmarked for the Common Agricultural Policy (CAP) and the Cohesion Fund. It was therefore agreed that the British would have a permanent discount on their contribution. Since then, other net contributor countries have been receiving these checks. Although in these cases they had to be negotiated with each MFF and were partial on a specific area.

It is a very controversial figure for many countries, and an attempt was already made to remove it in 2005. But what is undeniable is that it is a great bargaining chip. The frugal countries have wanted to keep it from the beginning, and even strengthen it. And faced with the difficulties of negotiation, the rest of the Member States have seen that it is an "affordable" and not very elaborate way of convincing the "hawks of the north". After an initial stance, they ended up increasing it: Denmark will receive 377 million (considerably higher than the initial 222 million); Austria will double its initial amount to 565 million; Sweden will receive 1,069 million (higher than the initial 823 million); and the Netherlands will receive 1,575 million. Germany, as the largest net contributor, will receive 3.671 billion.

The last important negotiation point to be addressed is the conditionality of compliance with the rule of law in order to receive the various funds and aid. Hungary and Poland, for example, have an open transcript for possible violation of article 7 of the Treaty on European Union (TEU), which allows a Member State to be sanctioned for violating basic values of the Union such as respect for human rights or the rule of law. Many countries have pressed the issue, but given the difficulty in negotiations and a possible risk of vetoing the agreement depending on the vocabulary used by the Hungarian President Viktor Orban, this clause has come to nothing.

To recapitulate, and as stated at the beginning of the article, the agreement ended up with an MFF of 1.074 trillion euros; and a post-pandemic reconstruction fund, the Next Generation EU, of 750 billion, divided into 390 billion in the form of subsidies and 360 billion in the form of loans. To this must be added Michel's "emergency brake" for the submission aid and the significant sum of the "rebates".

The cutbacks

Yes, there have been. Apart from the already explained rule of law clause, there have been several cuts in several of the items proposed by the Commission. Firstly, a significant cut in the Just Transition Fund, which has been reduced from the initial proposal of 40 billion to 10 billion, to the anger of Poland in particular. Secondly, the rural development funds are reduced from 15 billion to 7 billion. Thirdly, the 16.5 billion fund to support external humanitarian financial aid , the 31 billion solvency support instrument ( proposal by the Commission) and the 9.4 billion EU4Health program have come to nothing. And finally, the Horizon Europe project would drop from the 94.4 billion proposed by the Commission to barely 5 billion.

Winners and losers?

It is difficult to speak of winners and losers in a negotiation where all parties have yielded a great deal in order to reach an agreement. Although it remains to be seen whether the positions of the countries were truly immovable from the beginning or whether they were simply used as an instrument of pressure in the negotiation.

The countries most affected by the pandemic, such as Italy and Spain, can be happy because they will receive a very large sum in the form of subsidies, as they wanted. But this conditionality that they were not going to accept in any way, in a way, is going to come to them softened in the form of Michel's "emergency brake". And the reforms they did not want to be forced to make, they will have to carry out in agreement the recovery plan they send to the committee, which, if not sufficient, may be rejected by the latter.  

The frugal have succeeded in getting conditional aid, but more than half of it will be in the form of subsidies. And as a rule, the monetary limits they advocated have been exceeded.

Countries such as Poland or Hungary have succeeded in making the conditionality of the rule of law ineffective in the end, but on the other hand they have received considerable cuts in funds, such as Just Transition, which are important especially in Central Europe for the energy transition.

But, in the final, each Head of State and Government has returned to his country claiming victory and assuring to have accomplished his goal, which is what a politician has to do (or appear to do) in the end.

For both the MFF 2021-2027 and Next Generation EU to go ahead, the European Parliament's ratification is still pending. Although the Parliament has always advocated for a more ambitious package than the one agreed, there is no fear that it will block it.

Conclusion

As I have said, this agreement can be described as historic for several reasons. Apart from the obvious extension of the European committee or the Covid-19 pandemic itself, it is historic because of the Hamilton moment that seems to be about to take place.

It seems that the Member States have learned that the formula used after the crisis in 2008 did not work, that crises affect the entire Union as a whole and that no one can be left behind. Cases such as Brexit and the rise of Eurosceptic movements throughout the continent set a dangerous precedent and could even jeopardize the continuity of the project.

The "mutualization" of debt will allow already heavily indebted countries, which would have problems to finance themselves due to their high risk premium, to get out of the crisis sooner and better. This decision will obviously cause problems that remain to be seen, but it shows that the 27 have realized that a joint financial aid was necessary and that they cannot go to war on their own. As Merkel said when presenting her plan after the pandemic together with Macron: "It is the worst crisis in European history", and she added that, in order to emerge "stronger", it is necessary to cooperate.

