NEW GENERATION EU

It was even before the COVID-19 pandemic that Europeans realised that they were all in the same boat. And if they row inappropriately or, even worse, waste time trying to decide who is going to take the oars, then they will sink at the same time.

This allegory seems quite natural when we observe the truly historical events taking place in Europe. “This is not only about big money, but, in essence, about changing the contours of the European Monetary Union. For the first time, the EU borrows money to share it with countries as grants. This will definitely change the rules of the game by which EMU and the EU have so far worked,” Guntram Wolff, Director of the Research Center for European Politics and Economics, told Euronews.

Economic collapse

In the spring, when the epidemic had just entered Europe, it seemed that the EU as a political union became ineffective to cope with it. Borders were closed with little or no consultation, and each country introduced emergency economic measures without centralised coordination. When Italy, at that time most affected by the widespread spread of the virus, requested emergency medical assistance, the reaction of member states was absoletuly inadequate.

Of course, even before the pandemic, the EU faced many problems related to financial crises, Brexit, climate change, and migration. But it had never looked so helpless.

Collapse of the health-care system was followed by an economic collapse. The record holder was Spain, whose GDP in April fell by 39%. Economies of France and Italy shrank by 36%. Recession in Germany, the fourth economy in the world and the first in Europe, was 24% in April.

World Bank predicts the coronavirus pandemic will shrink the global economy by 5.2% in 2020, the worst since World War II. The situation is even worse in the EU, where a decline of 8.3% is expected. The largest decline for the year is expected in Italy - 11.2%. Spain is not far behind it - 10.9%.

"No" to coronabonds

In March, Italian Prime Minister Giuseppe Conte called for the emission of the so-called coronabonds, which all members of the Eurozone could adopt to share the burden of economic recovery. But Germany and the Netherlands have ruled out any kind of reciprocal debts claiming that this was prohibited by EU treaties and the German constitution.

Instead, on March 18, European Central Bank (ECB) launched a €750bn bond-buying program to help countries lower their borrowing costs. In June, ECB added another €600 billion to this pool.

Just two days later, EC announced the suspension of the rules on the limits of state budget deficit, which allowed the member states to pour as much money into their economies as they need. Then, on April 8, Eurozone finance ministers agreed on a € 540 billion bailout plan. Of these, 200 billion is a credit line for companies, 100 billion is to finance temporary unemployment programs and 240 billion is for the healthcare system. Interest rates on loans were close to 0.1%.

Although all these funds are needed now, they will have to be returned very soon, albeit with small percentages. Many economies, especially in the south and east of Europe, have been so undermined by the current crisis that it is possible to expect their full recovery soon.

Unusual move from Merkel

In May, Angela Merkel quite unexpectedly agreed with Emmanuel Macron that European countries, almost all affected by the pandemic, need to be supported in such a way as not to increase their debts.

Since, according to the EU Charter, its members cannot undertake obligations on each other's debts, then Merkel agreed that these obligations should be assumed by the EU itself! Realising that she needs to get the consent of all 27 member states, Frau Merkel slightly tempered the ardour of the French President, who offered to distribute one trillion euros and even more to countries just because they need it. After all, while the EU budget is still formed mainly through contributions from member states and Germany, and in fact the citizens of the country are the largest payers to the EU budget.

As a result, it was proposed on behalf of the EU to borrow 750 billion euros from international financial institutions. Of these, 500 billion will be distributed as grants, and the rest as loans at almost zero interest rates and with the condition of repayment right up to 2058. Grants are planned to be distributed over three years, starting from 2021, loans - a little longer.

To be eligible for funding, member states must prepare recovery plans that describe reforms and desired investments for the period 2021-2023. EC, based on criteria such as economic growth, job creation and social sustainability of member states, will be obliged to make a decision within two months from the date of application.

EU will start earning itself

EU has a high long-term credit rating. Therefore, it can borrow money on good terms, but it should think about how to return the money, given that the budget has decreased after the departure of Great Britain and during the pandemic.

