The Saviour of Europe

On July 21, 2020, at 5:30 am, the President of the European Council, Charles Michel posted in a single word tweet, “Deal!”. He was, of course, referring to a deal that was unanimously voted by all the member nations of the European Union (EU) at the Special meeting of the European Council. The meeting which was supposed to be a four-day summit was extended to a fifth day so as to bring about consensus among the EU members to get a unanimous vote on the proposed deal. So, what is the deal in question and what does it mean for the European Union?

The European Council, one of the three wings of the European Union, met in Brussels to vote on what is called the Multiannual Financial Framework (MFF). MFF is a seven-year financial framework that regulates the annual budget of the Union. To put it simply, it is the EU’s budget for a period of seven years. This budget is funded by the members on a pro-rata basis. MMF contains a set of goals – an EU-wide common policy, and this ‘EU budget’ allots funds to the members to spend under the agreed heads. The framework which came into force in 2014 is set to expire in 2020. Therefore, a new framework for the period of 2021-2027 had to be agreed on this year. This is precisely the reason for the Brussels summit. However, that does not explain the importance surrounding the summit. Apart from MFF, the EU and its member states agreed on a specific recovery fund, called Next Generation EU (NGEU), for the sole purpose of tackling the COVID-19 crisis. Under NGEU, the European Commission will borrow a sum of €750 billion from the capital markets. Out of this €750 billion, a sum of €390 billion will be disbursed to the members as grants; while the rest, €360 billion, will be provided in the form of loans. While the European Commission as a whole has borrowed only sparsely in the past, it is a first for the Commission to borrow on such a large scale. Therefore, the deal that we are talking about has two parts: MFF and the NGEU. With a €1.074 trillion seven-year budget and the €750 billion recovery fund, the financial package amounts to an enormous €1.82 trillion.

There are three things that stand out in the budget. First is the political authority clause. The deal document states that “[the] Budgetary Authority shall exercise political control, to be defined in the agreement between the European Parliament, the Council and the Commission”. This can be seen as a measure that could cause problems for Hungary and Poland. The European Commission had initiated proceedings against both these countries over rule of law concerns. Many leaders demanded that the EU funding to its member nations be linked to the condition that states follow democratic principles and “EU’s founding values”. During the discussions in the summit, the Hungarian Prime Minister Viktor Orbán threatened to veto the Commission’s proposal and demanded that the funding not be linked to the rule of law practices. However, the wording “political control” means that the money will also be linked to the observing the rule of law. Second, the deal contained clauses that put “emergency brakes” on the funding to a member state, if the state failed to adhere to the reform conditions attached to the funding. This move came after intense pressure from the premier of Netherlands Mark Rutte, who was the voice of the “frugal four”. Frugal four is an informal association of Sweden, Denmark, Austria, and the Netherlands. Initially, French President Emmanuel Macron had proposed for a sum of €500 billion in the form of grants and another €250 billion in the form of loans to the member countries. The frugal four along with Finland had opposed the idea of providing huge sums in the form of grants and wanted grants to be limited to below €300 billion. This proposal was unacceptable for Italy and Spain; the two countries worst hit by the COVID-19 pandemic refused to accept any total grant amount below €400 billion. Eventually, a compromise was reached and the grant amount was settled at €390 billion. The Netherlands Prime Minister, however, scored a victory by successfully getting the members to agree to a review clause. Third, the deal puts the issue of climate change at the forefront. It says, “Climate action will be mainstreamed in policies and programmes financed under the MFF and NGEU”. According to the deal document, a total of 30% of the expenditure of the €1.82 trillion will be used to reach the climate targets in conformity to the objectives of the Paris agreements. It also has a provision that rules that the European Commission should publish a report on climate expenditure annually.

Another key element to the deal is the specifications about how the revenue will be raised to pay off the debt that the European Commission will borrow under the NGEU provisions. The deal sets the deadline of 2058 to repay the whole amount. It was agreed that a tax on non-recycled plastic should be imposed. Another tax on imported goods from countries with lower carbon-emitting standards than the EU is also envisaged. Revenue from these taxes will be transferred to the EU for the purpose of repayment of the borrowings.

The deal is historic for many reasons. It is the first time ever that all the countries have agreed and empowered the European Commission to borrow a huge amount. But most importantly, with Brexit and the inward-looking policies being adopted all across the globe, many feared that the failure of the EU to reach a deal will pose an existential threat to the Union. However, the euro hit an 18-month high, as soon as the announcement of the deal came out, stock markets across Europe surged, and the European shares bounced. This deal now must pass through the European Parliament and must be ratified by all member states, which in all possibility seems likely. In a world where multilateral institutions and dialogue are on the wane, one can only hope this deal will exemplify the need of international institutions in coordinating responses to 21st-century problems that are increasingly cross-national.


Kartik Balaji Kundeti

A low-key individual with keen interest in Economics and Policy making. Currently pursuing Economics from SRCC, University of Delhi.

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