The EU Budget As an Opportunity in the Crisis

The Starting Positions for the Negotiations

However, there is no guarantee that the member states will reach agreement quickly or that the European Parliament will approve the plan in a smooth and timely manner. In order to minimise the risk of failure and to allow for a compromise solution without delay, the Commission had previously discussed its proposal with key stakeholders. The position papers presented by some member states in ad­vance gave the Commission additional indi­cations of national interests, and thus of a possible path for agreement. In its position paper of 19 April 2020 for the Eurogroup negotiations on the first corona aid pack­age, the Spanish government already stated that the Mediterranean countries had a strong interest in European aid being pro­vided in the form of grants rather than loans.

The Polish position paper of 8 May, on the other hand, provided indications that the central and eastern European member states are interested in substantial additional funds as part of a European economic stimu­lus package. As the main beneficiaries of cohesion policy, they are in favour of increasing the budget for the European Struc­tural Funds. In their view, the existing socio-economic criteria should continue to be applied for the distribution of these addi­tional funds. This would mean that the underdeveloped central and eastern Euro­pean regions would automatically benefit more than others from the additional funds in the economic stimulus package.

In its non-paper of 8 May, the French Ministry of Finance outlined the country’s ideas and objectives for a European recon­struction fund. Paris stressed that the member states hardest hit by the pandemic should receive the biggest share of sub­sidies. For a limited period of three years, the EU budget should be increased with additional funds of between €150 and €300 billion per year in order to give all Euro­pean economies a tangible economic boost. This could be financed by collectively taking on debt, which would be repaid over a period of 40 years. The money should be used for existing European spending pro­grammes with European added value, such as European research or investment sup­port. The distribution of additional funding should be based not only on the usual socio-economic criteria, but also on the death tolls as well as the burdens on health systems as a result of the pandemic.

The Franco-German agreement was un­doubtedly of particular importance and presented on 18 May during a joint video press conference by Chancellor Angela Merkel and French President Emmanuel Macron. The Franco-German tandem pleaded in favour of an ambitious – but limited in time and scope – fund for the economic recovery of European economies within the framework of the MFF. In total, an additional €500 billion is to be made available for the European Green Deal and digitisation. This bilateral initiative also advocated that the EU should take on debt and raise the ceiling of own resources for this purpose. Debt raising should remain a temporary exception and be linked to a binding repayment schedule in the Euro­pean decision on own resources. Although the Franco-German paper was on many points much more vague than the proposals put forward by the French Ministry of Finance, this initiative – together with the package of proposals presented one week later by the Commission – has domi­nated the debate ever since. The other mem­ber states had to find their own posi­tions on this Franco-German accord. The initiative also strengthened the European Commission’s backing for its proposal.

The so-called Frugal Four – the Nether­lands, Austria, Sweden, and Denmark, which have been advocating for an EU budg­et of 1 per cent of EU GNI for two years – had to react quickly to the Franco-German initia­tive. They therefore presented their own position paper as early as 23 May. With it, they also advocated for a temporary emer­gency fund to boost the European econo­mies and strengthen the national health systems. Under no circumstances, however, should the fund be financed through Com­munity borrowing. The money in the fund should only be used after a careful needs assessment and with strict commitments to implement structural reforms. At the same time, the Frugal Four maintained their basic positions for the upcoming MFF nego­tiations: They insist on an ambitious mod­erni­sation of European spending policies, on the conditionality of the rule of law, and on rebates for their contributions.

Prior to this, the European Parliament had also defined its negotiating position in several resolutions. Members of European Parliament also largely maintained their earlier demands for the MFF negotiations: They called for new European sources for own resources, for existing expenditure programmes to be significantly better equipped, and for a mandatory mid-term review of the MFF. As a contingency plan, they called for the expenditure programmes to be automatically extended in the event that agreement on the new MFF 2021–2027 cannot be reached in time. In addi­tion, the European Parliament called for a permanent increase in the ceiling of own resources and for the issuance of EU bonds to finance the MFF. In this way, the Par­lia­ment wants to allow for additional in­vest­ment in the European Green Deal, the digitisation of the internal market, and strategic investments.

