Most EU economies faced tough challenges to revive their economies pre-COVID. The pandemic made these challenges that much more daunting. The European Commission’s relatively quick action to help the member states proceed on the road to recovery was rewarded with the EU leaders’ approval of a €750bn recovery package and a €1tn seven-year budget.
The agreement was reached after the usual negotiation rituals that characterises the governance of the Union. After four months of behind the scene drafting of plans by the Commission, selected leakages to the media to test the acceptability of specific measures by the various EU leaders, and long hours of negotiations in Brussels, a compromise was reached.
This compromise agreement addresses in part major outstanding governance issues.
The EU will, for the first time, need to borrow extensively from financial markets to finance the €390bn in grants and €360bn loans. This implies that all the member states will be ultimately responsible for the repayment of this massive borrowing. Germany’s acceptance of this new joint EU debt concept is what made this recovery plan achievable.
The protracted negotiations that led to the approval of this plan exposed the deep divisions that still exist among EU leaders on the way forward to revive the member states economies.
The rescue package only partially provides immediate support to those countries like Italy that have been more severely affected by the pandemic.
National interests, rather than union solidarity, were on top of the wish list of every member state leader. As was to be expected, EU leaders engaged in familiar self-congratulations meant for their national audiences, even if French president, Emmanuel Macron, called the deal “a historic day for Europe”.
It will be a mistake to believe that this agreement will resolve the EU’s existential challenges.
This package, low-interest rates and the ECB printing of money will never be enough to reduce the debt mountain of individual countries that threatens their competitiveness.
The acceleration of structural economic reforms is the only way for EU countries to prepare for the challenging years ahead. The threat to socio-economic harmony in the EU remains high.
The introduction of watered-down conditions linked to the disbursement of money to countries like Poland and Hungary are unlikely to ensure the full respect of the rule of law in these member states. Following the conclusion of negotiations, Prime Minister Robert Abela tweeted that the agreement signified “A great result for Malta”.
Malta is to be allocated €2.25 billion in EU funds over the next seven years. The figure combines €1.92 billion allocated to Malta from the EU's core budget allocation and €327 million in grants from a newly-created instrument set up following the coronavirus-caused economic slowdown.
The greatness of this result can be assessed once the details of Malta’s fund allocation are transposed in an economic impact assessment. It will be interesting, for instance, to know what taxes will be introduced on an EU basis to repay the massive borrowing.
Besides the recovery fund, EU leaders approved a €1tn budget for the Union for the next seven years. The decision of EU leaders to instruct the Commission to protect EU spending more effectively against fraud is a welcome development.
This budget that aims for more focus on the green agenda may ultimately be of more relevance for the revival of EU economies.