The EU relaunch agreement to “permanently change” the approach to tackling the bloc crisis

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Updates on the EU economy

The historic stimulus package agreed by EU leaders this week has the potential to permanently change the way the bloc handles major crises.

At a two-day summit that ended in Brussels on Friday, leaders unblocked a Budget amount of € 1.8 billion built in part on unprecedented levels of debt issuance from the European Commission. The core innovation is the € 750 billion pandemic stimulus fund, which was first sketched in July and will allow transfers to member states affected by the pandemic from next year. The compromise also paved the way for a separate agreement on ambitious new climate change targets and set the next EU budget over seven years.

Angela Merkel, who holds the rotating EU presidency and negotiated the deal that overcame a blockade by Poland and Hungary, was relieved. “It is a huge burden for me,” the German Chancellor told reporters.

French President Emmanuel Macron also expressed his satisfaction: “This summit was a test for Europe and we have passed this test.”

The stimulus fund, which must be ratified by national parliaments, is explicitly designed to be a temporary part of the EU’s toolbox for exiting the crisis. As such, it does not offer a lasting answer to those worried about the lack of fiscal firepower at the supranational level to deal with future economic crises.

But analysts see the deal as a fundamental change. “Even if the debt instrument is not permanent, it will permanently change the way we think about the instruments that Europe has at its disposal in the event of a crisis,” said Lucas Guttenberg of the Jacques Delors Institute in Berlin. “It shows what is possible.”

French President Emmanuel Macron in front of the European Council building during the EU summit © POOL / AFP via Getty Images

The centerpiece of the stimulus fund – 390 billion euros in subsidies granted by Brussels to member states – will bring a net profit representing more than 10% of pre-crisis economic output in Croatia and Bulgaria, according to the Central Bank European. Greece is expected to receive a net advantage of 9 percent, while Portugal will receive 5.4 percent and Spain 3.4 percent.

Guntram Wolff, of the Bruegel think tank, said the flow of finance would provide significant “fiscal space” for weaker economies to support the recovery in years to come. “The element of transfer from the stronger countries to the weaker countries is important,” he said.

As seen in the history of the EU, a major crisis – the devastating economic fallout from the Covid-19 pandemic – has helped forge consensus and overcome deep divisions among member states. Before the summer, the so-called frugal countries – the Netherlands, Denmark, Sweden and Austria – were opposed to the commission raising debt to fund subsidies to member states. More recently, the EU has tackled a last-minute threat to the entire budget package because Warsaw and Budapest opposed plans to cut payments to countries that violate the rule of law.

Bar chart of the net impact of EU stimulus fund spending (% of GDP 2019, selected countries) showing which countries benefit the most from the fund?

In both cases, solutions have been found. Poland and Hungary were wowed on Thursday by a non-binding statement intended to assure them that they would not be unfairly singled out under the new rules. The declaration also states that member states can challenge its legality in the European Court of Justice before it is used.

Diplomats insisted that the substance of the rule of law legislation remained unchanged. Nonetheless, they acknowledged that the complex political feuds involved in securing both the stimulus fund and the climate deals have exposed the dissent within the union.

The deadlock on the rule of law in countries that have drifted, or are at risk of drifting, towards authoritarianism also highlights a lasting resistance to Brussels surveillance – an issue that will likely weigh on stimulus fund spending in the years to come. This debate “would return”, warned a diplomat.

Likewise, while the summit set climate targets for a 55% reduction in emissions by 2030, disagreements remain among member states on how to achieve these targets. The range of views was highlighted by the various environmental priorities that the 27-member EU is committed to addressing – from the spruce bark beetle ravaging trees in the Czech Republic to Maltese concerns about needs. island states.

The difficulty in dealing with Hungarian and Polish objections to the rule of law mechanism underlines the need to develop permanent tools to fight crises which cannot be so easily retained by a small number of Member States exercising their right to veto, according to Mr. Guttenberg.

“We cannot build new instruments with every crisis,” he said, because that meant having to get the agreement of the 27 countries – or the 19 in the case of euro zone initiatives. The summit agreement, he said, was a big step. But “this is just not the end of the road”.

Additional reporting by Guy Chazan in Berlin and Victor Mallet in Paris

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