It happened today, 16 November. Hungary and Poland have managed to block Europe’s €750 billion Recovery Fund.
Europeans rarely agree on anything and now the Visegrad group of East European countries led by Hungary and Poland is threatening Europe’s path to recovery after the pandemic is (finally) controlled – presumably next year. The story, convoluted as European Union stories usually are, throws however a harsh light on the challenge of creating a United States of Europe when Europeans can’t even come together when faced with the economic devastation caused by the coronavirus. At the time of writing, close to 10.6 million cases and over 265,000 deaths were reported across the EU’s 27 member states.
Yet last week had started with some good news: It’s a rare thing when the European Parliament wins a battle against the EU Council. The battle was over the 2021-2027 budget that includes the €750 billion Recovery Fund, the key instrument devised by the EU Commission to help keep afloat European economies overwhelmed by the pandemic crisis. On 10 November, the budget commission of the European Parliament announced a preliminary agreement with the Council on a budget of €1.074 trillion, bringing to a close negotiations that had dragged on for two months, and finally paving the way for the implementation of the Recovery fund.
Members of Parliament (MEPs) were not satisfied. In spite of the European Parliament gaining some additional funding, they still felt that insufficient budget cash was dedicated to programs in key areas such as health and research and that there should be clear guarantees that the EU Council – the EU member governments – actually have plans to create new sources of income for the EU budget in the coming years.
The European Parliament’s Pet Programmes Got a Boost
The European Parliament did succeed in obtaining some €15 billion more to sustain some crucial programs for the EU, in particular Horizon Europe (plus €4 billion), EU4Health (plus €3.4 billion), the student exchange programme Erasmus+ (plus €2.2 billion).
The gains secured by the European Parliament, however, are certainly modest and don’t reverse the damage done by “European leaders” (i.e. member states) back in July to the European Commission proposed budget. A quick look at these three flagship programmes shows what was achieved, not as much as most people wanted.
Erasmus is perhaps the best-loved and best-known European Union programme. Since its inception, it has garnered 10 million alumni. Erasmus ranks high in the polls showing that most Europeans view it as beneficial. And studies have consistently shown the far-reaching benefits of the programme: Graduates with Erasmus experience are generally more mobile, more civically minded and prone to volunteering, as well as more engaged in elections, including at the European level.
On Erasmus funding, the European Parliament which asked for €41.1 billion found itself at loggerheads with both the Council and the EU Commission: In July, EU governments agreed to fund Erasmus with only €21.2 billion, a 52.5% increase over the previous long-term budget, yet below the modest €26.4 billion proposed by the EU Commission. The additional €2.2 billion now obtained by the European Parliament merely adds the equivalent of an additional year of financing for Erasmus+.
Horizon Europe, born as an ambitious €94.4 billion (in 2018 prices) research and innovation programme devised by the EU Commission to succeed Horizon 2020, was reduced to €80.9 billion by the European Council in July 2020, as member governments, always eager to show how clever they are at containing costs, looked for ways to diminish the proposed EU budget. When the budget came up for approval by the European Parliament, MEPs fought to reverse the cuts made by the Council. Still, compared to the €13.5 billion shortfall, a gain of €4 billion doesn’t look like much.
Many people in the scientific community were unhappy. For Robert-Jan Smits, former director-general of the European Commission’s research and innovation directorate and president of Eindhoven University of Technology, the programme “deserves more.” He conceded, “it’s a bit more, but of course it doesn’t come close to the €100 billion the European Commission originally proposed and the €120 billion the European Parliament had asked for. So yes, I am disappointed, very disappointed.”
The new funding is around €10 billion less than what was proposed by the European commission in Mayhttps://t.co/tN9BgoRh4K
— Chemistry World (@ChemistryWorld) November 15, 2020
Still, it’s a step, however small, in the right direction to help preserve at least some of the research momentum in key areas like digital, health and climate change.
EU4Health programme managed to survive best the Council-to-EUParliament roller-coaster. Born in May 2020 as a response to the coronavirus, the European Committee of the Regions (CoR) and its cities along with the European Parliament had pressed for a budget of €9.4 billion, but EU member states in July were prepared only to accept a budget of €1.7 billion. The 10 November compromise delivered beyond expectations: The new EU4Health programme will be able to spend €5.1 billion between 2021 and 2027 to equip the EU health systems to prevent, prepare for and respond to health threats and crises.
How the EU Commission Will Find the Extra Money
An increase in contributions is not expected, governments don’t dare go back to their electorate to ask for funds. The European Council statement is clear: the extra €15 billion should come “primarily from competition fines” imposed by the bloc, at least €12.5 billion are expected from this unlikely source. The rest of the money would come mostly from “reshuffled cash” – an even more unlikely source.
In short, the EU Commission will need to find funds in a way that keeps intact the already agreed-upon budget ceiling of €1.074 billion – and that does not infringe on the Council’s (for now immovable) position that the Commission cannot be allowed to find new sources of funding, and certainly not resort to issuing European bonds, something that Germany is deeply allergic too – fearing somewhat irrationally that bonds are the royal road to budget deficits (they don’t need to be).
Funding Source #1: Competition Fines
It is true that Margrethe Vestager has been very successful in the past at getting payback for monopoly misdeeds by Silicon Valley giants. In 2018, she fined Google €4.34 billion – that’s a record $5.1 billion – for breaching EU antitrust rules: It was found that since 2011, Google had imposed illegal restrictions on Android device manufacturers and mobile network operators to defend its dominant position in general Internet searches. In 2019, she fined Google €1.49 billion again for breaching EU antitrust rules, on the basis that it had abused its market dominance by imposing a number of restrictive clauses in contracts with third-party websites which prevented Google’s rivals from placing their search adverts on these websites. In total, Google has been fined a combined $9.5 billion since 2017 by EU antitrust regulators.