For many years the EU has been unable to decide on the introduction of its own taxes. For example, a digital tax for tech giants Google, Amazon, Apple, Facebook and others which use all sorts of schemes, albeit legal ones, to evade taxes in Europe. A tax on the use of the common market intended only for multinational corporations with revenues exceeding EUR 750 million. This would also strengthen the competitiveness of European small and medium-sized enterprises. Financial Transaction Tax, which is also viewed as a potential instrument for eliminating financial market volatility. A border carbon tax that aims to protect European steel producers and other energy-intensive industries from cheaper imports from countries with less stringent environmental policies. But there is already a positive trend, for from January 1, 2021, a pan-European tax on plastic waste will come into effect.

Most of these taxes are applied at national levels. Therefore, much depends on whether the leaders of countries, mostly northern ones, can agree that taxes are no longer only the prerogative of exclusively national states.

Bargaining is appropriate

All these issues, coupled with the new EU budget for 2021-2027 (1.074 trillion euros) were discussed on July 17 at the first in-person EU summit in five months. Instead of the planned two days, the meeting took five, just 20 minutes earlier before it could hit the record for the duration set in 2000.

The main controversy was about the amount intended for grants. As a result, the group of northern countries, or the Frugal Four, as they were called (Austria, the Netherlands, Denmark, Sweden, and later joined by Finland), succeeded after heated debates and nervous breakdowns (Macron even pounded on the table in a fit of rage). The 750 billion package remained unchanged, but the amount of grants fell to 390 billion. Merkel and Macron could save most of the grants, albeit at the expense of the EU budget.

After the withdrawal of the UK, it was planned to abolish the practice of discounts on transfers to the EU budget for net donors (Great Britain, Germany, Austria, the Netherlands, Sweden and Denmark), which Margaret Thatcher wrestled in due time. But the Frugal Four made concessions on grants only on the condition that not only do the discounts remain but also get increased for them. Other participants had to agree. Austria won the most of the deal with fourfold increase in discounts (from €137m to €565m annually). For Germany, the discounts automatically remained, but in the same volume.

But the volume of discounts for countries, potential recipients of grants, were cut down. Thus, Italy, which was originally promised 81.8b, and Spain (77.3b), will be able to get no more than 60b euros. However, in return they have increased borrowing line.

No veto any more

Mechanisms for overseeing the implementation of the promised reforms also sparked considerable controversy. After a long word battle between the Netherlands and Italy, they agreed that any national government could temporarily block Brussels' grant transfers to the recipient country if it suspects that it is not fulfilling its obligations. Next, a commission is created that checks everything on the spot. However, this entire process should not exceed three months, after which the EU Commission makes a final decision. Dutch Prime Minister Mark Rutte demanded that any country generally has the right to veto the grant if it suspects a violation of conditions.

Leaders also defended a new mechanism that would force member states to adhere to the core democratic values of the EU and the principles of the rule of law. Hungary and Poland objected to this.

No green light from the EU parliament

Nevertheless, EU parliamentarians still has a lot of work to do with the budget for the next 7 years (2021-2027). This became clear after the session of the EU Parliament on July 23.

Cuts, albeit forced, in programs such as health research, education (including Erasmus), digital modernisation and innovation, asylum, migration and border management have been particularly criticised.

“We have promised a strong impetus to European innovation. We are losing our positions with regard to China and Asia in terms of innovation, we are losing our future," Manfred Weber, head of the largest political group in parliament, the European People's Party, said.

In addition, MPs disagreed with a 10% cut in agricultural funds, as well as a 9.6% cut in direct aid to support the incomes of farmers and ranchers.

Members of the European Parliament demanded clearer conditions under which countries that violate democratic values will not be able to receive funding.

In general, having approved the plan for the distribution of 750 billion euros as emergency aid, European MPs refused to accept the draft new EU budget, returning it to the commission for revision before the next meeting, which will be held in the fall.

Ready for compromises

EU Recovery Fund, also called the New Generation EU by its founders, is still a project. Undoubtedly, the member states will come on terms with the EU parliament by autumn too. After all, no one disputes its necessity and innovative ideas. And no one wants to delay its implementation scheduled for January 2021.

European parliamentarians are citizens of European countries, which were badly affected by the pandemic and the problems that followed. They understand the problems causing the budget cuts and will be willing to compromise anyway.