Vulcan Insight

Divisions persist ahead of July showdown

26 June 2020

Following last week’s inconclusive video-conference, from which EU heads of state and government failed to reach a deal on the EU’s next long-term budget and associated recovery instrument, all eyes are now turning to an extraordinary Council summit due to be held on July 17-18. As the first in-person summit to take place in Brussels since February, some commentators anticipate an all-night negotiating session as part of a concerted effort to hammer-out an agreement.

Divisions persist along familiar fissures between the Member States, ranging from the size of the budget to whether funds should be in the form of grants or loans. Proposed cuts to cohesion funds, which seek to reduce economic and social disparities and to promote sustainable development, have become a notable sticking point.

The European Commission’s recent proposal for a new recovery instrument, Next Generation EU, includes a significant €55 billion top-up of the current cohesion policy programmes between now and 2022, under the new REACT-EU package. Funds will be allocated based on the severity of the socio-economic impacts of the crisis, including the level of youth unemployment and the relative prosperity of Member States.

Those in the greatest need of additional funds, predominantly in Southern and Eastern Europe, have formed the informal ‘Friends of Cohesion’ alliance, united in the belief that cohesion funding is of vital importance to achieve economic and social convergence. In February, representatives of fifteen Member States met in Portugal to declare their opposition to proposed cuts to cohesion funds allocated to less-developed regions in the EU’s next long-term budget.

This week, Portuguese Prime Minister António Costa reiterated these concerns, dispatching a letter to fellow members of the alliance in which he appealed to them to strive for a working consensus at next month’s summit and “not to draw red lines” which could scupper an agreement. Costa has emerged as a leading voice for Europe’s South in the Council, while Portugal’s Elisa Ferreira oversees the Cohesion and Reforms portfolio in the European Commission.

The next Multiannual Financial Framework (MFF) nevertheless needs to be agreed to by unanimity, not by a qualified majority. A smaller coalition of Member States, the so-called ‘frugal four’ (Austria, Denmark, Sweden and the Netherlands) insist the EU budget must not exceed 1.0% of GDP, and remain staunchly opposed to debt mutualisation.

As the budget question drags on into the summer, the two polarities in the debate still remain too far apart. An eventual solution will likely be found not by the spirit of compromise but by sheer necessity to weather the ongoing economic storm. EU leaders will privately worry a lowest common denominator solution may widen divisions within the bloc or fail to spark an effective economic recovery, and could instead provide political stimulus for populist detractors of the Union.