European Union (EU) Leaders met in Brussels last week for four days (17-20 July) to discuss the recovery deal to respond to the Covid-19 crisis and a new long-term budget. The challenges facing the 27 EU are formidable and the European Commission (EC) predicted earlier this month that the EU economy would shrink by 8.3 per cent in 2020. In fact, the EU is facing the worst recession in its history.
The Eurozone (19 member countries out of 27 with the common currency Euro) GDP contracted by a record 3.8 per cent in the first quarter of this year compared to the last quarter of 2019 and that translates into an annualised fall of 14.4 per cent. So, the fear is further contraction in the second quarter also and some analysts suggest that the first quarter GPD figure would pale in comparison with the second quarter data.
European Central Bank (ECB) President Christine Legarde said that the Eurozone economy could contract by as much as 12 per cent this year and the shape of any recovery was highly uncertain. In fact, analysts consider the impact of the pandemic as the greatest challenge Europe has faced since end of the World War II.
The Summit was convened to discuss €1,074 billion budget and €750 billion Covid-19 recovery package. The size of the deal is quite substantial. The total package is €1.8 trillion equivalent to 4 per cent of EU GDP where intra-EU trade constitutes only 3 per cent of EU GDP. Meanwhile, the ECB also weighed in and left its interest rate unchanged at minus 1 per cent, effectively paying borrowers to borrow money to stimulate the Eurozone economies. The ECB further injected more than €1 trillion buying government debt and corporate bonds.
EC President Charles Michel presented his proposal for the Multiannual Financial Framework (MFF) and the recovery package on July 10. He said " the goal of our recovery can be summarised in three words: first convergence, second resilience, and third transformation. Concretely, this means repairing the damage caused by Covid-19, reforming our economy and remodelling our societies". But in the midst of the crisis and solutions outlined by the EC President to get out of it, serious rifts arose even before the summit started as to which countries to pay the most to help others and which nations should get the most to turn around from the deepening economic crisis.
The summit was originally planned for two days but ended up to be the longest stretching over four days. The summit is considered to be the longest since the Nice Summit held 2000 which lasted 25 minutes longer. The Summit was marked by 4 days of arguing, walkouts, insults and anger. At one point French President Emmanuel Macron was seen to bang the conference table accusing the 'frugal four' for putting the EU in danger. The protracted negotiation laid bare the deep division between the North and the South of Europe, pitting Rome against The Hague.
Dutch Prime Minister Mark Rutte had provided the strongest opposition to the original financial grant plan which led to his being dubbed as Mr No. He became the political face of the "Frugal four". The reason for the opposition to the volume of grants was that it would burden their countries with debt to fund the spending of other member countries. The deep division was over the overall size of the recovery package, the mix of grants and loans and the conditions that should be attached to the grants and loans.
Also, old grievances between the 'Frugal four' and highly indebted countries like Italy and Greece resurfaced once again. The Northern nations known as the 'frugal four' include Austria, Denmark, the Netherlands and Sweden, and later joined by Finland also. They would have largely loans rather than grants to be repaid within a specified period of time. They further wanted the stimulus package to be broken into €290 billion as grants and €360 as loans with fiscal controls. But nations in need like Greece, Italy, Portugal and Spain, some call them 'The Club Med', would rather have grants instead of loans.
However, failure to reach an agreement would have created enormous strain on the ties that keep the EU together as that would have resulted in 'two speed' economic recovery from the pandemic crisis with northern member countries recovering at a much faster rate while southern states struggling. And that made making a deal so essential for EU leaders.
After four days of marathon meetings marked by often bitter debates and tense negotiations, EU leaders emerged on last Tuesday ( 21 July) with a E1.82 trillion budget and Covid-19 recovery package. It was some sort of a success in view of the acrimonious climate that prevailed at the summit. EC President Charles Michel called it a good deal.
The price for the successful outcome was a boost to the budget rebates for the 'frugal four' and Germany who received additional rebate to their contribution to the EU budget to the tune of €50 billion over the next seven years. Also, the deal cut extra funding for scientific research, healthcare and the green-energy transition. The European Parliament already warned that it might not approve the deal if these critical spending are not revisited.
The package includes €750 billion in grants and loans to help stimulate economies severely hit Covid-19 shutdowns, particularly those in Southern Europe already saddled with very high levels of public debt. The recovery package centres on €390 billion grants to EU countries that need not be repaid, with each country receiving funds proportional to the impact of the pandemic on their economies. Italy and Spain are expected tobe the main recipients. The remaining €360 billion will be available in low interest loans to members of the EU but conditions will apply but those conditions have not yet been fully specified.
To further add to the controversy Euro-sceptics have argued that this recovery package is a "slush fund" to keep the European project alive and primarily driven by German Chancellor Angela Merkel and French President Emmanuel Macron. The fund is primarily geared to pacify Italy, the third largest economy in the EU and the eighth largest in the world. Italy has been making very loud noises about the imminent collapse of the European project if substantial amount of money was not forthcoming to repair the damage caused by Covid-19. They further argue that in future this type of fund can also be deployed if necessary to pacify other recalcitrant member countries to keep them in the fold.
Italy is also strategically very important to the EU's evolving strategic reorientation as France and Germany are developing an economic and military policy independently and in opposition to China and the US. Italy has been a country that remains at the forefront as one of the two major EU countries with France being the other ready and willing to undertake military interventions and invasions of weaker nations in Asia and Africa to safeguard the interest of the NATO alliance. In fact, Italy along with France were largely responsible for the destruction of Libya as a state.
Indeed, Italy did receive the largest share of the recovery package, with Spain receiving the second largest but much smaller in size. Italy is set to receive €82 billion (out of €390 billion) in grants and €127 billion(out of €360 billion) in loans. The total amount of E209 billion account for 28 per cent of the total recovery package just for one country out of 27 member countries. Italian Prime Minister Giuseppe Conti said on last Tuesday that the EU stimulus plan would allow his government to transform Italy and help face the Covid-19 crisis with 'strength and effectiveness'. Former Italian prime minister Matteo Renzi tweeted, 'The agreement shows that a pro-European government is good for Italy'.
This is the biggest borrowing ever agreed by the EU. Now the EC will borrow the €750 billion from international financial markets issuing EU backed bonds for the first time in its history. In fact, this is the first time the EU is borrowing money to give grants to its member countries. This will now also make the EU a major borrower in global financial markets. To raise the money for repayment, the EC proposed a 'digital tax' i.e., a tax on Google and Facebook and the like and the US has already warned the EU of serious trade and investment consequences if such a tax is imposed and a tax on financial transactions which has consequences for the Netherlands. Therefore, it appears both taxes will face strong opposition internally and externally. So, that leaves the most important question unanswered-- how the EU will pay back the borrowed money if those two modes of tax collection fail.
However, to formalise the deal, national parliaments in 27 member countries will have to pass it, then the European Parliament will have to ratify the deal. Given the process for formalising the deal, it is not yet a sure thing as a number of countries have strong ultra-right populists movements with anti-EU agenda and any one of them can torpedo the deal in parliament but that is an unlikely possibility.
But the revised new agreement also points to new fractures and growing power of a coalition of small but powerful countries willing to use their new found power. Also, gone are the days when Germany and France were assumed to call the shots alone. Les Echos, the French financial newspaper summed up the new EU power alignment saying, "Even hand in hand without having to confront British roadblocks, this couple is no longer almighty in Europe".