European Council

Lessons From the EU Summit

For the first time in its history, the EU has committed itself to joint debts to fund the €750 billion coronavirus aid recovery package. Three hundred ninety billion euros of it will be paid in grants, which is less than suggested by Germany, France and the EU Commission, but arguably still sufficient to merit the label epochal. However, the summit was a struggle and it may have changed the EU’s future.

Transfer Union

The compromise made is a paradigm shift in two ways. The capital that the EU Commission is supposed to acquire on the financial markets is more than ever before. It also marks the begin of the – at the very least – partial transfer union. Partially as, unlike the corona or euro bonds discussed at the beginning of the crisis, individual states are now not liable for everyone’s debts. Liability is instead limited to the share of payments into the EU budget. In addition, only €390 billion of the total amount are to be paid as grants that do not have to be repaid. The remaining €360 billion will be distributed as loans that will be repaid by the recipient states themselves over a period of 38 years.

Two issues arise here. First, a lot can happen in 38 years. If one only took the previous decade, it is fair to assume that new crises are inevitable. It hence seems somewhat inconceivable that the total of these loans will ever be repaid in full by every recipient state. And with a Commission no national government appears to be afraid of, skipping out on the tab is not unrealistic. Second, history has taught one that newly introduced EU measures often set a precedent and hence become part of the repertoire. Joint fiscal responses to a crisis, thus open the door widely for future grants in lieu of loans.

New Self-Confidence From the Frugal Four

Besides the newly introduced fiscal modus operandi, the summit has also sharply increased the self-confidence of certain member states. Austria, the Netherlands, Sweden, Finland and Denmark, the frugal four, have discovered the art of the deal for themselves and indeed their power within the union. The summit has proven that cooperation between them allows for own agendas to be realised – even if these agenda are in opposition to Franco-German plans. The Nordic-Alpine coalition has the potential to change the dynamic in Europe in the long term while putting its fiscal-conservative, liberal and free-trade-oriented stamp on it.

The Rule of Law

Prior to the summit, the EU Commission and many countries in Northern Europe had demanded that money from the EU budget and therefore also from the recovery plan ought to be paid if recipient states uphold the rule of law, a mechanism aimed primarily at Hungary and Poland. However, it was evident that the rule of law was only a second or third priority, even for the northerners. And while the heads of state and government agreed on the rule of law mechanism, it remains almost unenforceable and thus only a symbolic gesture. Sanctions are only possible if a qualified majority of the EU member states agree, which, at this stage, seems inconceivable. Moreover, even if a majority to enforce the mechanism was found, depriving Hungary and Poland of funds may violate EU law. The summit compromise hence hampered every opportunity to force Hungary’s Viktor Orbán and Poland’s Jarosław Kaczynski to adhere to the fundamental European values. The corona package thus comes with a hefty price tag: the failure of the rule of law in Europe’s prestige project.

The Future of the EU

However, it is not only the rule of law that will suffer. To finance the aid package, the EU budget for the next seven years will be far less future-oriented than the Commission would have preferred: Investments in science, cybersecurity or health have been scratched. These cuts can conceivably have very negative long-term consequences for Europe if the money is only sufficient for the traditional areas of agriculture and structural policy.

All in all, the compromise was necessary for Europe’s stability and subsequent recovery. However, the way it has been facilitated raises several new questions particularly in regard to future crises. With a transfer union in the making, any new crisis has now become an opportunity for division — particularly if member states start failing to repay their debts. It is thus a compromise that raises more questions with regard to the EU’s future than it provides answers.