Unmasking the Rifts in the European Union: New Coalitions at the EU’s Historic Summit from July 17-21 2020
This is part of a series on the Novel Coronavirus (COVID-19) pandemic.
During the second-longest summit session in the European Council’s history, in the early morning hours of July 21, 2020, and after almost four days of tough negotiations, the twenty-seven heads of state and government finally agreed on a €1,074 billion long-term budget and a € 750 billion COVID-19 recovery fund.
In an unprecedented manner, a group of four countries, the frugals, (Austria, Denmark, the Netherlands, and Sweden—later enlisting Finland as a fifth country) exercized surprisingly strong bargaining power over the whole of the European Union, threatening to block the EU’s multi-annual financial framework (MFF) and rescue package. The so-called “Frugal Four” (F4) managed to retailor the COVID-19 package to 390 bn in subsidies and 360 bn in loans, instead of the 500 in subsidies originally foreseen in the Merkel-Macron plan.
This is yet another example of the new post-Brexit order of Europe, where smaller coalitions form according to policy issues and push certain agendas. The Višegrad countries and the Hanseatic League are other cases in point. While the latter grouping did not take a central position in the run up to this summit, the Višegrad states managed to avoid tougher rule-of-law provisions to reign in the illiberal democrats in the East. The idea of linking provisions to protect Europe’s democratic values with EU funding was watered down in the final agreement after several rounds of negotiations.
On Monday, Germany, France, the Višegrad Four group, Latvia, and the F4 supported a proposal drafted by Latvia. Even though there is a reference to Article 2 of the Treaties where the principles of the EU are embedded, it does so in a reference to “the protection of the EU’s financial interest.” This wording is significantly vaguer than the proposal by Council President Charles Michel. The original text referred to a system:
To tackle manifest generalised deficiencies in the good governance of member state authorities as regards respect for the rule of law when necessary to protect the sound implementation of the EU budget […] and the financial interests of the Union.
Like it or not, what is truly amazing is that the F4 have succeeded in pushing the limits of the bargaining power of small states in the EU. If we—following Panke & Gurol (2019)—define countries as “small” if their populations are less than the EU-27 average of 16.5 million, the F4 is a group of small but relatively prosperous states, joining forces to increase their leverage in their fight for budgetary discipline. Yet, Italy, the country hardest hit by the COVID-19 pandemic, emerges as the biggest beneficiary and is set to tap into €127 billion in loans and more than €82 billion in grants. In return, the Frugal Four countries managed to obtain considerably larger rebates on their contributions to the EU budget. However, the contested prime minister of Bulgaria, Boiko Borissow, also can return to Sofia with a negotiation success and an extra €32 billion.
While the Commission remained in the backseat during the negotiations, the European Parliament clearly voiced its concerns towards the final package, especially towards the cuts to be made to the Commission’s Just Transition Fund, which was downgraded from €40 billion for climate action to just €10 billion, turning environmental policy into a second order priority. Another collateral concerns the funding provided to research and development, limiting the capacities of the European Research Council (ERC) as well as the Erasmus Exchange Programme.
The rise of the Frugal Four: “a.k.a. the Rebate Squad”
During spring 2020, the F4 maneuvered to stop a permanent Eurozone finance scheme, the Budgetary Instrument for Convergence and Competitiveness (BICC), to be endowed with €17 billion from 2021 to 2027. Instead, as a replacement for this de-facto Eurozone-budget, the temporary Recovery and Resilience Facility (RRF) was supposed to provide €560 billion—taken from the total of €750 billion to be raised by the Commission on the capital markets—to protect the EMU. This program was seen as “what Europe needs at this stage” by then Eurogroup-President Centeno (Financial Times, May 29, 2020). It has, however, the effect of substantially cutting into the funds at the Commission’s disposal and giving control over spending to Eurozone members, on top of avoiding even a timid institutionalization of a Eurozone budget.
Second, defining their red line in EU budget negotiations, the Frugal Four lobbied to limit the MFF 2021-2027 to a maximum of 1 percent of the GDP. According to a COVID-19 non paper of the Frugal Four, their common position was that, given the depth of the post-COVID-19 economic crisis:
Member states would have to devote a larger share of their national resources to the EU budget. Additional funds for the EU, regardless of how they are financed, will strain national budgets even further (F4 COVID 19-non-paper 2020).
A deal needed to be made under German EU-Presidency in the form of a trade-off between budgetary contributions and the redistribution of EU funds to member states. Finland and other Northern states have previously indicated they would be in favor of cutting EU-structural programs and common agricultural policy (Financial Times, December 2, 2019). Similarly, the F4 pushed for “a strong commitment to reforms” and“modernizing” the EU budget, involving reprioritization of spending “in areas that are less likely to contribute to the recovery.”
The third intervention concerned the proposed EU-recovery fund. This instrument should consist of €500 billion in grants and €250 billion in loans, as foreseen by the joint Merkel-Macron plan of May 18, 2020. In their rival proposal, the F4 insisted that the totality of the funds be provided as loans, and not in the form of non-refundable grants, as demanded by the Southern EU-states, Italy, Spain, Greece, and France. Most importantly, the F4 opposed any form of mutualization of debt. Finland, sitting on the fence during the negotiations, finally joined the F4 camp, opposing the amount of non-refundable transfers to the Europe’s South. In particular, the F4 stressed the “temporary, one-off nature” of the recovery fund, “with an explicit sunset-clause after 2 years,” stressing, in particular, the importance of research and innovation, resilience of the health sector, climate, growth, and the digital agenda as areas of priority (cf. F4- COVID 19-non-paper, 2020).
Only when the economic fallout of COVID-19 lockdowns became clear, fiscal policy debates focused on how to fund the recovery. Mirroring earlier discussions about “eurobonds,” an initiative led by France, Spain, and Italy to issue joint European debt (christened “coronabonds”) that was opposed by the Frugal Four and Germany, and quickly stalled in April 2020. Yet, in a dramatic turn of events, Merkel and Macron issued a joint proposal on May 18, 2020 to jointly fund €500 billion worth of grants to countries hit hardest by the pandemic. Remarkably, this proposal did not only include sizable (non-repayable) fiscal transfers, but also foresaw the European Commission issuing debt, and thus set a precedent for large-scale, centralized borrowing in the EU. During the long and emotional negotiation phase about the modalities of this fund, the Southerners, first and foremost Italy, detected a lack of solidarity among their European partners, while at the same time being wary of technocratic meddling into national government (as was the case when Greece was under troika-rule in order to obtain rescue funds from the ESM umbrella in 2012).
Unsurprisingly, the stark opposition between North and South raises questions about European solidarity and trust in the EU. The negotiations in the run-up to the “historic” July 2020 European Council clearly showed the deepening divisions between member states. In a future post-Brexit Europe, we may expect a variable geometry of intra-EU coalitions, driving the agenda of an ever more differentiated integration.
Dr. Thomas Henökl works as Associate Professor of Public Policy at the University of Agder (Norway), and Senior Research Associate at the German Development Institute in Bonn. His interests lie in the fields of European politics, public administration, EU foreign and security policy, international cooperation and development, and more widely on comparative politics and organization theory. Previously, Thomas Henökl worked for the European Commission, DG Relex (from 2011 the European External Action Service), and at the European Institute of Public Administration (EIPA). Thomas has a PhD in Political Science from the University of Agder (Norway), as well as three Masters’ degrees in Political Science, European Public Policy, and Public Administration from the University of Innsbruck (Austria), the Institut d’Etudes Politiques (Sciences-po), Paris, and the Graduate School of Public Administration at the International Christian University, Tokyo.
Published on July 24, 2020.