Facebook, Amazon and Apple are also facing investigations across Europe. In June 2020, Margrethe Vestager opened investigations into Apple‘s App Store, as well as its payment platform, accusing the company of stifling competition. And she has just announced that she has opened a formal investigation against Amazon, accusing the e-commerce giant of misusing the data in its possession and distorting the EU market.
However, to consider as a source of financing the fines for infringement of competition is surely a restrictive approach to fiscal policy. It may produce some spectacular fines now and then, but it’s neither a sustainable nor a reliable source of funding. Bottom line, the question is: How many fines is Margrethe Vestager expected to impose on Big Tech? Obviously, there is a limit to this way of financing a budget, although some satisfaction may be derived from the fact that EU member states are not asking for the cash raised by fines and allowing the EU Commission to use it.
Funding Source #2: “Reshuffled Cash”
The other way the EU Commission is expected to find cash is, as stated by the European Council, through “reshuffled cash”. How is this meant to work?
A mechanism was included in the EU budget package, the so-called “conditionality on the rule of law” which allows the EU Commission to freeze the distribution of funds to member states that do not respect its “fundamental principles”, in particular its democratic values. Back in July, the conditionality regime had been merely hinted at in the Council conclusions: “A regime of conditionality to protect the budget and Next Generation EU [the €750 billion recovery fund] will be introduced. In this context, the Commission will propose measures in case of breaches for adoption by the Council by qualified majority.” (highlight added)
Why Hungary and Poland see Rule of Law Conditionality as a Threat
Now, the Council has introduced the rule of law conditionality, but it is the concept of qualified majority that scares Eastern Europeans. The mechanism is clearly directed at Eastern Europe’s rising “illiberal democracies”, to use Victor Orban’s famous phrase for describing what he has done to his own country, Hungary.
What is behind the move: EU member states in Western Europe are tired of paying economic subsidies to Eastern Europe that are essentially used to finance the dismantling of key democratic institutions, in particular the take-over of the judicial system by the ruling parties in Poland and Hungary. So “reshuffled cash” means not distributing funds to non-democratic member states and redirecting it to more deserving causes.
The president of the European Parliament, David Sassoli, did not hide either his satisfaction with the result or the need to rush to close the game quickly: To become operational, the entire budget package and the Recovery Fund will have to receive the green light from both Parliament and the Council.
The Parliament did it fast, on 12 November it was done. Now it’s the turn of the European Council. Unsurprisingly, the strongest opposition comes from the Visegrad group of countries led by Hungary and Poland. These countries are already on a collision course with Brussels due to alleged “interference” on their domestic policies. They are currently under a formal EU process investigating them for undermining the independence of courts, media and non-governmental organisations.
Viktor Orban’s Hungary made it clear immediately that he could veto the entire package. His government considers the measure a “blackmail”. And his position was immediately echoed by the Polish Prime Minister Mateusz Morawiecki.
There are those who expected Visegrad’s opposition to fade in the face of more practical needs since Hungary and Poland are among the countries that benefit most from EU funds. Consider that in 2019 alone, Hungary received €6.2 billion compared to just €1.2 billion paid to Brussels. Likewise, Poland received €16.3 billion against just over €5 billion paid out to the EU. To get a sense of what this means, compare this to Italy, a country that also has large pockets of poverty and regions in need of economic assistance: Italy, far from being subsidized like Hungary and Poland has paid out to Brussels €16.8 billion and only received €11.4 billion.
More importantly, opposing the agreement between Parliament and the Council would mean delaying the influx of decisive resources in the midst of a pandemic crisis, with gloomy prospects for the entire Eurozone and its national economies.
But this did not happen.
On 16 November, Hungary and Poland formally blocked the adoption of the 2021-2027 budget and recovery fund by European Union governments “because the budget law included a clause which makes access to money conditional on respecting the rule of law”.
This means that the money, originally meant to flow to member states by the summer of 2021 will now be delayed.
Reuters reported that the Polish and Hungarian veto will now be discussed at a meeting of EU European affairs ministers on 17 November and then at a video-conference of EU leaders on 19 November. But finding a solution might take longer than that, officials said. Hungary and Poland are betting that everyone wants the Covid Recovery funding as soon as possible and that the link to the rule of law will be removed from the budget package.
Austria’s Chancellor Sebastian Kurz said it was “an absolute necessity” to link the distribution of European funds to the rule of law, especially when “the sums to be handed out were so vast”.
Look out for more similar reactions. A group of countries led by the Netherlands as well as the European Parliament wanted an even stronger link to the rule of law and have said they would not approve the budget without it. Max Weber, Chairman of EPP, the European Parliament’s largest political group, tweeted:
The #ruleoflaw is not about one country or about East and West. It is neutral and applies to everybody. If you respect the rule of law there is nothing to fear. Denying the whole of Europe crisis funding in the worst crisis since decades is irresponsible. https://t.co/jrF8BuCxwO
— Manfred Weber (@ManfredWeber) November 16, 2020
It is obvious that the EU cannot be at the bid and call of two of its youngest members, like Hungary and Poland, who are breaking the law and fast becoming autocracies – a despicable type of government that is totally unacceptable in the European Union. The last thing European taxpayers can accept is that their funds, in a time of pandemic, go to support countries that flout freedom and democracy.
Featured image: Protesting the dismantling of Poland’s judicial system. credit: EPP article: Those who respect the rule of law have nothing to fear