EUCO: No Hamilton moment but a great telenovela

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  EU leaders have been in Brussels since past Friday for the longest EUCO meeting since that of Nice in December 2000 in order to discuss the new MFF (Multi-Financial Framework) and the EUR750bn recovery fund to cope with the COVID-19. They have not been able to find a compromise yet as the Frugal Four + Finland block progress on the Recovery Plan for Europe. The Summit ended at 6.00 am today (Brussels time) and is expected to resume at 4.00 pm after a well-deserved rest. Despite a lot of acrimony and frustration, there is a strong determination shared by all participants to reach an agreement, but we fear that Michel's ambitious proposal is likely to be watered down significantly, which would mean this is again a missed opportunity for the EU to show real solidarity and move towards the completion of the monetary union.


I think we can all agree this is not Europe’s Hamilton moment, but this is a great telenovela. The best case scenario is that an agreement is reached today or tomorrow.

We see at least three main points of disagreements emerging over:

  • the rule of law (rift between East and West).
  • the volumes of the EU recovery plan and governance (rift between North and South).
  • the EU leadership. This meeting is also about the future balance of power in post-Brexit EU and it seems bright clear that Macron and Merkel’s vigor to push for an ambitious agreement has been bad-perceived by a bunch of member states.

When the EUCO resumes today at 4.00 pm, EU leaders will discuss a new negotiation box covering three main topics:

  • the level of grants: The current negotiation figure is at €390bn, slightly lower than France and Germany’s red line of 400bn, and much lower than the initial EC proposal (€500bn) and past Friday’s draft (€450bn). At some extent, the Frugal Four + Finland’s strategy to consider that supporters of the recovery fund will not jeopardize a deal for a few tens of billions of euros is about to prove to be right. On top of it, it will be interesting to know whether the recovery plan will still be fully financed through EU issuance, which is unclear at this stage.
  • the governance of the fund: The initial proposal was reverse qualified majority voting, which means that a majority is required to block disbursement of the fund, but the Netherlands counter attacked by asking for unanimity. The current compromise on the table is based on qualified majority voting to unlock the funds assorted with minority emergency brake. While not being formally a veto, the minority emergency brake has more or less the same impact as it allows a group of countries (not clear how many countries would be required in the current scheme, it is still up to negotiations) to hijack the process.
  • the rule of law: It might be a new fresh issue that has barely been discussed over the weekend. Hungary, Poland and Slovenia are strongly resisting a system where the disbursement of the funds would be tied to respect for fundamental rights and rule of law. It might slowdown a bit the whole ongoing process, but we don’t think this issue could really derail negotiations.

Comment:

Knowing how the EU is functioning, it was obvious from scratch that Michel’s ambitious proposal would be watered down significantly, but not as much. The deal that will likely be agreed will clearly not be important enough to cope with the magnitude of the crisis. This is a missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and that would  constitute at the same time a strategic move towards the completion of the monetary union.  On top of it, it shows how deep is the EU fragmentation and that national interests often prevail, even when only a few tens of billions of euros are at stake. Given the level of acrimony and frustration reached over the past three days, this EUCO will probably have deep long-term consequences on the functioning of the EU and will intensify the rift between North and South. Not saying that this is the first step towards the Netherlands leaving the EU, this is very implausible, but it is certain that trust between member states, based on cooperation in good faith, which is at the very core basis of the European construction, has been broken and it will take a lot of time to rebuild it. This is definitely not what we have been dreaming of…

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