Search for the Path to Compromise

Even before it finally presented its package on 27 May, the Commission thus had an insight into the positions of key players, and thus the most important cornerstones for a path to compromise. Its proposal takes up decisive elements of these positions. For example, Italy and Spain – the mem­ber states most severely affected by the pan­demic – are to receive the largest shares from the recovery plan. In addition, the share of non-repayable grants clearly out­weighs that of loans. This is in line with the expectations of the highly indebted south­ern European member states and the demand of the European Parliament. In favour of the central and eastern European states, the package contains a significant increase in the Cohesion Funds, which will already take effect in the last months of 2020 and apply for the next four years. According to expectations of the western Europeans, the Commission proposes to direct additional funds and the growth stimulus towards modernisation policies and the climate policy objectives of the European Green Deal as well as the digi­tisation of the internal market. The alloca­tion of funds from the reconstruction and resilience facility for economic recovery shall be linked to the implementation of national reform programmes. All member states are to draw up such programmes by 30 April 2021 at the latest and submit them to the Commission for approval. These so-called National Recovery and Resilience Plans are intended to compile those reforms and investments that strengthen the growth potential and the economic and social resili­ence of the respective member states, and thus promote a sustainable economic recovery. To this end, measures for eco­logical and digital change in particular are to be listed. In the framework of the Euro­pean Semester, the Commission is consider­ing agreeing with the member states’ con­crete milestones and targets as well as a timetable for implementing the reforms and investments. Money will only be paid out if the member states have actually achieved these interim targets.

The European Economic Recovery Plan and the support policies are thus closely linked with the European Semester for economic policy coordination, the imple­mentation of long-term structural reforms in the member states, and the continuous monitoring of the use of European funds in these countries. All this is in line with the demands of the net contributors from northern Europe.

Finally, with its supranational approach, the Commission is responding to the Euro­pean Parliament’s requests of integrating the recovery plan into existing Community instruments, such as the MFF and the Euro­pean Structural Funds. In this way, the Par­lia­ment’s rights of budgetary control are respected. The creation of a new health programme is also in line with the Euro­pean Parliament’s wishes and the Franco-German ideas.

The Continuation of the Budget Negotiations

Nevertheless, the MFF negotiations are not starting from scratch, but are following on from the unsuccessful negotiations that came to a temporary halt at an extraordinary European Council summit on 20–21 February 2020. The President of the Coun­cil, Charles Michel, now has three options for continuing the negotiations in the Euro­pean Council:

(1) He could support the Commission’s proposal and present it to the Heads of State and Government as the starting point for negotiations. Reductions or reallocations in some policies already agreed by the member states in their negotiations would have to be brought forward again and jus­tified. This would make it more difficult for the Frugal Four to insist on a limited MFF and rebates for themselves.

(2) Alternatively, President Michel could take up the interim status of the negotiations at the special European Council summit of 20 February 2020 and add the Com­mis­sion’s proposal for an economic stimu­lus auxiliary budget. In their joint position paper, Berlin and Paris had already ad­vocated for this by using the interim status of the February negotiations as a starting point. This would put the Commission’s proposal for a temporary economic stimulus budget at the forefront of the nego­tiations. Any deviation from interim results that had already been agreed upon – as they had been fixed in the 14 Feb­ruary pro­posal of the President of the European Coun­cil – would have to be justified. The Commission’s approach to also adapt the actual MFF to the challenges of the crisis could be examined in detail by the member states and would have to be justified in more detail by the Commission.

(3) The most likely option would be for President Michel to present a completely new proposal for the critical negotiations on the next MFF 2021–2027 in the Euro­pean Council. Based on the state of play of the negotiations in February, Michel could use both the European Commission’s new proposal and the positions of the member states to put together his own updated com­promise proposal. Such an overall pack­age – increased by the economic stimulus budget – could facilitate an agreement, as it would provide the Heads of State and Government with many new elements for the traditional European package deals and exchanges. The agreement to closely link payments from the European Structural Funds to the European Semester and to focus on the goals of the European Green Deal could thus be compensated for with higher payments from the temporary Next Generation EU economic stimulus budget. To this end, the new Just Transition Fund (JTF) could be used to cushion the costs in regions and sectors particularly affected by the phase-out of fossil fuels. The controver­sial distribution of grants and loans from the economic stimulus package between northern and southern European states could be balanced by changing the criteria for allocating the money.

However, this approach also involves risks:

• The total volume of the two elements – the MFF and the recovery stimulus pack­age – is limited. Not all distributional conflicts can be resolved with additional funds. Moreover, the combining of the two money pots in the negotiations is likely to feed the expectations of potential recipients that they will receive addi­tional financial compensation.

• Package deals between the two elements of the negotiation package has one major disadvantage: The downside of linking the two elements is that it would give rise to extensive veto possibilities for in­di­vidual member states. If everything is connected with everything and must be agreed unanimously in the package, every­thing can also fail due to one minor point of the deal.

