(CN) — After marathon negotiations in Brussels, bitterly divided European leaders on Tuesday approved a landmark $857 billion economic stimulus package to help Europe pick itself up from the coronavirus pandemic.
But it’s far from certain whether this deal will be the Marshall Plan many have called for to get the European Union out of its deepening economic and political troubles. The massive recovery fund is attached to a convoluted deal watered down by compromises to satisfy conflicting demands among the European Union’s 27 member nations.
Still, the breakthrough deal caps months of quarrels between EU leaders over how the bloc should respond to the economic crisis caused by the coronavirus pandemic, which has infected 2.7 million Europeans and killed more than 135,000.
In a groundbreaking move, the EU’s 27 member states agreed to fund the recovery package through shared debt, a long-debated and controversial step in European politics.
Some have called this Europe’s “Hamilton moment” because it pushes toward a federalization of the EU’s fiscal policies and echoes the centralization of debt in the United States as advocated by Alexander Hamilton.
The recovery funds were approved alongside a new seven-year $1.1 trillion EU budget that funds everything from European institutions to subsidies for European farmers. The deal was approved by the European Council, made up of European heads of state. It still needs the approval of the European Parliament, but the parliament is unlikely to stop it from going through.
Europe’s leaders hailed the deal even as they acknowledged its flaws.
“There is no such thing as a perfect world,” French President Emmanuel Macron said at a news conference where he called the deal “historic.”
“But we have made progress,” he said. “I think we can legitimately rejoice.”
What makes the deal historic is the use of the EU’s collective financial clout to borrow massive amounts of cash on the international money markets. The EU as a whole is doing this because many of its member states, including Italy, Spain and France, are heavily indebted and face hefty borrowing costs on their own. In Italy’s case, with its public debt already about 130% of its gross domestic product, adding more debt to get itself out of the coronavirus crisis could lead the nation into defaulting on loan payments and in turn endanger the entire EU economic zone, the world’s largest single market.
Under the deal, the European Commission, the EU’s executive body, will be able to distribute about $446 billion in grants and $411 billion in loans to EU states to help various economic sectors weather the economic storm caused by the pandemic.
The commission will have a lot of money to play with, but the deal also sets up potential problems. For example, it allows European leaders in one country to scrutinize how money is being spent in another, and potentially stop funds from flowing to another country.
In a briefing note, Alessandro Leipold, the chief economist at the think tank Lisbon Council, called this a major flaw that runs the risk of turning the recovery fund into a vehicle for toxic politics.
“I do agree it is historic,” he said on Euronews, a news broadcaster based in Lyon, France. “This is something that shows solidarity, and which was completely unthinkable before Covid.”
But he said the deal’s good intentions may be scuppered by including devices that allow individual countries to object to how funds are spent elsewhere.
“Perseverance on this road is worrying,” he said. He said relying on such “intergovernmentalism” has damaged the EU in the past.
Another potential problem is that the size of the recovery fund may not be up to the task. The European Commission estimates an 8.3% decline in economic activity in the EU this year and even steeper declines in the hardest-hit countries, such as Italy, Spain and France.
Wolfgang Munchau, an analyst who runs the political risk group Eurointelligence, said in a briefing note that the deal amounted to a “measly fiscal transfer” of 0.7% of the EU’s GDP. He criticized the deal because of the many compromises it took to get it over the line.
A recovery fund based around the issuance of common debt was first proposed by economically stressed Southern European countries, most adamantly by Italian Prime Minister Giuseppe Conte and Spanish Prime Minister Pedro Sánchez.
Their calls for a new Marshall Plan were met with resistance, however, in Northern European countries, including by German Chancellor Angela Merkel. Come May, Merkel shifted her position, calling it crucial for the EU to show solidarity and back a common debt proposal to save Europe’s economies and the EU political project.
Still, there were holdouts. The Netherlands, Austria, Sweden, Denmark and Finland objected to the idea of financing the debt of poorer Southern countries. Nasty arguments ensued that dredged up old rivalries and animosities over who benefits and who doesn’t from EU membership.
Generally, those in the North complain that southern countries are wasteful and take advantage of the North’s wealth; those in the South argue that Northern countries are profiting through unfair tax structures and cheap exports that benefit from the EU system.
During this latest round of negotiations, which began on Friday and lasted until nearly 6 a.m. Tuesday, a group of Northern nations, known as the “Frugal Five,” extracted concessions, including higher rebates on the funds they pay into the EU budget. These nations are called net contributors, because they pay more than they get back from the EU budget. They also succeeded in slimming down the EU’s new seven-year budget, arguing that they should not have to pay more for the loss of billions of dollars from the departure of the United Kingdom.
In turn, this means funds dedicated to climate change are being cut from about $34 billion to about $11 billion and funds for scientific research were cut in half.
Another point of contention was whether countries seen as backsliding on democratic principles — particularly Poland and Hungary — should face a loss of funds if they are found to be violating rule-of-law principles. But tougher requirements in this area were watered down due to objections from Hungary’s Prime Minister Viktor Orban, a far-right authoritarian whose government is angering many in Europe.
The deal, like many EU policy decisions, required the unanimous consent of the 27 members — giving smaller countries like the Netherlands and Hungary an outsized role in the negotiations. Some experts warn that the power exerted by smaller countries may feed into future battles in the European Union.
“The European Council was evidently ready to pay a very high price to preserve the core of the fiscal-transfer element,” Munchau said, referring to the deal’s pivotal common debt scheme.
For many in Europe, the question will be whether this recovery fund will be seen in the months ahead as having helped or hindered the rise of a tide of anti-EU sentiment on both the left and right across Europe.
The EU is challenged by a growing number of political parties that advocate radical changes to the way the union operates and there is the constant threat that another country will follow the example of the U.K. and seek to leave the political and economic bloc through a referendum. For now, Italy is considered most likely to pursue such a course, though that remains improbable.
For now, anyway, it appears that trust in the EU has actually grown since the coronavirus pandemic erupted in late February in Italy and then swept across Europe. For example, a recent poll by the European Council on Foreign Relations found that since the pandemic, 63% of respondents feel more cooperation among EU nations is needed in the face of global threats.
Courthouse News reporter Cain Burdeau is based in the European Union.