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 the President of the European committee , Charles Michel, after announcing agreement in July [committee European]

ANALYSIS / Pablo Gurbindo Palomo

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

After the failed summit in February, European countries were aware of the importance of reaching a agreement, but certain countries saw it as more urgent than others to close the framework Multiannual Financial Framework (MFF) for the next seven years. However, 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 frugal ones (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 subsidies, and the remaining 360 billion to be given in the form of a 70% disbursable loan between 2021 and 2022.

The figures are dizzying, and starting from the February negotiations, where part of the members preferred something more austere, one might ask: And how did we arrive at 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 outstandingproposal was presented on May 18 by French President Emmanuel Macron and German Chancellor Angela Merkel. And not only because it was promoted 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 US national identity. 

It seems that with the Franco-German proposal that 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 of the European industrial sector, supporting production in the Old Continent and diversification of supply chains to reduce global dependence on the 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 of 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 through the long-term community funds, either through their usual resources or through new sources of income. It should also be noted that the proposal spoke of 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 must be in the form of loans and not subsidies," said Austrian Chancellor Sebastian Kurz. The proposal of the frugal is that the 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 proposalThe Commission announced on May 27 its new, very similar to the Franco-German one, but enlarged. The proposal is composed 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 of the European Agricultural Fund of development Rural: it serves 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 Instrument

• EU-Invest program increased to $15.3 billion

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

The third pillar covers 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.

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

• 16.5 billion in support for the financial aid external humanitarian 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 about reaching an agreement agreement.

The hot points of the negotiation were mainly on 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 conditionality subject . On the other hand, the frugal ones, led during the summit by Mark Rutte of the Netherlands, wanted the reconstruction fund to be reduced as much as possible, in any case in the form of loans to refund and as an "absolute precondition". "Any financial aid from the North means making reforms in the South. There is no other option," Rutte said 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 frugals, 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 of 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 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 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 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 send their reform plan to committee and it will have to be C by qualified majority. After its approval, any country is allowed to submit to committee its doubts about the fulfillment of the plans presented by a State; in that case the committee would have a maximum period of three months to pronounce itself. As long as the country does not receive a decision, it will not receive the aid.

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 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 went to 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 to convince 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 different 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 sanctioning a Member State 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 in the face of difficult negotiations and a possible risk of a veto of 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 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 of 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 40 billion in the initial proposal to 10 billion, to the anger of Poland in particular. Secondly, the Funds for the rural development are reduced from 15 billion to 7 billion. Thirdly, both the external humanitarian financial aid support fund of 16.5 billion, the solvency support instrument of 31 billion (in its proposal by the Commission) and the EU4Health program of 9.4 billion have come to nothing. And finally, the project Horizon Europe 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 given quite a lot in order to achieve 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 from agreement with the recovery plan they send to committee, which if they are 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, on final, each Head of State and Government has returned to his country claiming victory and assuring to have fulfilled his goal, which is what a politician has to do (or appear to do) at the end of the day.

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 stated, 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 across the continent set a dangerous precedent and could even jeopardize the continuity of project.

The "mutualization" of debt will allow States already heavily indebted, and which due to their high risk premium would have problems to finance themselves, to get out of the crisis sooner and better. This decision will obviously lead to 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 post-pandemic plan together with Macron: "This 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.