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German Chancellor Angela Merkel (right) discusses with French President Emmanuel Macron during a round table meeting at an EU summit in Brussels on July 20, 2020. Image Credit: AP

The European Parliament will deepen its scrutiny this week of the breakthrough agreement of an approximately €1 trillion long-term budget, and €750 billion coronavirus recovery fund. While these issues are primarily economic in nature, they represent a major political milestone in the post-war history of European integration.

The historic package deal follows the longest summit of EU leaders last week for two decades as the continent recovers from the devastating pandemic which has resulted in at least 135,000 deaths and an estimated economic contraction of over 8 per cent this year. The agreement is such a big breakthrough not just because of the mammoth size of the overall deal, but also, for the first time ever, EU leaders committed for the corona recovery package element to the principle of mutualised debt as a funding tool, potentially paving the way for greater, future EU supranational powers of taxation and a more politically federalised continent.

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Unless changed by the Parliament, the pandemic recovery deal will see €390 billion in non-repayable grants for the worst-hit countries and €360 billion in loans with the money raised partially through jointly issued debt. There is even talk about a ‘Hamilton moment’ for Brussels in reference to Alexander Hamilton, the Treasury Secretary for the newly created United States of America, who convinced the Congress in 1790 of the benefits of common debt.

The success is a major ‘feather in the cap’ of the new political leadership in Brussels, specifically European Commission President Ursula von der Leyen and European Council President Charles Michel, who showed they can get big political deals ‘over-the-line’. Yet is was also a key legacy building moment for Chancellor Angela Merkel in particular too.

This is because Germany assumed the six months presidency of the EU on July 1 in what is the twilight of Merkel’s long period in power. She views the half year between now and Christmas as perhaps the last big moment for her to cap off what has been a remarkable era in office.

Her [Merkel's] influence has been critical in helping the continent navigate the political and economic tumult of the last decade and a half and in her sights now, following the two deals this week, is a post-Brexit UK-EU trade agreement this Autumn.

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Merkel has long been the most important political leader in continental Europe having been in office since 2005, a political eternity ago. To put this longevity into wider European perspective, three US presidents (George Bush, Barack Obama and Trump), four French presidents (Jacques Chirac, Nicolas Sarkozy, Francois Hollande and Emmanuel Macron), and five UK prime ministers (Tony Blair, Gordon Brown, David Cameron, Theresa May and Boris Johnson) have already served during her long tenure. And Merkel has also already exceeded the previous record of Margaret Thatcher as Europe’s longest serving female leader which was 11 years.

Merkel has not just a substantial track record of domestic political achievement in Germany, but also in EU affairs too. Her influence has been critical in helping the continent navigate the political and economic tumult of the last decade and a half and in her sights now, following the two deals this week, is a post-Brexit UK-EU trade agreement this Autumn.

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Merkel and French President Emmanuel Macron were pivotal in securing last week’s deal, especially in corralling other European leaders. The main divisions on display were between the wealthier, thrifty North of Europe (especially Netherlands, Austria, Sweden and Finland), and the higher-debt south (including Italy and Spain) hit hardest by the pandemic.

The more fiscally conservative nations, sometimes known as the ‘frugal four’, pushed for lower overall level of funding in the long-term budget deal, and a higher ratio of loans to grants in the recovery fund. While the four did not get everything they wanted, they secured enough concessions to sign off on the deal, including receiving significant increases in the rebates they receive on their budget contributions, a throwback from 1984 when Thatcher secured discounts on the UK’s budget contributions.

Yet, disagreements at the summit were not just north-south in nature. Another dimension of dispute was East-West with Eastern European states like Hungary and Poland pushing back on Michel’s warning that future funding should be conditional on respect for the rule of law and wider governance.

Brexit serves as a warning to the EU-27

To get a deal, this principle was eroded during the summit with, for instance, Poland eroding the proposed link between the post-pandemic recovery fund and the 2050 climate neutrality goal. Poland, which stands to gain €37 billion in grants from the fund, plus potentially several billions more from a “just transition fund” to move away from coal, is the only EU state not to have made the 2050 pledge.

The compromises on display last week underline that Merkel’s argument was ultimately taken on board that Brexit serves as a warning to the EU-27, in the midst of their divisions, that it is vital for the continent to come together in the face of its worst shock for decades. Leaders now hope that the package will spur not just the recovery, but also social solidarity given that support for Brussels in some southern nations has fallen given lack of EU support at the beginning of the crisis, underlining the need to regain public trust in states like Italy and Spain again, not just rejuvenate growth.

— Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics