Vulcan Insight

Moment of truth for EU Budget negotiations

17 July 2020

EU Heads of State and Government meet today for their first in-person summit since the outbreak of coronavirus. The aim of the meeting will be to reach an agreement on the EU’s next 7-year Budget and Recovery Fund. Over the next two or more days, European Council President Charles Michel will aim to bridge the remaining differences to reach a deal on the combined €1.82 trillion package.

As countries across the EU begin the tightrope walk of reopening their economies under new health and safety restrictions, the stakes for this weekend’s European Council summit couldn’t be higher. Following an initial “exchange of views” via videoconference a few weeks ago, European Commission President Ursula von der Leyen’s “Next Generation EU” Recovery Package is up for negotiation in earnest at leaders’ level.

In recent days, President Michel has already somewhat tweaked the Commission’s proposed numbers by slightly reducing the overall volume of the proposed MFF in line with some demands by the “Frugal Four” faction. Controversially, Michel’s revision primarily features cuts in the “Digital Europe” investment programme as well as other research programmes. The EU’s international military and security operations have also had their funding cut in the revised proposal.

Yet, despite President Michel’s modest revisions, the by now well-entrenched differences between countries persist. To begin with, as EU leaders spoke to the press while arriving at the Council’s Europa building there wasn’t even consensus on whether or not this summit needed to produce results.

While French President Emmanuel Macron said that, together with Charles Michel and German Chancellor Angela Merkel, he “will do everything he can do for an agreement to be found,” Dutch Prime Minister Mark Rutte, the somewhat leader of the Frugal Four, dampened hopes of a breakthrough telling reporters that chances of reaching a deal this weekend is “less that 50 percent.”

This sentiment was also reflected by Chancellor Merkel who acknowledged the continued big differences in positions and difficulties in reaching “a result this time.”

On the details of the financial package, publicly at least, red lines continue to be drawn at the established points of contention. On the MFF, the Frugal Four look to force an overall reduction in the volume of the budget to one percent of national GNI, at most, while also “modernising” its spending priorities in line with research and innovation objectives.

In opposition, the “Friends of Cohesion,” a group of primarily southern, central and eastern European countries is looking to further increase the MFF, while also retaining a significant funding stream for cohesion policy. 

In addition to the high-level positions, each leader naturally aims to push national objectives in the MFF. For Ireland and France, continued high levels of funding for the Common Agricultural Policy is among the key priorities.

Meanwhile, according to Prime Minister Mateusz Morawiecki, Poland is opposed to any proposed links between access to EU funds and tackling climate change and the rule of law. With that approach, Poland is sure to bank on the support of Hungary’s Victor Orbán, as well as the other member of the Visegrad Group – the Czech Republic and Slovakia.

And as if the MFF was not offering enough of a battle, Commission President von der Leyen’s €750 billion coronavirus Recovery Fund is also up for negotiations. It appears that the Fund’s basic tenet – issuing mutualised debt on the financial markets – has, albeit reluctantly, been accepted by leaders. However, the Frugal Four countries continue to aim to significantly reduce the overall size of the Fund to what Chancellor Merkel called “dwarf size.”

Besides that, a key sticking point will revolve around the Fund’s distribution ratio between grants and loans. Currently, the Commission’s proposal foresees €500 billion to be available through grants, with the remaining €250 billion available through ultra-low interest rate loans. Again, on this the Frugal Four will fight to significantly restrict the volume of money available through grants.

Moreover, a major bone of contention as leaders descend on the Europa building continues to be the Commission’s proposed methodology for how the Fund’s money will be allocated among the countries. Under the current proposal, the Fund’s distribution would be guided by pre-COVID-19 economic figures. As such, significant sums of recovery money could flow to countries which, in fact, had been least affected by the coronavirus.