After an initially hesitant reaction to the coronavirus pandemic, the EU agreed on a new long-term budget and economic rescue package in July. While considered a breakthrough in a time of crisis and milestone in European integration, the negotiations laid bare significant internal rifts that will remain a barrier to an ever closer union and united voice in global politics.
Negotiated: Next Generation EU
When the meeting of the European Council concluded on July 21st at 5.30 am, a debate started whether the five-day negotiation marked the longest summit in EU history. There was a certainty, however, about the historical, symbolic and political significance of its outcome. The leaders of EU’s 27 member states reached a deal on a €750bn ($858bn) fund, named Next Generation EU (NGEU) and equivalent to 4.7% of the EU’s GDP, to help member states recover from the economic impact of Covid-19. Also, the bloc agreed on an EU budget, or multiannual financial framework (MFF), of €1.1trn ($1.3trn) for the next seven years, its first after Brexit.
The negotiation for the NGEU was particularly gruelling and laid bare significant north-south rifts within the EU. The European Commission had initially proposed €500bn in grants and €250bn in loans following pressure from Southern European countries, straightened and worst-hit by the pandemic. Yet, grants were vehemently opposed by a group of wealthy, mostly northern European members, nicknamed the “frugals” – namely, Sweden, Denmark, Netherlands, and Austria. Eventually, the amount of grants was cut to €390bn, while loans were raised to €360b
Although hard-fought, the agreement was ground-breaking as it provides significant financial resources to counter the recession and strengthens EU-wide cohesion. Moreover, through the NGEU, the European Commission for the first time undertakes large-scale borrowing through jointly issued debt backed by all euro countries, marking a turning point in EU policy, particularly compared to the Eurozone crisis a decade earlier. While the deal provides new optimism within the EU, significant challenges remain that could threaten the bloc’s economic strength and cohesion in the future.
An Existential Crisis Requires Extraordinary Measures
In the decade before the Covid-19 pandemic, the European Union faced numerous challenges, including the European debt crisis, the refugee crisis and Britain’s vote to leave the union, its second-largest economy. Yet, with expectations that the economic impact of the pandemic would lead to the steepest recession on record, German Chancellor Merkel called the coronavirus crisis the EU’s biggest test since its founding.
Therefore, the deal reached on July 21st was greeted triumphantly, especially by Germany and France as well as others in favour of a stronger EU, as it provides much-needed relief and European solidarity. However, in the months leading to the EU summit, leaders struggled to find common ground around a collective strategy for countering the pandemic-induced economic downturn. Particularly in the early months of the pandemic, cohesion and solidarity within the EU were scarce. In March, EU members largely resorted to unilateral measures including the reintroduction of border controls in an ‘every member state for itself’ reaction which quickly threatened the functioning of the EU’s single market.
In these months, Italy was hit hardest by the pandemic, overwhelming its healthcare system and forcing strict lockdowns that brought the country’s economy to a halt. Already with the second-highest debt to GDP ratio among EU members, Italy was looking towards Brussels for relief. Yet, the EU’s hesitant early response to the crisis left the Italian public disillusioned and feeling abandoned while leading to a rethinking even within pro-European parties, as they increasingly questioned the usefulness of the European project.
Growing Frustration in Southern Europe
At that point, it was especially the question over joint bonds, or corona bonds, to finance healthcare and economic reconstruction that revealed a deep divide between groups of member states. Frustration in southern Europe was particularly high when the demand for collective debt by an alliance of nine member states, including France, Italy and Spain, was rejected by mostly wealthy northern countries, including Germany. While expecting a demonstration of solidarity from the rest of the EU amid devastating health and economic crisis, southern Europe was reminded of chancellor Angela Merkel’s vehement opposition to the long-term common debt during the Eurozone crisis in the early 2010s.
For pandemic relief, Germany and others instead pointed towards the European Stability Mechanism, the euro area’s €500bn bailout fund. However, countries affected the worst by the pandemic quickly rejected the instrument as they deemed unfair, potentially stigmatising conditions attached to it. Amid intensifying attacks from European politicians and growing public disaffection with the bloc across Europe’s south, EU leaders recognised the need for extraordinary measures. This realisation included the need to counter the economic divergence in Europe, threatening not only its common currency and but also eroding vital support for the European project altogether.
Therefore, France and Germany first proposed a plan for €500bn in grants as a pandemic response in May, citing the European fragility amid an unprecedented state of emergency. This required the creation of collective debt to avoid the dangers of a massive recession and rising unemployment in the EU. Although intense debate followed over the allocation between grants and loans, the proposed fund laid the foundation for a historic agreement in July in what was considered a defining moment for the European Union.
