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Economy Europe Debate on EU

Toward an ever closer imperfect union

July 25, 2020

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Landmark deal will transform EU, but could also lead to conflict.

By Mujtaba Rahman
7/21/20

In moments like this, the big picture is important. But so are the niggling details.

Early this morning, EU leaders signed off on a consequential €1.8 trillion deal in response to COVID-19 that looked politically and legally impossible just a few months ago.

It’s an agreement that has the potential to redraw the way the European Union operates, especially in times of crisis. But if it’s not handled carefully, the provisions it contains also risk undermining the bloc, poisoning relations between its leaders in ways that could ultimately do much more harm than good.

The deal is a big win for the European Commission and its president, Ursula von der Leyen. She and her top team deserve credit for their clear-sighted intellectual focus: on how to help member countries, primarily in Southern Europe with limited budgetary space, deal with the economic fallout from coronavirus without further impairing their debt levels or wasting invaluable time having to stand up new institutions from scratch that may have triggered lengthy EU treaty or constitutional change.

Von der Leyen and her team also deserve recognition for their courage. The path they chose was certainly not the one of least political resistance. Despite all the recent attention on Dutch Prime Minister Mark Rutte’s shenanigans, and those of his like-minded gang of so-called frugals, it should not be forgotten that the backing of Berlin and Germany’s Chancellor Angela Merkel was far from guaranteed when Brussels began drawing up the plan several months ago.

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So, the central and most innovative tenet of today’s deal — large-scale European-wide borrowing on capital markets, subsequently transferred to member countries hit worst by the health pandemic in the form of grants, to the tune of €312.5 billion for responding to the coronavirus and an additional €77.5 billion less directly related to the pandemic — should be recognized for what it is.

As one senior French official told me yesterday, “We are in touching distance of a historic breakthrough. The Dutch and other frugals wanted no grants based on mutualized loans. They now appear ready to swallow €390 billion of them.”

Italy, the deal’s biggest beneficiary, will receive an unprecedented €209 billion under the new plan, of which €82 billion will be in grants and €127 billion will be in loans. (This compares to €173 billion in the Commission’s original proposal, although grants were cut by €3.8 billion while loans increased by €38.8 billion).

While the Recovery Fund is declared to be “temporary” and “exceptional” — keywords that were necessary to build political support in Berlin and elsewhere in Northern Europe — it will be anything but. This agreement will set a precedent for how the 27 EU members deal with external shocks in the future. The eurozone is therefore now underpinned with a more robust fiscal architecture than before the coronavirus struck.

The plan is thus also a big victory for French President Emmanuel Macron because it delivers, finally, a large chunk of what he promised to achieve in Europe during his presidential election campaign in 2017 but so far failed to do — as the 2018 Meseberg summit and puny eurozone budget “for competitiveness and convergence” so clearly highlighted.

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Today’s package breaks through the fortifications preventing a more federal and united EU to match, or sustain, the federal leap forward of the single currency two decades ago. Macron has succeeded where François Hollande and Nicolas Sarkozy — and even Jacques Delors — failed.

But as always with Europe, the devil is in the details, which reflect the compromises that were needed to get today’s deal over the line.

Implementation will now be key in determining whether this morning’s success puts the EU on a more stable trajectory, or creates the conditions for more acrimony and conflict between different parts of Europe — and its institutions — in the future.

The Dutch won the right to effectively delay disbursements to member countries, kicking the issue to EU leaders, should they or any other member state take the view that reforms are not progressing as they believe they should.

This has put the Commission on guard. What The Hague has effectively said is that it does not believe the Commission can or will credibly enforce the EU’s treaties — the reason for which it exists. The Council has therefore won the right to “exhaustively discuss the matter” in the event one or more national governments has concerns.

This could render today’s deal unworkable. The Commission, as the EU’s supranational executive tasked with policing the aggregate EU interest, sits above EU politics. This position gives it the legitimacy it needs to take on member countries, pushing them to reform their economies and tackle vested interests.

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That is very different from Dutch parliamentarians, through their premier at the European Council, hectoring the Italian prime minister on the credibility of his or her reform program.

As one senior EU official who has worked at the top table with leaders for over a decade tells me, this could “destroy” the European Council, by poisoning relations between EU leaders and providing ammunition to opposition politicians, often populists, who will argue domestic policy choices are being driven not by the give-and-take of deliberation with Brussels — already bad enough but accepted as the price of EU membership — but other EU capitals.

If one national reform plan is referred up to EU leaders, it’s likely that every plan or a large number of plans will meet the same fate, resulting in divisive and potentially toxic negotiations for years to come, with continued uncertainty and political drama, around the time of each and every disbursement.

In that case, today’s agreement would not contain a recipe for the EU’s success, but the seeds of its failure. In implementing today’s historic agreement, Europe’s leaders should be mindful not to undermine the important step that they have taken.

* Mujtaba Rahman is the head of Eurasia Group’s Europe practice and the author of POLITICO‘s Beyond the Bubble column.

Sourcewww.politico.eu

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