• The proposed criteria for distributing the funds from the stimulus budget among the member states appear to be open to criticism, as the Commission has clearly been pursuing an attempt to appease potential veto players with this instrument. However, the criteria cannot nec­es­sarily be derived from the extent to which the member states are affected by the pandemic. For example, Belgium, whose infection and death rates are very high, would receive considerably less money than states with very low numbers. The criteria are therefore likely to be called into question during the negotiations. If the Commission cannot pro­vide a convincing justification, this con­flict could mark the beginning of the failure of the overall compromise.

• In order to avoid this, the European Council President must be able to have recourse to a traditional instrument of European budget negotiations, namely the ability to offer individual member states special payments or exemptions. To do this, he must have a certain degree of financial leeway that can allow for this solution. Since it is obvious that some member states want to make use of this possibility of special arrangements or payments, this option could further in­crease the overall volume of the package.

• The total foreseeable volume of the two elements, amounting to almost €1.85 tril­lion, can only be financed through (a) significantly higher national contribu­tions from the member states, for which there is no indication whatsoever, (b) new sources for own resources that will not generate sufficient resources in the short term, and (c) the raising of debt, for which the Commission has made a pro­posal. However, the legal basis for loan financing on this scale seems highly ques­tionable. Complaints can be expected, at least before the Federal Con­stitutional Court in Karlsruhe.

• The necessary adaptation of the Euro­pean decision on own resources requires the rapid approval of all national parlia­ments. This seems extremely ambitious if the economic stimulus package is to be implemented as early as January 2021. This is why the French Ministry of Finance, in its non-paper of 8 May, pro­posed a political commitment and obligation of all Heads of State and Gov­ern­ment to implement a new decision on own resources in advance. However, this idea is probably not very realistic, given the rulings of the German Federal Constitutional Court on European political rights and the obligation to make the Bun­destag responsible. In this respect, possible borrowing by the EU remains subject to considerable uncertainties.

• The further course of the Brexit nego­tiations and a possible extension of the transition phase present additional disruption potential.

The Long-term Effects

As in previous EU budget negotiations, the European Commission has linked its pro­posal for a new MFF 2021–2027 to a major reform project – the transition of European economies to climate-neutral, sustainable, and digital growth models. In this respect, the Commission is using the Covid-19 crisis to implement these objectives more effec­tively and in a more targeted manner with the new EU budget.

The original proposal of May 2018 had been formulated by the previous Commission under President Jean-Claude Juncker, but it hardly took these new political prior­ities into account. For example, the Euro­pean Green Deal, the JTF, the promotion of digitisation, and the project for a European defence policy had not yet been budgeted for, or not adequately. The Commission has now taken advantage of the European Coun­cil’s invitation of 23 April 2020 to draw up a comprehensive recovery fund. In addition, there was a great necessity and high expectations in some member states that a demonstration of European solidarity was now needed – in the form of a massive economic stimulus package from the Euro­pean budget. The new Commission took all of this on board in order to underpin its political priorities with appropriate budg­etary proposals.

The proposal is expected to have long-term implications for the European integra­tion process. The European solidarity that

was loudly called for at the beginning of the pandemic is now becoming clearly visible. The EU is prepared to spend huge sums of money to support the member states most affected. At the same time, it is determined to break up existing structures and procedures of the MFF negotiations, and thus to change itself. In addition, the scope for European action in health policy will expand considerably. With the pro­posed new programme, the EU would be able to act more quickly and with greater solidarity in this policy, too.

The use of the Community budget and cohesion policy instruments undoubtedly strengthens the economic policy options of the Community institutions, first and fore­most the European Commission. At the same time, the control and participation rights of the European Parliament are respected. The proposal to take out debt jointly via the EU budget also strengthens the sentiment of solidarity in the EU. Dur­ing the financial and debt crisis 10 years ago, the EU still chose the intergovernmental approach beyond the European treaties in order to establish new institutions such as the European Stability Mechanism and to be able to implement additional financing and rescue programmes.

Certainly, negotiations in the European Council and with the European Parliament will not simply lead to the adoption of the European Commission’s proposal. But if the member states follow the basic approach and direction of the proposal, this package will mark a turning point in the process of European integration. It would be as drastic as the agreement on the European Single Market or European Monetary Union.

However, if the integration process is indeed deepened and broadened to such an extent, this also means that all actors bear much greater responsibility for the success of the EU. For all EU-27 member states and EU institutions, this increase in common policies also requires a greater willingness to compromise, mutual consideration, and an understanding of each other’s national sensitivities, problems, and concerns. This applies both to the potential recipients of European solidarity and to those who pro­vide the necessary financial resources.