This step of some fiscal unity can be seen as a rapprochement to the Federal Europe, at least in the Eurozone, that has been discussed for decades now. Whether this is a path with or without return remains to be seen.

The always complicated negotiations are made even more difficult by the 75 billion euros that the United Kingdom is no longer contributing to the negotiations.

ANALYSIS / Pablo Gurbindo Palomo

The negotiations for the European budget for the period 2021-2027 are crucial for the future of the Union. After the failure of the extraordinary summit of February 20 and 21, time is running out and the Member States must put aside their differences in order to reach an agreement before December 31, 2020.

The negotiation of a new European Multiannual Financial framework (MFF) is always complicated and crucial because the ambition of the Union depends on the amount of money that the Member States are willing to contribute. But the negotiation of this new budget heading, for the period 2021-2027, has an added complication: it is the first without the United Kingdom after Brexit. This complication does not lie in the absence of the British in the negotiations (for some that is more of a relief) but in the 75 billion euros they have stopped contributing.

What is MFP?

The Multiannual Financialframework (MFF ) is the EU's long-term budgetary framework and sets the expense limits for the Union, both as a whole and in its different areas of activity, for a period of not less than 5 years. In addition, the MFF includes a number of provisions and "special instruments" beyond that, so that, even in unforeseen circumstances such as crises or emergencies, funds can be used to address the problem. This is why the MFF is crucial, as it sets the political priorities and objectives for the coming years.

This framework is initially proposed by the Commission and, on this basis, the committee (composed of all member states) negotiates and has to reach a unanimous agreement . The proposal is then sent to the European Parliament for approval.

The amount allocated to the MFF is calculated on the basis of the Gross National Income (GNI) of the member states, i.e. the sum of the remuneration of the factors of production of all members. But customs duties, agricultural and sugar levies and other revenues such as VAT are also part of it.

Alliances for war

In the EU there are countries that are "net contributors" and others that are "net receivers". Some pay more to the Union than they receive in return and others, on the other hand, receive more than they contribute. This is why the positions of the countries are flawed when they face these negotiations: some want to pay less money and others do not want to receive less.

Like any self-respecting European war, alliances and coalitions have been formed beforehand.

The Commission 's proposal for the MFF 2021-2027, made on May 2, 2018, already made many European capitals nervous. The proposal was for 1.11% of GNI (already excluding the UK). It provided for budget increases for border control, defense, migration, internal and external security, development cooperation and research, among other areas. On the other hand, however, cuts were envisaged in the Cohesion Policy (aid to help the most disadvantaged regions of the Union) and the Common Agricultural Policy (CAP).

The Parliament presented a report provisional on this proposal in which it called for an increase to 1.3% of GNI (corresponding to a 16.7% increase from the previous proposal ). In addition, the parliamentarians asked, among other things, that the funds for cohesion and agriculture be maintained as in the previous budgetary framework .

On February 2, 2019, the Finnish committee presidency proposed a negotiation framework starting at 1.07% of GNI.

This succession of events led to the emergence of two antagonistic blocs: the frugal club club of the frugal and the friends of cohesion.

The frugal club is composed of four northern European countries: Sweden, Denmark, the Netherlands and Austria. These countries are all net contributors and advocate a budget of no more than 1% of GNI. On the other hand, they ask that cuts be made in items they consider "outdated" such as cohesion funds or the CAP and want to increase the budget in others such as research and development, defense and the fight against immigration or climate change.

Austrian Chancellor Sebastian Kurz has already announced that he will veto in committee any proposal exceeding 1 % of GNI.

The friends of cohesion include fifteen countries from the south and east of the Union: Spain, Bulgaria, the Czech Republic, Cyprus, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia and Slovenia. All these countries are net recipients and are demanding that CAP and cohesion policy funds be maintained, and that the Community budget be based on between 1.16 and 1.3% of GNI.

This large group met on February 1 in the Portuguese town of Beja. There, they tried to show an image of unity before the first days of MFF discussion , to be held in Brussels on the 20th and 21st of the same month. They also announced that they will block any subject cuts.

It will be curious to see whether, as the negotiations progress, the blocs will remain strong or whether each country will move towards what suits it best.

Outside of these two groups, the two big net contributors stand out, pulling the strings of what happens in the EU: Germany and France.

Germany is closer to the frugal in wanting a more austere budget and to allocate more money to more modern items such as digitalization or the fight against climate change. But first and foremost it wants a quick agreement .

France, for its part, is closer to the friends of cohesion in wanting to maintain a strong CAP, but also wants greater defense expense .

