Splash the cash

EU prepares to splash the cash

Germany’s conversion leaves orphans of Brexit struggling to defend tight budget.

By PAUL TAYLOR

It took the coronavirus crisis to persuade the European Union — and especially its German paymaster — that it’s finally time to spend, spend, spend.

The Continent’s tectonic plates have shifted not once but twice since the long-term EU budget was last negotiated seven years ago — both times to the detriment of the Union’s self-appointed guardians of fiscal discipline and parsimony.

First came Brexit. Not only has the United Kingdom’s departure left a giant hole in the EU’s future revenues, it has dispossessed the bloc of its most powerful champion of free trade, unfettered competition and — crucially — limited EU spending.

The second earthquake came when Germany, the largest net payer into EU coffers, abruptly crossed the floor last month. Throughout the 2010-2015 eurozone debt crisis, Berlin led the camp of Northern creditor nations opposed to any debt mutualization.

Today, along with France, it has become the biggest champion of collective borrowing, throwing its decisive weight behind a massive recovery fund to help countries hard hit by the coronavirus pandemic. Germany is also backing a much bigger EU budget.

This is bad news for the rump caucus of Northern states known as the Frugal Four: the Netherlands, Sweden, Denmark and Austria. They look increasingly isolated in their rearguard battle to keep the common budget as small as possible and to attach tight strings to grants to struggling Southern European countries.

These apostles of austerity felt ambushed by the Paris-Berlin proposal — rapidly embraced and augmented by the European Commission. The proposal on the table now includes €500 billion in grants and a further €250 billion in loans to be handed out mostly to the worst-affected countries.

The four Northern countries have in common a strong tradition of national parliamentary control over public expenditure and tax-raising. That’s one reason why they are also resisting proposals to create new EU-wide taxes or levies to finance repayment of the debt incurred to create the recovery fund.

The perception that they were blindsided makes those governments’ domestic position harder, driving them to talk more belligerently to show voters they are fighting hard for national interests before accepting the inevitable compromises that will be needed to conclude the 2021-2027 budget.

“The more the big two come with a take-it-or-leave-it package, the harder it makes life for the other countries,” said a Nordic diplomat. “No country will agree to be a cheerleader for the big two countries.”

Empty vessels make the most noise. And in this case, it’s likely a matter of when, not if, they’ll crack.

“The Frugal Four are not very homogenous,” said a senior official from one of the Central European powers, who is convinced that the holdouts can be peeled apart and mollified by the incoming German EU presidency with concessions, notably on the economic conditions for countries to receive grants.

In the meantime, the official lamented, they are poisoning the atmosphere with insensitive criticism of Southern partners that have been pushed to the brink by Covid-19.

The northerners reject what they see as a caricature of themselves as stingy rich countries. Denmark and Sweden point out that they spend more of their GDP on development than their bigger EU partners, and offered shelter to more refugees as a proportion of their population in the 2015-2016 migration crisis. Feeling politically isolated makes them more prickly, but also more easily cornered in negotiations.

“Austria will be extremely flexible in the end. But [Chancellor Sebastian] Kurz’s rude rhetoric has toxified the whole climate,” the official said. “Conditionality will be key for the Netherlands and also Denmark ... making sure the money is invested in forward-looking projects aligned with digitalization, innovation and climate change.”

The exact terms of those conditions, and their supervision, will be central to finding a compromise. While no one wants to revive the hated “troika” of European Union, International Monetary Fund and European Central Bank inspectors, some “soft conditionality” oversight by the Commission will likely be put in place to satisfy the frugals.

The Netherlands has tried hard to step into the giant Euroskeptic shoes of the U.K. since Brexit. Dutch Prime Minister Mark Rutte, the longest-serving EU leader after German Chancellor Angela Merkel, put together an informal group of eight Northern countries styling themselves the New Hanseatic League to oppose French proposals for a common eurozone budget.

The loose alliance of the Netherlands, Ireland, Sweden, Denmark, Finland, Estonia, Latvia and Lithuania set out a liberal economic platform calling for the completion of the single market, an ambitious free-trade agenda, stricter budget discipline, and economic reforms and compulsory debt restructuring for EU states that seek financial assistance.

It briefly grew to 10 members when the Czech Republic and Slovakia signed a call to give the eurozone’s bailout fund, the European Stability Mechanism, more power to scrutinize national budgets.

But the budget battle illustrates the limits of that coalition. Without implicit German backing, the Dutch overplayed their hand and may end up with fewer friends and less influence. The group has shrunk back to four (or four and a half, with Finland tagging along for now), as divergent national interests over the EU budget take priority.

Despite having become substantial net payers, the Irish have “never been frugal” about the EU budget, as long as their generous farm payments are protected, said Rory Montgomery, a former Europe adviser to the Irish prime minister and Irish EU ambassador, who is now a public policy fellow at Trinity College, Dublin. The Baltic states are net beneficiaries of the EU budget, so their interests don’t align with the Frugal Four either.

“The Hansa group is in suspension,” Montgomery said. “It came together in reaction to Macron’s ideas for the eurozone that have now been superseded.”

Montgomery reckons the Hanseatic League may ride again to defend liberal market principles when it comes to updating EU trade, competition and state aid policies in the wake of the coronavirus crisis, and in opposition to a carbon border tax and other proposals for direct EU revenues.

But whether they’ll be able to hold back a supercharged Franco-German engine remains to be seen. The coronavirus crisis has nudged Berlin closer to Paris on trade and competition issues too.

Without an ally among the big member countries, Europe’s thrifty minnows are likely to be reduced to negotiating the best price for their surrender.