Budget reboot

EU leaders back budget reboot for coronavirus recovery

European Commission tasked with drawing up economic rescue plan but big questions remain unresolved.

By DAVID M. HERSZENHORN

Get ready for the biggest, baddest budget the EU has ever seen.

EU national leaders on Thursday directed European Commission President Ursula von der Leyen to draw up plans for a new long-term financial blueprint for the bloc that would also drive an economic recovery from the coronavirus with a combination of loans and grants. The leaders did not agree on a figure for the recovery effort, which some Commission officials have proposed should be up to €2 trillion.

The leaders delivered the instructions to von der Leyen at their latest virtual European Council summit — a videoconference in which they discussed not just the devastating economic toll of the pandemic, but all aspects of the crisis, including the challenge of when and how to lift containment measures.

The effort to reinvent the Mutiannual Financial Framework (MFF) — the EU's regular, seven-year budget — to also serve as an emergency rescue program is a potentially treacherous gambit aimed at circumventing a fierce fight among EU leaders over how to finance a recovery fund.

Among the risks is the possibility that a budget deal, already extremely late compared to previous cycles, will be further delayed, potentially jeopardizing implementation of a wide range of EU programs that could stall when the current budget plan runs out on December 31.

But there is an array of other potential problems, including legal hurdles to the unusual financing measures being contemplated by the Commission, questions over whether the strategy could be put into action quickly enough, and uncertainty over various technical details that would accompany such an unprecedented leveraging of the budget commitments of EU nations.

While von der Leyen said she viewed the idea as the only viable solution, it is far from clear that leaders on the European Council will ultimately accept what the Commission puts forward, especially the higher national contributions that will be required at a time when all EU economies are now contracting and some headed for deep recessions.

"I am convinced that there is only one instrument that can deliver this magnitude of tasks behind the recovery and that is the European budget clearly linked to the recovery fund," von der Leyen said, appearing with Council President Charles Michel at a post-summit news conference.

"The budget is time-tested," she said. "Everybody knows it. It is trusted by all member states and it is per se designed for investment, for cohesion and convergence." Von der Leyen added: "The next seven-year MFF budget has to adapt to the new circumstances, post-corona crisis. We need to increase its firepower to be able to generate the necessary investment across the whole European Union."

But from their own post-summit comments, it was clear that national leaders remain fiercely divided over some of the most fundamental questions about financing a recovery fund, including whether the package should deliver assistance in the form of grants — as favored by the hardest-hit countries like Italy and Spain — or with loans.

Some EU countries such as Germany and the Netherlands have strongly resisted calls for some new form of joint debt instrument, insisting that ultimately each nation should be responsible for its own balance sheet and that it would be wrong to create entanglements that even theoretically could put credit ratings at risk, or lead to unexpected liabilities.

"We have talked about this, not always in a uniform way," German Chancellor Angela Merkel said of the continuing debate. "Should it be done via grants or loans? How should the financing be done?"

French President Emmanuel Macron also acknowledged that sharp disagreements remained, but he came out squarely in favor of grants, which could also come in the form of transfers within the EU budget.

"There are disagreements that remain — it’s true," Macron said. "It’s not so much about common debt but rather knowing whether it’s used to finance loans or real transfers."

He said adding further debt on hard-hit countries would be counterproductive. "It doesn’t rise up to what is needed because these loans will be added to the debts that these countries have already," he said. "I think in the moment we are going through, these transfers must be transfers, real budgetary transfers." But Macron added, "On that, there is no consensus today."

The leaders' last videoconference nearly broke down in rancor as Italian Prime Minister Giuseppe Conte and Spanish Prime Minister Pedro Sánchez pushed for joint debt to finance a recovery plan. By contrast, during and after Thursday's meeting, leaders appeared to be taking great care to avoid inflaming arguments.

Michel and von der Leyen both stressed that some parts of the EU and some sectors in the EU economy were suffering heavier damage and should get the most help. At the same time, Michel emphasized that further work was needed to decide how best to structure the recovery plan, and he expressed satisfaction that leaders were unanimous in the need to act forcefully and fast.

Michel noted that leaders during the videoconference had also given their political endorsement to emergency economic programs totaling more than €500 billion already approved by finance ministers, and had called on national parliaments to approve the measures so they are operating by June 1.

During the post-summit news conference, von der Leyen declined to give a precise timeline for the new MFF or the recovery proposal. But in response to questioning by Merkel during the summit, she told leaders that the Commission was aiming for May 6, two officials who listened to the videoconference told POLITICO. "Don't forget to talk to us," Merkel replied.

Reaching agreement on the MFF is always excruciatingly difficult and an initial effort led by Michel at a summit in February failed to clinch a deal. Many officials and leaders also believe that it will be impossible to reach an agreement without a physical summit where heads of state and government can negotiate face to face. But it is not clear when the health situation will permit such a gathering.

Dutch Prime Minister Mark Rutte said it would be "very helpful" to have an agreement before summer, and that a traditional summit would "help enormously."

Rutte, who is a leader among the so-called "frugal" countries who are net contributors and advocate for a smaller EU budget, said that if direct grants are needed, then the Commission should consider how to reallocate money from other programs. "See what makes sense in terms of reprioritizing," he said.

Conte, the Italian prime minister who in recent weeks has complained of a lack of EU solidarity, said he was extremely pleased with the results of the virtual summit.

"Great progress, unthinkable until a few weeks ago," he said in a statement.

Those remarks likely came as a major relief to von der Leyen, who had been accused of insensitivity for at one point dismissing a joint financing proposal called corona bonds as a mere "slogan."

On Thursday, von der Leyen emphasized that she was aware that some countries were hurting more than others, and she also stressed that the health crisis itself was far from over.

"The health situation is by far not fully under control and many member states have not yet reached the peak," she said. "But at the same time, we already know that the scale, the speed and the impact of the economic crisis is unprecedented in modern times. While the pandemic knows certainly no borders and is blind to nationalities, some countries are certainly hit harder than others and unless we act decisively and collectively, the recovery will not be symmetric and divergences between member states will increase."

Von der Leyen would not peg a specific number for the proposed recovery fund, but she said the Commission would propose an increase in the so-called "headroom" between planned national contributions to the EU budget and the maximum the bloc could theoretically call upon.

She said the ceiling should rise from the current 1.2 percent of Gross National Income (GNI) to around 2 percent of GNI for the first two or three years of the budget plan. That increase would allow the EU to make loan guarantees for a large financing package for the recovery.

"We are not talking about billion, we are talking about trillion," von der Leyen said. She also said that the Commission would pursue a balance in the debate over grants versus loans, and that she was heartened national leaders supported the idea of using the MFF as a recovery tool.