The problem of "rebates

And if all these variables were not enough, it is necessary to add the figure of compensatory checks, or "rebates". These are discounts to a country's contribution to the budget. This figure was created in 1984 for the United Kingdom, during the presidency of the conservative Margaret Thatcher. For the "Iron Lady", the amount contributed by her country to the budget was excessive, since most of the amount (70%) went to the CAP and the Cohesion Funds, from which the United Kingdom hardly benefited. It was therefore agreed that the UK would have certain discounts on its budget contribution on a permanent and full basis.

These compensatory checks have since been provided to other net contributor countries, but these had to be negotiated with each MFF and were partial on a specific area such as VAT or contributions. An unsuccessful attempt was already made to eliminate this figure in 2005.

For the frugal and Germany these checks should be maintained, in civil service examination to the friends of cohesion and especially France, who want them to disappear.

Sanchez seeks his first victory in Brussels

The Spanish Prime Minister, Pedro Sánchez, is staking much of his credibility both in Europe and in Spain on these negotiations.

In Europe, for many he failed in the negotiations for the new Commission. Sánchez started in a position of strength as the leader of the fourth largest Economics in Europe, after the exit of the United Kingdom. In addition, he was the strongest member of the socialist parliamentary group , in the doldrums in recent years at the European level, but second force in the elections to the European Parliament. Therefore, for many, the election of the Spaniard Josep Borrell as High Representative of the Union for Foreign Affairs and Security Policy, with no other Socialist in key positions, was seen as a failure.

Sánchez has the opportunity in the negotiations to show himself as a strong and reliable leader so that the Franco-German axis can count on Spain to carry out the important changes that the Union has to make in the coming years.

On the other hand, in Spain, Sanchez has the countryside up in arms over the prospects of reducing the CAP. And much of his credibility is at stake after his victory in last year's elections and the training of the "progressive coalition" with the support of Podemos and the independentistas. The Spanish government has already taken a stand with the farmers, and cannot afford a defeat.

Spanish farmers are highly dependent on the CAP. According to the Ministry of Agriculture Fisheries and Food: "in 2017, a total of 775,000 recipients received 6,678 million euros through this channel. In the period 2021-2027 we are playing more than 44,000 million euros."

These CAP subsidies are of two different types:

• Direct subsidies: some are granted per production Issue , per crop (called "coupled"), and the others, the "decoupled" ones, are granted per hectare, not per production or yield, and have been criticized by some sectors.

• Indirect subsidies: these are not intended directly for the farmer, but are used for the development of rural areas.

The Issue of aid received varies depending on the sector, but can represent up to 30% of a farmer's income. Without this aid, a large part of the Spanish countryside and that of other European countries cannot compete with products coming from outside the Union.

Failure of the first budget summit

On February 20 and 21, an extraordinary summit of the European committee was held to reach an agreement. It did not start well with the proposal of the committee chairman, Charles Michel, for a budget based on 1.074% of GNI. This proposal did not convince anyone, neither the frugal for being excessive, nor the friends of cohesion for being insufficient.

Michel's proposal included the added complication of linking the submission aid to compliance with the rule of law. This measure put the so-called Visegrad group (Hungary, Poland, Czech Republic and Slovakia) on their guard, since from the west of the Union they question the rule of law in some of these countries. So another group is taking the lead.

The Commission's technical services made several proposals to try to please everyone. The final one was 1.069 % of GNI. Closer to 1%, and including an increase in the "rebates" for Germany, the Netherlands, Sweden, Austria and Denmark, to please the frugal and attract the Germans. But also an increase in the CAP to please the friends of cohesion and France, at the cost of reducing other budget items such as research, defense and foreign funds.

But the blocs did not budge. The frugal remain entrenched at 1%, and the friends of cohesion in response have decided to do the same, but at the 1.3% proposed by the European Parliament (even if they know it is unrealistic).

In the absence of agreement Michel dissolved the meeting; it is expected that in the coming weeks there will be talks and another summit will be convened.

Conclusion

The EU has a problem: its ambition is not matched by the commitment of its Member States. The Union needs to reinvent itself and be more ambitious, say its members, but when it comes down to it, few are truly willing to contribute and deliver what is needed.

The Von der Leyen Commission arrived with three star plans: the European Green Pact to make Europe the first carbon neutral continent; digitalization; and, under Josep Borrell, greater international involvement on the part of the Union. However, as soon as the budget negotiations began and it became clear that this would lead to an increase in expense, each country pulled in its own direction and these proposals were the first to fall victim to cuts due subject the impossibility of reaching an understanding.

An agreement must be reached before December 31, 2020, if we do not want to have no money for anything: neither for PAC, nor for "rebates" nor even for Erasmus.

Member States must understand that for the EU to be more ambitious they themselves have to be more ambitious and willing to be more involved, with the increased budget that this entails.