EU leaders agree to historic €1.82 trillion budget and recovery deal

21 July 2020

Following 90 hours of tense negotiations, white smoke finally rose over the glass façade of the European Council’s Europa building as President Charles Michel tweeted one word to the world: “Deal!”

At the end, it took the longest EU Summit on record for EU27 leaders, together with Mr. Michel and European Commission President Ursula von der Leyen, to reach an agreement on the Commission’s blueprint for the €750 billion coronavirus Recovery Fund and the bloc’s €1.074 billion multiannual financial framework.

Despite the sometimes acrimonious debates which are somewhat typical of EU budget negotiations (before the Summit even began, Austrian Chancellor accused southern EU members of being “states that are broken in their systems; at one point French President Macron is said to have almost flown back to Paris over his anger with the “Frugal 4” position; while on Saturday Hungarian Prime Minister Victor Orbán publicly accused his Dutch counterpart of “hating” him and the Hungary) leaders recognised the sense of urgency in agreeing on the historic €1.82 trillion financial package.

While Tuesday morning’s accord is broadly based on President von der Leyen’s May “Next Generation EU” proposal, the proposal and financial distribution between Member States and funding programs was substantially altered in order to reach unanimous consent.

The Recovery and Resilience Fund

In May, President von der Leyen turned heads when, based on a previous Franco-German joint paper, she proposed a “huge” Recovery and Resilience Fund worth €750 billion, comprised of €500 billion in grants and €250 billion in loans, with the money being raised on the financial markets through the issuance of common debt.

Initially, the proposal had been welcomed with ecstasy by countries such as Italy, Spain, Greece, Belgium and Ireland, while being outright rejected by others such as Austrian Chancellor Sebastian Kurz who called it “a debt-union through the backdoor.”

Meanwhile, when leaders eventually got to together on Friday, the concept of shared debt issuance had been unanimously accepted, with the thorniest issue on the matter being the balance between grants and loans, as well as “Frugal 4.5” (at some point Finland’s Prime Minister Sanna Marin joined the team on some aspects) demands for strict governance criteria on the disbursement of recovery funds.

On the grants versus loans debate, after holding up progress until Monday, Heads of State and Government eventually agreed on an almost equal balance of €390 billion in grants and €360 billion in loans. While less than the originally proposed two-thirds balance in favour of grants, a 50:50 distribution had always been seen as the landing zone for EU Budget hawks.

On governance, Dutch Prime Minister Mark Rutte had earlier demanded an “emergency break” that any country be able to veto disbursements to another country over concerns regarding the country’s use of the funds and/or the implementation of necessary economic reforms. In the end, a compromise was found around wording that allowed concerns to be brought to the attention and decision-making of the entirety of the European Council, without allowing a single Member State to veto any disbursements.

The deal was heralded by President of the Republic Macron as a “historic change in our Europe and eurozone” and showed the “distance travelled in [only] two months” towards closer fiscal integration. The sentiment was echoed by Italian Prime Minister Giuseppe Conti, an early advocate of shared EU debt, “a historic moment for Europe.”

Yet, in order to win the “Frugals” compromise on the short-term Recovery Fund, they were granted significant financial concessions on the EU’s broader 7-year budget.

Financing the Union – the MFF

On the MFF, going into the first day of Summit on Friday, the deep disagreements between delegation took off where they were paused in February: plugging the annual €10 billion deficit left by the UK’s departure, EU own-resources, rebates, how to effectively distribute the funding between programmes, and how to link funding to climate goals and the rule of law.

A major point of contention in February had been the “Frugal 4’s” outright refusal to agree to an increase in their budgetary contributions to help plugging the substantial hole left by Brexit. In a compromise agreement, the “Frugal” countries agreed to slightly increase their contributions in return of a small reduction of the MFF’s overall reduction from the Commission’s initial proposal of €1.1 billion as well as a reorganisation of the distribution mechanism.

Eventually, in the deal that was agreed in the early hours of Tuesday, Heads of State and Government ended up making “regrettable” funding cuts to some key European Commission initiatives.

Specifically, as part of the deal, leaders cut a proposed €26 billion “solvency instrument” at EU-level that was intended to prop up viable companies in danger of failing due to the COVID-19 crisis. Besides that, leaders made far-reaching cuts in the areas of health, migration, external action, climate programs, as well as research and investment programs, an action that “decreases the innovative part of the budget, even if more than 50 percent of the overall budget, MFF and Next Generation EU combined, will support modern policies,” according to Commission President von der Leyen.

On linking access to money with rule of law, leaders significantly watered-down language to reach agreement, simply agreeing that “A regime of conditionality to protect the budget and Next Generation EU will be introduced” with possible sanctions agreed by the European Council. A specific mechanism for this, however, is left open to be discussed “rapidly.”

In a major win for rebate countries, leaders agreed to retain rebates despite them being opposed by a majority of countries, with them receiving more than €7.6 billion annually in lump-sum corrections. In what can be described as a pay-off for its comprises, Austria managed to almost double its rebate pay out.

Moreover, EU leaders also agreed to increase the level of EU customs duties that countries can retain for their own budgets, a major win for the Netherlands with its ports, but also Germany, France, Belgium, Spain and Ireland.

Lastly, in a succession to long-lasting European Parliament demands, EU27 leaders agreed to a reform package of the EU’s own-resources system by introducing new EU-direct funding systems.

As a first step, a new own resource on non-recyclable plastic packaging at the rate of €0.80 per kilogram will be introduced, to be applicable as of 1 January 2021. Further, the European Council agreed on a carbon border adjust mechanism, digital taxation, an extension of the emissions trading system as well as a possible Financial Transaction Tax over the next 7-year term. Any own resources, however, may only be spend on the repayment of Next Generation EU borrowing costs.

Over the coming weeks, the European Parliament’s Budget Committee is set to intensively scrutinize the European Council’s MFF deal, before the entirety of the European Parliament is set to vote on whether to accept or reject the budget deal hashed out by leaders over 5 days and 90 hours.