European Summit Concludes: The Full Summary

Tyler Durden's Photo
by Tyler Durden
Tuesday, Jul 21, 2020 - 12:05 PM

Authored by Erik-Jan van Harn, of Rabobank


  • Heads of state have discussed the EUR750bn recovery fund that was proposed by the European Commission

  • There were a number of hurdles to be taken in the run up to the meeting, such as the size and composition of the recovery fund and the distribution key

  • After 90 hours of negotiations, the European leaders managed to reach an agreement. The deal is a watered down version of the initial proposal. Concessions were made to win over the ‘Frugals’ (Netherlands, Denmark, Sweden, Austria)

  • After consensus in the European Council, the proposal has to pass the European Parliament and has to be ratified by national parliaments. The majority of the funds will probably be distributed in 2021/2022

They’re talking billions

This weekend, the heads of state of the 27 EU member states met in Brussels to discuss the revamped EUR 1074bn multi-annual financial framework (MFF) and the EUR 750bn ‘Next Generation EU’ stimulus package. The revamped MFF and the recovery package, aimed at mitigating the economic damage of the COVID-19 crisis, spurred the debate on European solidarity in the past months.

European Council chairman Charles Michel has met with each prime minster and president bilaterally in an effort to get everyone on board. Additionally, a number of leaders, such as chancellor Merkel, president Macron and prime minister Conte have met with the Dutch Prime Minister Rutte, leader of the Frugal Four (Netherlands, Denmark, Sweden, Austria), in attempts to persuade the Dutchman to soften his stance towards the deal. The four member states have expressed their concern over the initial conditions of the package. Specifically the notion of grants and the governance of the fund.

Michel unveiled his new proposal on July 10. The plan closely resembled the original plan of the Commission but shifted some of the governance of the fund towards the European Council (and thus the heads of state) and away from the European Commission. Reform plans can now be passed by a qualified majority in the European Council.

Fourfold disagreement

So why did it prove so difficult to reach an agree at the Summit in the first place? Prior to the 17- 19 Summit there was broad support for a recovery package. Heads of state agreed that the COVID-19 crisis is economically affecting Southern member states more extensively compared to Northern states and that individual countries are not to blame for the economic and health toll of this crisis. However, the political route towards a support package proved to be a bumpy one. In a previous article we already argued that there were a number of hurdles to be taken.

First, Frugal leaders argued that countries would have been able to fend for themselves if they have had sound government finances. This is a common feeling for many voters in the Frugal countries. Consequently, in order to be able to sell the deal at home, they took a tough stance on grants. This especially holds for the Netherlands, since elections will be held in 2021.

Second, the governance of the fund was a major issue of disagreement. The Frugals have emphasized the importance of economic reforms, especially for the Southern member states, which in their eyes, have reformed too little in the past decades. Therefore, the Frugals wanted to have a say in how the funds are spend. With the Troika governance of Greece in mind, dependent member states are naturally not too keen on granting veto power to individual countries.

Third, the distribution key was controversial. The initial proposal was based on the size of the economy (GDP), the level of wealth (GDP per capita and) and the historical long-term unemployment. This means that countries with a low GDP per capita and countries with a high historical unemployment would benefit the most. This allocation is not necessarily linked to the economic damage caused by the corona crisis. Under the initial term, Poland for example (a country which is expected to be relatively moderately hit by the corona crisis) would be able to receive on a relative sizeable share of the funds because of its relatively low GDP per capita.

Fourth, including the rule of law in the distribution key was a thorn in the side of Eastern European countries ,such as Poland and Hungary (which is already under increased EU supervision).

A turbulent weekend

As expected, the Summit quickly turned into a heated debate over abovementioned issues. This culminated into tensions rising during the late night dinner on Friday. Chairman Michel launched a second proposal that night in an attempt to win over the Frugal Four and especially the Dutch, who positioned themselves as the leader of the resistance. Michel’s second proposal included an emergency brake on distributions of cash, a EUR 50bn shift from grants to loans and a promise that member states do not have to hand over a larger part of their collected import tariffs (compounding to considerable figures for countries such as Belgium and the Netherlands). Yet, this still wasn’t enough to garner the backing of all members.

Rising tensions and an inability of countries to come to terms over the recovery fund resulted in an extension of the Summit. When Council President Michel launched another proposal on Monday, European leaders were cautiously optimistic about a deal. Early Tuesday morning there was finally white smoke after a 90 hour Summit.

The final deal is a considerable rapprochement to the Frugals and the Visegrad countries. The following adjustments have been made:

  • The overall size of the fund has remained the same but the composition has shifted from EUR500bn in grants to EUR390bn in grants.
  • The Frugals receive higher rebates on their EU contributions and a bigger role in the governance of the fund.
  • Disbursement of funds for proposed investment plans have to be ratified by a qualified majority. Member states can object to funds being disbursed within 3 months after acceptance. The final decision is formally up to the European Commission.
  • As for the rule of law, Poland’s Mateusz Morawiecki asserted that there is no direct link between the rule of law and the funds in the deal. The mechanism has yet to be created by a group headed by Chancellor Merkel and is to be accepted by the European Council later on. Since the Council requires unanimity, Poland and Hungary can veto disadvantageous proposals.

As for the MFF, the overall size has remained fixed at EUR1074bn. Countries have to plug a hole of roughly EUR10bn as a result of Brexit, but managed to reach unanimous agreement on the budget. The MFF draft of February constitutes as the basis for the new deal, but the spending on healthcare will be increased. Additionally, the EU will work towards reforming its own resources over the coming years through taxation on non-recycled plastic, the carbon border adjustment mechanism, a revised ETS scheme and a digital levy. A more controversial topic is the possible introduction of a financial transaction tax. But the latter will be decided at a later point in time.

Looking forward

For the MFF and recovery fund to come into effect, the European parliament should agree on the package and national parliaments would have to ratify. The working assumption in Brussels is that the ratification process will only be completed at the beginning of 2021. With every country more or less pleased with the result, ratification will probably not cause any issues, but there is a risk involved1 since the ratification requires unanimity. The Dutch elections for example could spur the debate regarding the fund on a national level.

Once the European Commission has raised the capital it will take a while for the funds to be distributed. The majority of the funds will most likely be distributed in 2021/2022. If it turns out to be the case that these funds are not distributed timely, countries can tap into the EUR 100bn SURE facility and if necessary apply for bridge loans from the ESM/EIB.

Because it takes a while for the funds to be distributed, we do not expect a large economic impulse. Rather, the fund decreases the risk of further divergence between member states. A risk that has serious consequences, as we argued earlier.

Two major topics are left out in the open. First, the conditions regarding the rule of law as mentioned earlier. Second, the exact distribution key which was a major topic to begin with. For now we assume that no major changes have taken place there. And even though the final distribution key is unknown at present, a senior Italian official expects2 Italy to receive about EUR 82bn in grants and EUR 127bn in loans according to initial estimates3 . If this proves to be correct, the money has found its way to the countries mostly in need of extra funding (and as a side effect, to the Visegrad countries)