The EU’s recovery package does not signal the advent of an EU superstate 

Yesterday marked the end of four long tortuous days in Brussels. EU leaders have finally agreed the details of the €750 billion coronavirus recovery package and approved the €1,074 trillion seven-year EU budget which will take effect on 1 January 2021.  

Disputes over how much money the EU should spend, and how that money should be spent, are hardly new. What is unprecedented, however, is how the EU Commission will raise the recovery money: it will borrow more than it has ever done before on financial markets, using the EU budget as a guarantee – though the Commission has promised to look into other ways to raise resources, for example by introducing an EU-wide carbon or plastic tax. 

But this deeper fiscal integration does not mean deeper political integration. The details of the agreement show that member states have no intention of loosening their grip over EU internal affairs.  

The EU can only do what member states tell it to do  

One of the long-running critiques of the EU has been its inability to respond quickly in times of crisis. But the EU can only act where the treaties explicitly allow it to do so. Where it could respond to Covid-19, it did. In the first three weeks in March, the Commission launched three joint procurement initiatives to secure more medical equipment and ventilators, relaxed state aid rules and repurposed unspent EU funds to mitigate the economic impact. But for anything more substantial, such as this package of loans and cash grants to member states most hit by the crisis, the Commission needs the support of member states and the EU Parliament – and more money. 

For the Commission, this meant one of two things: a larger EU budget or guarantees for loans. A larger budget was unlikely. The eurozone crisis showed how difficult it was for member states to share debt. Asking to use the EU budget as a guarantee for loans was also risky. 

Germany’s position on this was crucial. Initially, it had rejected both proposals – especially without a clear idea of how the additional money would be spent. But eventually it issued a joint proposal with France on a new €500 billion package which favoured a mixture of direct grants and EU guarantees for loans. France and Germany also urged the EU to look at new ways to raise resources. This proposal formed the basis of the Commission’s proposal for a Covid-19 recovery package. 

The recovery package is unprecedented – but it is also a compromise 

Member states weren’t haggling over the final amount or the scale of EU borrowing. The difficulty was getting them to agree on how the money should be dispersed.  

The Commission’s original proposal spoke of €500 billion in direct cash grants and €250 billion in loans. Finland and the Netherlands, Sweden, Austria and Denmark –known in Brussels as the frugal four – originally ruled out grants all together. Southern EU countries like Italy and Spain rejected any loans that attached stringent conditionality on how the money should be spent. As with much EU business, the result was somewhere in the middle: €390 billion in grants and up to €360 billion in loans. Member states will also have until 2058 to pay the loans back.  

It also came at a price to the seven-year EU budget. Money for economic recovery meant cuts elsewhere. In this case it means less money for research and support for regional development. To avoid a Polish or Hungarian veto over the deal and the recovery package, the EU also watered down the explicit link between the disbursement of funds and the respect of the rule of law. 

The recovery package will test EU solidarity 

These discussions were not pain-free. The recovery package shows that member states are ready for the Commission to play a greater coordinating role in crisis management. But only if member states are closely involved. They also want the EU Commission to come up with new ways of raising resources, rather than to expect member states to pay more into the budget.  

The frugal four secured a mechanism that will allow the 27 governments to delay any cash disbursements to member states that are slow to introduce any economic reforms – though Italy and Spain made sure there were no prescriptions on what these reforms should look like. A careful balance on the recovery package has been struck for now. But if a member state is slow to introduce reforms, this could lead to yet more acrimony in the Council, increase distrust and make a compromise harder to achieve in the longer-term.  

In the short term, talks are not yet over on the recovery package. MEPs will need to sign it off along with the budget and it is entirely possible that some details will change as a result. The only certainty is that an EU superstate is still a long way off.