On 21 July 2020, following weeks of tough negotiations, the European Council agreed the largest budget and financial package in the EU’s history. Even if, under pressure of the “Frugal Four“ grants were cut in important sectors, the joint politico-economic instrument is a big step in the right direction.
Since the Commission had presented its proposal for a recovery plan on 27 May 2020, the European Council has been negotiating a relevant agreement. Apart from a recovery fund under the name “Next Generation EU” the plan also comprises a proposal on the (modified) Multiannual Financial Framework (MFF) 2021-2027. Regarding the negotiations concerning the latter, the fronts seemed to be hardened already before the Coronavirus crisis. Still, in the early hours of 21 July 2020 and following the almost longest summit of the European Council, EU Council President Charles Michel was at last able to announce: “Deal!”. However, to reach this point, they had to go along an extremely stony path. Apart from the “Frugal Four” – Austria, Sweden, Denmark and the Netherlands – who were opposed to direct grants to the Member States, it was Poland and Hungary, who were against linking funds with the principles of the rule of law.
The Commission proposal
The Commission proposal had been quite ambitious. Particularly affected states and regions should receive financial aid in form of grants and loans within the scope of the recovery fund “Next Generation EU”. This would also be necessary to cushion the economic impact on the European Single Market. Export-oriented Member States would also benefit from the support for those countries, who had been particularly hard hit by the pandemic, especially Italy and Spain. Hence, the Commission envisaged a volume of 750 billion euro for the recovery fund, of which 500 billion should be made available in form of grants and 250 billion in form of low-interest loans. Apart from that, additional 1.1 trillion euro were budgeted for within the scope of the Multiannual Financial Frameworks 2021-2027.
With a total of ca. 1.8 trillion the volume of the package, which has now been decided by the European Council, is almost exactly the same as originally proposed by the Commission. The “Next Generation EU” instrument will have a total volume of 750 billion; however, what has changed is the breakdown between grants and loans. Hence, under pressure from the “Frugal Four”, the total amount of grants was reduced to 390 billion; the remaining 350 billion were made available in form of loans.
Due to the Council conclusions, reducing the grants will have a strong impact. For example, the resources for the Just Transition Fund, which, among other, shall cushion the economic consequences for regions, which are particularly hard hit by a coal phase-out, has been cut from 40 billion euro to 17.5 billion. The funds for the health programme EU4Health, which had still been hailed at the end of May 2020 and which was to ring in a paradigm change in EU health policy, has been scrapped within the scope of the recovery fund. Hence, what remains are the 1.7 billion euro, which had been budgeted with the scope of the MFF. The proposal, to link EU subsidies to the adherence to the rule of law, is only vaguely mentioned in the present agreement.
However, the plan to completely repay loans by generating additional own resources, is mainly unchanged. Hence, the Council conclusion stipulates that “As additional own resources, the Commission will put forward in the first semester of 2021 proposals on a carbon border adjustment mechanism and on a digital levy with a view to their introduction at the latest by 1 January 2023”. The possible introduction of a financial transaction tax is also mentioned. However, whether apart from a plastic bag tax, which is hardly profit-yielding, these planned new own resources will materialise, is more than questionable. EU taxes can only then be collected if the own resources have been accepted and adopted by all Member States. If only one country is opposed to this, it might result in heated discussions in the Council as to how loans should be repaid from 2028. In this case, EU member contributions might have to be increased significantly.
Dissatisfaction in the European Parliament
The proposal must still be accepted by the EU Parliament. The leader of the European People’s Party (EPP) Manfred Weber indirectly threatened a veto on German television, should the conditions in respect of the rule of law not be satisfactory: “This will be a key criterion for us in Parliament”. The SPÖ MEP Andreas Schieder, regretted in a first response – that apart from lowering one’s sights in respect of the rule of law - also those with regard to climate protection as well as the health and research policy would be affected. “The minimal compromise, which has been cobbled together after days of negotiations, does not do justice to the extent of the crisis we are faced with”, said Schieder. The deputy leader of the Greens Ska Keller welcomed the agreement, however, she mentioned a “long list of bad news”. In a resolution a clear majority of MEPs opposed the Council decision on Thursday 23 July 2020.
In spite of all reductions, the fact that the EU - within the framework of the presented recovery package - commits to a direct fiscal policy for the first time is a big step towards a common prosperity-oriented economic policy. What is particularly pleasing is the fact that especially the centrepiece of the recovery plan, the Recovery and Resilience Facility has even been increased in favour of the most severely affected Member States. What is of particular importance now is that the subsidies are made speedily available as only then an economic impact can be ensured. Also pleasing is the planned generation of own resources by implementing the long overdue plastic and digital levy and a carbon border adjustment mechanism. However, it remains to be seen whether EU Member States will agree. Unfortunately, the originally planned taxation of large corporations is no longer mentioned. What also hurts is that cuts of grants, which the Austrian government has presented as a success, will hit important areas, such as the socially just transition, investments or research. This means that exactly those resources are lacking, which were supposed to cushion the green transition and the structural change associated with it in a socially acceptable manner. “Hence, the result is at the expense of the future prospects of workers and regions”, said ÖGB President Wolfgang Katzian, who also warned that this might further threaten social stability in Europe.