A Crucial Deal – With Shortcomings
Combined with considerable stimulus spending from individual states and extraordinary measures from the ECB, the NGEU rescue package puts Europe on course for a robust economic recovery. In a time of crisis and ongoing Brexit negotiations, the deal is a crucial breakthrough for the future of the European project. However, without Britain, a new dynamic had developed around the summit table. It underlined the north-south rift within the EU in addition to an existing east-west divide. Consequently, compromises were necessary to eventually reach a deal, some of which are viewed as costly flaws that create a potential for conflict in the future.
The “frugals”, a group of mostly northern net-contributor states in the EU, and later Finland, were centre stage during the prolonged July 17-21 summit. Their opposition to grants led to hard-fought negotiations and uncertainty whether an agreement could be reached after all. Only through significant concessions proposed by European Council president Charles Michel, did they manage to break over the frugal states deadlock on Europe’s vital recovery package.
Among the concessions were large increases to the rebates of the Frugal Four, discounts applied to their EU budget contributions. A decision that was met with resistance from other EU members as it kept intact a bargaining tool that the UK initially won in 1984 and that France and the European Commission pushed to abolish after Brexit. Moreover, concessions also included cuts to future-oriented EU programmes in research, health care and climate adjustment following demands from the frugal countries to hold down the EU’s long-term budget (MFF). This negotiation, too, was met with disapproval including from commission president Ursula von der Leyen.
In addition to Europe’s north-south divide, the outcome of the EU summit was also in doubt due to increasing east-west friction within the bloc. Both Hungary and Poland face EU disciplinary proceedings over violations of liberal democratic norms. In recent years, the increasingly authoritarian Hungarian government under prime minister Viktor Orban has weakened the country’s checks and balances and used the pandemic to rule by decree. Meanwhile, Poland’s right-wing Law and Justice party (PiS) has undermined judicial independence and also seized on the pandemic to expand its powers.
With European values at risk, the commission, France and others pushed for conditions attached to the EU deal that requires adherence to the rule of law to qualify for disbursements. However, amid threats from Viktor Orban to block the deal if included, EU’s leaders were willing to accept a flawed agreement in July without precise conditions, well-aware of the momentous signal but pressured by the level of urgency.
That, however, changed in early November when EU negotiators agreed on a rule of law mechanism that ties the budget to EU values. As a reaction to growing authoritarianism within the bloc, this mechanism will enable Brussels to restrict funding to member states breaching the rule of law principles. While its implementation has widespread support beyond the required majority of member states, Hungary and Poland continue to oppose any rule of law regulation.
Consequently, they vetoed the adoption of the EU budget and pandemic relief package and thereby blocked it for the time being, as unanimous backing by member states is necessary for their passage. Now, the EU will have to negotiate a compromise with Hungary and Poland to avoid an emergency spending programme for 2021 and delayed pandemic relief, even though both countries are among the main beneficiaries of these programmes.
Key Challenges Remain
The successful conclusion of the EU summit in July marked a milestone for European integration and sent an encouraging signal for the bloc’s post-Brexit era. The decision to counter the pandemic-induced economic downturn with collective debt represents an unprecedented shift towards European fiscal federalism and shows its ability to counter major crises decisively. Yet, while agreement on the rescue package strengthened the EU overall, the preceding negotiations revealed growing divisions within the bloc that were not resolved and have delayed the adoption of the deal amid a dispute over the rule of law conditions.
These ideological splits among its 27 member states will remain obstacles to strategy unity. It is particularly problematic given overarching European questions, including what the EU truly stands for and its role in global politics amid a rapidly changing world order. Substantially reducing internal divisions would facilitate negotiations and allow the bloc to increasingly speak with a single voice, thereby marking a turning point towards a more effective and future-oriented EU. However, in recent years, the trend within Europe has mainly been the opposite. In most European countries, populist parties are represented in the parliaments and have been growing while established parties lose support. Consequently, the political landscape has become increasingly fragmented, with leading parties only rarely reaching more than a third of the vote anymore.
Populist leaders view themselves as outsiders who counter the political establishment while portraying the EU as a hindrance rather than a solution to key challenges. In this context, Hungary’s Viktor Orban stands out in particular amid his vision to create an ‘illiberal new state based on national foundations’. This, at the same time, has emboldened other right-wing populists, especially in France and Poland while they also emerged in Germany. This development will impede the EU’s ability to respond to critical challenges in fiscal policy, foreign policy, defence and migration. Finally, it shows that, while the deal reached in July is celebrated as a historic success that will prevent further drifting apart within the EU for now, cohesiveness and solidarity will remain fragile.