A new web of alliances is taking shape as EU members wrangle over billions of euros intended to fuel Europe’s post-coronavirus recovery.
Traditional friendships are being tested as governments start negotiating over the European Commission’s proposal to borrow money on the markets and create a four-year €750 billion recovery fund, to be added to the EU’s long-term budget. The battle will move to a higher level in a videoconference on Friday when EU leaders debate the plan for the first time.
The fight over the 2021-2027 budget had already been raging for years and clear camps had emerged. A group of southern and eastern countries pushed for a bigger budget, as well as defending regional development cash — known as cohesion funding — and agricultural subsidies. The group enjoyed the support of France on some fronts, particularly on payouts for farmers.
Meanwhile, a group of self-described frugal countries, oftentimes with the support of Germany, was pushing for a smaller post-Brexit budget and a focus on modern programs like research.
But the COVID-19 crisis and the Commission’s recovery proposal has upended this map of alliances, creating a more fragmented negotiation where countries move in different factions depending on the particular question at hand.
Much of the debate centers around two key issues: the balance in payouts between grants and loans, and what criteria should be used to determine how much money each country will receive.
Here are five new factions emerging in the recovery funding debate.
The ‘loans for loans’ gang
Austria, Denmark, Finland, Netherlands, Sweden
While member countries appear to agree that a compromise will ultimately include a mix of loans and grants, a fight is raging on the balance between the two.
Governments have clashed over the Commission’s proposal that the bulk of the €750 billion pot should be distributed as grants to member countries, while only around a third would be paid out as loans.
Under the Commission’s plan, the money allocated as grants would still need to be paid back — but not by the member countries who receive the cash. Instead, the repayments would come from the EU budget as a whole, over a period of 30 years starting in 2028.
A group of the traditional frugal countries, joined by Finland, wants a greater portion of the EU’s borrowed cash to be distributed via loans to member governments. Those countries themselves would then be responsible for paying the money back.
“There is no clear justification for providing grants (rather than loans) from the Recovery and Resilience Facility,” the Dutch government wrote in a letter to its national parliament last week.
Hungary has also expressed support in Brussels for the loans-for-loans concept, but now appears to be warming up to grants.
The grants gang
France, Germany, Czech Republic, Greece, Italy, Portugal, Spain
Paris and Berlin have called for a €500 billion recovery fund that would provide grants to member countries — an idea that was warmly welcomed in Southern Europe, where highly indebted countries prefer EU transfers over more loans.
The idea of grants also has support in parts of the bloc’s east — though some leaders are nervous about the vast size of the Commission’s proposal and the joint responsibility for the repayment of borrowed cash distributed as grant money.
“If we want to support states that have a problem with too much debt, we probably won’t be of much help if [we] increase this debt by means of loans,” Czech Prime Minister Andrej Babiš wrote in a recent analysis of the Commission proposal. “I support grants but in a reasonable overall volume.”
Criteria critics I: Wealthy westerners
Austria, Denmark, Finland, France, Ireland, Luxembourg, the Netherlands, Sweden
Much of the work that EU governments have been doing so far is trying to understand the formulas the Commission has proposed for distributing cash — and figuring out whether they are winners or losers.
Ambassadors have already engaged in an intense debate over a proposed €310 billion pot of grants which would be available under the new fund’s Recovery and Resilience Facility, a program to support investments and reforms. According to the Commission’s plan, these grants would be distributed using a formula that would take into account unemployment between 2015 and 2019, population size and GDP per capita.
This group of relatively wealthy countries is arguing the allocation criteria, especially for the Recovery and Resilience Facility, should better reflect the direct impact of the COVID-19 crisis.
“We need a clearer analysis of why and where the money is really needed as a result of the corona crisis. And how this money is going to ensure that all member states come out of this crisis stronger than before,” Dutch Foreign Minister Stef Blok told POLITICO last week.
The recovery instrument should target “the countries most affected by the COVID-19 crisis,” the Danish government wrote in a paper.
The view is shared across numerous member governments beyond the Frugal Four, in particular those who feel that the proposed allocation for their countries does not reflect the economic damage inflicted by the crisis.
“One area of concern for us would be that this New Generation [recovery] fund as it’s been proposed is being based on pre-COVID figures around individual economies,” Irish Minister for European Affairs Helen McEntee told RTÉ Radio One last week.
“The people of this country have spent a lot of time making sure that we are now in a very good position, or that we were in a good position pre-COVID,” McEntee said, adding that Ireland is “hoping to get as much support from this as possible” and that PM Leo Varadkar will raise the issue of allocations during the leaders’ videoconference.
Ireland is set to experience a fall of 7.9 percent in its GDP this year, according to the Commission’s spring forecast, and will qualify for €1.2 billion out of the €310 billion in grants under the Recovery and Resilience Facility, according to the Commission’s proposal.
Further complicating the negotiations is the fact that the Commission has put forward another formula for a €50 billion cohesion program, REACT-EU, which would take into account GDP, unemployment and youth unemployment from 2020 and 2021 — data that does not exist yet, making it impossible for countries to calculate how much they would receive.
Criteria critics II: Anxious easterners
Czech Republic, Estonia, Hungary, Latvia, Lithuania, Romania, Slovakia
Eastern members are also critical of the Commission’s formula — but for different reasons. They are concerned that too much money will go to Southern Europe, even though countries in that region are wealthier than they are.
According to the Commission’s projections, Hungary would receive €6.1 billion in grants under the Facility, compared with €12.9 billion for Portugal, while the population of Portugal is only slightly higher than that of Hungary.
The “Recovery and Resilience Facility key needs to be adjusted,” said one diplomat from an eastern member state. “Unemployment should not be in the key.”
A number of Eastern European states have lower unemployment rates than Southern European EU members but also have lower GDP per capita than those countries.
Speaking at a meeting of leaders from the Visegrad Four group of Central European countries last Thursday, Slovakia’s Prime Minister Igor Matovič said that “we should avoid a situation wherein a country with more or less the same population and more or less the same GDP per capita situated in Southern Europe will profit from the program far more than a Central European country.”
One outlier is Poland, which is set to be among the Commission plan’s top beneficiaries. While Warsaw has signaled its support for its fellow Visegrad countries, it has also not fully challenged the proposal from Brussels.
Asked whether Poland is happy with the proposed allocation methodology, Finance Minister Tadeusz Kościński told POLITICO: “Mostly yes, but not completely. We will be negotiating this.”
Commission’s southern comforters
Cyprus, Italy, Greece, Portugal, Slovenia, Spain
Some countries say that the Commission’s allocation formulas may not be perfect, but, given time constraints and the economic impact of the crisis, governments should broadly accept its approach.
Southern countries benefit significantly from the way in which the Commission designed its plans. Together, Italy and Spain qualify for over 40 percent of the Recovery and Resilience Facility’s €310 billion in grants.
Asked if Greece is satisfied with the Commission’s proposed allocations, Miltiadis Varvitsiotis, Greece’s deputy minister responsible for European affairs, told POLITICO that “so far we view the proposal in a positive way.”
For some officials, speed matters more than numbers.
“At the end, it might be better to focus on doing things fast than doing them perfectly,” said one diplomat. “Of course everybody can find reasons to complain,” the diplomat said, adding that at the end of the day “you have to see everything as a package.”
There are concerns that any changes to the allocation keys at this stage could jeopardize the chances of a deal in July.
“We don’t have magic,” said another diplomat. “Changing the formula is simply the perfect recipe for delay.”
Jacopo Barigazzi and Barbara Moens contributed reporting.