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European Recovery Plan: Still Hope for an Agreement in July

June 25, 2020

EU heads of state maintained a positive atmosphere when they met on 19 June, despite not advancing meaningfully towards agreeing on a European Recovery plan after the COVID-19 pandemic. Broad agreement exists on the overall architecture of the recovery plan, but crucial elements still need to be settled, such as the relative weight given to loans and grants.

The summit planned on 18-19 July will be decisive. The European Council’s President Michel will be in charge of brokering a deal until then, but Germany’s Chancellor Angela Merkel will also play an important political role in the process. If an agreement is reached, the large volume of legislative work to bring the plan to life will fill the schedules of the EU institutions during the coming months. EU leaders also received an update on the Brexit negotiations with the UK. The transition period is not expected by anyone to be extended, and EU leaders restated their faith in Michel Barnier’s approach to the negotiations, which will reach a climax in early October.

EU Summit on 19 June

EU leaders met via videoconference on 19 June for a first discussion of the European Recovery plan. The meeting was not expected to yield an agreement on the EUR750bn economic stimulus for the recovery after the COVID-19 crisis proposed by the Commission, nor the long-term budget framework for 2021-27 (EUR1.1trn), to which the recovery plan is linked. Abroad agreement emerged on some major objectives, however:

  • Need for exceptional response to an unprecedented crisis.
  • The recovery plan is to be financed through Commission borrowing on the financial markets and, guaranteed through a temporary increase in the EU’s tax base (own resources).
  • The effort is to be targeted towards the most affected sectors and geographical areas.
  • The EU’s normal budget over the next 7 years (Multiannual Financial Framework - MFF) is to be negotiated together with the Recovery Plan.
  • The package should deal with the immediate crisis, but also support the European economy’s longer-term green and digital transition.

Disagreements remain on several elements of the package:

  • The overall size of the recovery package and the relative share of grants and loans.
  • The criteria for dividing funds between member states, notably the reliance on historical GDP figures which some considered too static and didn’t account for damage inflicted by COVID-19.
  • Quick disbursement (some countries asked for more frontloading and a shorter pay-out period).
  • Whether the Council, and not just the Commission, has a say in how funds are allocated, and the conditions for getting access to the funds, such as economic policy criteria and respect of fundamental rights.
  • Concerns by Germany and European Investment Bank over the usefulness and feasibility of the solvency support instrument contained in the new EUR560bn Recovery and Resilience facility. The measure would allow the EIB, based on an EU guarantee, to offer solvency support totaling more than EUR300bn to companies in member states that are hit by COVID-19 but have difficulties in obtaining national support.

Most member states are ready to reach a compromise quickly. But the so-called “frugal four” (Netherlands, Denmark, Sweden, Austria, and now also Finland) continue to reject the inclusion of grants in the recovery package and want to reduce the overall ambition, although cracks are appearing. Dutch Prime Minister Mark Rutte is increasingly isolated. Sweden and Denmark have Social Democrats as Prime Ministers who previously criticized the EU austerity policy against Greece when they were in the opposition. In Austria, Chancellor Sebastian Kurz has to listen to his coalition partner, the Greens, which strongly supports the European Commission’s approach.

Michel Depends on Merkel for a Compromise

European Council President Charles Michel had a bad start to his mandate after failing to achieve a deal on the EU’s long-term budget. That has now been overshadowed by an even greater challenge in dealing with the COVID-19 aftermath, and he has already sustained criticism for not being sufficiently aligned with the European Commission in finding a solution to the crisis. His success in brokering a deal now is likely to depend on the extent he can draw on the support of Angela Merkel. Normally, the head of state of the rotating EU presidency has a marginal role at EU summits, but Merkel is not just any leader and she will have considerable powers to unlock agreement.

Michel is aiming to reach a deal during a two-day summit in Brussels on 16 and 17 July. He has started a full round of teleconferences with leaders individually. Based on these talks, he will present a new proposal combining part of his February budget package and the new measures of the recovery package. This “Negotiation Box” will include both the amounts and the modus operandi for the various instruments. In the meantime, a technical examination of the Commission’s proposal continues in Brussels. Once the box is on the table, the normal European Council preparations will kick in, with ambassadors, advisers to the EU leaders, and European affairs ministers involved in the talks. Michel will also need to ensure that the European Parliament is kept onboard. While the formal role of the EP is limited for loans and the EU’s taxation powers, its agreement is needed for how EU funds are earmarked for different areas of spending, and the many technical regulations that are needed to turn the political ambitions of the rescue package into practice. After the deal is reached, the EU quarter in Brussels will be busy for some months, and EU officials should expect to reduce their summer holidays.

Annex: Multi-Annual Financial Forecast (MFF) and Recovery Plan – Indicative time schedule

June

  • Examination of the Commission’s proposal throughout the month.
  • Summit via videoconference on 19 June
  • European Council President holds bilateral talks with leaders of member states.

July

  • Early July. EC presents a new “Negotiation Box”. Examination by COREPER and sherpas. General Affairs Council on 14 July.
  • European Council to be held in Brussels on 17-18 July. Objective to reach agreement on:
    • Level of expenditure for regular EU-budget (extraordinary increase for 2020 and Multiannual Framework 2021-2027 and allocations for Recovery Program (grants and loans). Political agreement on how expenditure programs should be managed.
    • Revision on the EU’s own resources decision (increase in the ceiling from 1,2% of GDI to 2%. Possible inclusion of plastic waste tax).
    • A mandate to Commission to raise necessary debt in the market to fund the Recovery plan.
  • Following weeks (likely running into August): Formal Council approval of Council position, including legal texts. ECO/FIN (Budget) tentatively planned for 24 July.

August – September

  • Negotiations with the European Parliament on the package will take place and are expected to conclude by mid-September. This includes MFF 2020, MFF 2021-27, 2020 budget, 2021 Budget, Regulations on individual programs.
  • National Parliaments will startexamining changes to the own resources’ decision.

October

  • Agreement with Member states on the programming of structural funds for 2020-2022.

November – December

  • Return to the debate on new own resources (ETS-extension, digital tax, carbon border tax, new corporate or “single market” tax).

From 1 January 2021:

If all goes well, roll out of other EU programs can start. The decision on the distribution of the Recovery and Resilience Facility will be taken in April 2021.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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