We asked three analysts to share with us their insights on the New Generation EU agreement.
«There are four shortcomings and two missed opportunities»
On Tuesday 20 July EU leaders approved an historic package. It is a step forward for the EU, which was able to rise to the challenge and adopt a common response to a common challenge. The EU will effectively issue joint debt to borrow on financial markets. With this money, it will fund explicit cross-country transfers to supports especially the most vulnerable member states. An instrument of this size and scope, underpinned by these principles, was unthinkable in the past and until just a few weeks ago.
This noted, the current deal is not the best possible option, there are four shortcomings and two missed opportunities. First, the amount of grants could have been higher, to ensure a stronger macroeconomic effect in more countries. Second, the possibility for one country to trigger a super emergency brake creates a complex and burdensome governance structure that might slow down the process. Third, the conditionality on the respect of the rule of law could have been stronger. Fourth, the higher rebates for a few rich countries create an additional burden for those that will have to pay those amounts instead.
The opportunity to modernise the EU budget structure was missed, with new and emerging policy priorities, such as innovation and the green transition, underfunded. Second, the ambition on the introduction of new own resources remains low, creating a risk for future EU budgets to be burdened by debt repayment. These two missed opportunities undermine the EU’s long-term investment because the EU budget remains unfit for tackling emerging priorities. All this considered however, the deal is good enough. It is surely much better than the alternative of no deal, which would have sent an economic and political (international) signal that the EU cannot react to a common challenge. This was avoided.
«The final compromise leaves mixed feelings»
The final compromise leaves mixed feelings. It constitutes a historically ambitious package which almost doubles EU spending for 2021-2024 with money raised in the financial markets. At the same time, as it is often the case with European Council’s budgetary deals, the compromise has been reached by drastically cutting key EU programmes delivering added value for all – in areas such as research and innovation, health or development aid. It is now up to national parliaments to ratify the Own Resource Decision (a pre-condition to set up the 750bn Covid-19 recovery instrument) and up to the European Parliament to give its consent to the MFF proposal.
On the latter, we know from the past that the European Parliament’s political leverage is very limited in MFF negotiations, particularly when it comes to challenging the figures agreed during a hard-fought battle in the European Council. Yet the Parliament may obtain gains on the governance of the new ‘recovery and resilience facility’ – imposing equal treatment with the Council on the adoption and control of national recovery plans – , on the rule-of-law conditionality – strengthening the procedure – and on the issue of Own Resources – forcing the Council to take a clearer commitment to introduce new Own Resources in the coming years.
«Finding an agreement was only the first step in a much longer process»
Next Generation EU is an important agreement that marks a fundamental shift in the scale of European Commission borrowing capacity. It also provides an important demonstration of solidarity across European Member States. Although much of the rhetoric that surrounded the negotiations was frosty, the final result seems to have cast a warm glow across national electorates. The standing ovation given by the Italian parliament to Prime Minister Giuseppe Conte was a rare display of political unity – particularly in reaction to a decision taken in the European Council.
The challenge now will be to sell the agreement both to the European Parliament and for national ratification. The warmth generated by having reached an agreement is already starting to cool. Members of European Parliament express concerns that their institution has been cut out of the new arrangement; they also complain that European priorities seem to have been downgraded. Given more time to reconsider their positioning relative to Europe and to their sitting governments, there is no doubt national parliamentarians will find things to disagree with as well.
The debate will become even more complicated once the focus of attention turns from how the money will be spent to how it will be financed. The agreement says that the European Commission will be able to introduce a new levy on plastic from the 1st of January, but that assumes this levy will survive the ratification process or that the tax itself can be corrected for its disparate impacts across countries. The goal of agreeing new taxes on carbon emissions and digital commerce before the start of 2023 is even more ambitious.
This is not to say that Europeans will learn to regret this agreement. It is an important accomplishment. The point is just that finding an agreement was only the first step in a much longer process.