© Bloomberg

Ursula von der Leyen took office last year knowing she faced a bruising battle over the EU’s next seven-year budget, but she could never have imagined that it would be like this.

What was always going to be a prolonged bout of haggling among EU leaders has now become a question of how much the bloc is willing to do to help regions hardest hit by the pandemic — and how to do it.

The recovery fund plans that Ms von der Leyen put on the table on Wednesday would boost EU spending by €750bn, increasing the bloc’s budgetary firepower by more than two-thirds. This fund would be fused with the next budget, which is supposed to kick in next year and which EU nations have been haggling over since 2018.

Back in February, before the pandemic, EU leaders spent two days holed up in Brussels arguing over adjusting the bloc’s future spending power by fractions of a percentage point of gross national income. They are now being asked to back what the commission president described as a “bold” step forward in the bloc’s history.

Ms von der Leyen has effectively asked the EU to do something it used to be quite good at: strike a grand bargain. But a treacherous path lies ahead.

The Frugal Four of the Netherlands, Austria, Sweden and Denmark have already made clear that they are sceptical about the idea of borrowing to finance grants that Brussels has now proposed on a large scale. And many of the old sticking points on the budget remain unresolved.

At the same time, by tying the fund — dubbed Next Generation EU — to the ongoing budget negotiations, Ms von der Leyen has created a vast marketplace across which governments can trade horses as they seek a deal.

The fund also brings fresh money to the table — Brussels has earmarked part of the borrowed money for cohesion and the Common Agricultural Policy, two policy areas under strain during the budget wrangling among national governments.

“We are not distinguishing the [budget] proposal from the recovery plan proposal,” said one EU official. “By looking at this together we are bringing some answers to some of the difficulties in February.” 

Here are the questions that will be preoccupying minds in national capitals:

Loans vs grants

Emmanuel Macron and Angela Merkel’s deal earlier this month to back a €500bn recovery fund paved the way for Ms von der Leyen’s proposal.

Under the Franco-German plan, all the money would have been distributed as grants. The commission president took that sum as a baseline for her own grants proposal and then added another €250bn of loans on top.

The idea of permitting the commission to borrow money and dole it out as grants makes the frugal states deeply uncomfortable, however, because it smacks of deficit financing.

There may be a compromise to be found here, however. It would involve the grants component being pared back, bolstering the share of the package that is comprised by loans. This could be coupled with clear assurances that the recovery fund is a brief and temporary programme, as well as tougher conditions on the handouts and a slimline multiannual financial framework, as the seven-year budget is known, that preserves the frugals’ rebates.

Own resources

The obvious question raised by all this fresh EU borrowing is how it will be paid back. The commission has a ready answer to this: namely that member states create a suite of fresh new taxes and levies, and hand the revenue over to the commission as “own resources”.

This would fulfil a longstanding dream of commission presidents, who have pleaded down the years for budget reform that would provide the EU with more reliable streams of revenue. But the technical and political barriers are formidable.

The commission’s targets include levying money on imports of certain carbon-intensive goods, securing a share of revenues from the bloc’s emissions-trading scheme, and creaming off cash from companies that benefit from the single market. Mothballed plans for a tax on tech giants are also being dusted off.

The problem is that national treasuries have traditionally dug their heels in when asked to accept new EU revenue sources. Now their finances are under even greater pressure. The alternative would be tighter EU budgets in future, as other priorities get raided to pay back the debt.

© AP

Conditionality

Countries on the economic frontline are wondering what conditions they will have to meet to unlock money from the fund. The lion’s share of the €750bn will go to a dedicated Recovery and Resilience Facility, with the power to dole out grants and loans.

But the RRF’s role is to make sure that the spending matches EU priorities, and is in synch with the recommendations that Brussels hands governments as part of its annual review of national spending plans.

Governments would submit packages of proposed reforms and investments which would need to be signed off by Brussels, and crucially also by other national governments, before money can be unlocked.

Some of the northern member states are already preparing to demand tougher reforms as one of their conditions for backing the scheme.

The distribution key

Even with EU endorsement of national spending plans, the amount of money that can flow to individual countries will be capped, using an allocation key that Brussels has not yet officially disclosed.

Italy would, for example, be eligible to apply for nearly €82bn of grants, according to a table seen by the Financial Times, while Spain could seek €77bn and France nearly €39bn, with further loans and other support available on top of this.

Poland would be another leading potential beneficiary of the grants, with nearly €38bn pre-allocated, compared with around €29bn for Germany.

But a chunk of the borrowed money has not been allocated to individual member states yet, as it is designated for other EU programmes, including a mechanism to help support the solvency of viable companies and a programme of strategic investments.

One diplomat noted that governments will reserve judgment on Ms von der Leyen’s plan until these details are clear.

jim.brunsden@ft.com; @jimbrunsden 

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