THE WARSAW INSTITUTE REVIEW
Date: 31 August 2020
A Hamiltonian Moment for the European Union
July 2020 failed to offer a breakthrough towards an EU-wide federation. Instead, France and Germany consolidated their grip on power within the bloc. A set of optimum conditions significantly stirred up both resentments and wariness between EU nations in a move that might aggravate anti-EU moods and foster disintegration trends.
Author: Tomasz Grzegorz Grosse
A joint Franco-German proposal to establish a European recovery fund –– known under its pompous name as ‘Next Generation EU’ –– sparked off a discussion over what is referred to as “a Hamiltonian moment” in the European Union while en route towards federal-like structures. Yet what was the outcome of the EU summit, held between July 17 and 21, 2020, pinpoints these federalism-tainted tendencies being strongly mitigated by a recurrent wave of intergovernmentalism. The bloc’s system has yet again appeared to be a hybrid of a plethora of elements. Meetings of the heads of state or government of EU nations, or just EU summits, have repeatedly been an occasion to emphasize an intergovernmental factor in a united Europe. At the July meeting, European Union leaders stepped up to adopt an anti-crisis stimulus in a move that boosted the role of states in managing brand-new tools whilst somewhat downplaying those of EU-wide bodies –– like the European Commission or the European Parliament. This gives rise to certain systematic trends that weigh heavily on the EU’s future. Besides, they further entrench the dominance of Germany and France whilst widening gaps between different groups of states.
Next Generation EU
What comes as a federal factor are debt-issuing efforts made by all EU member states. Admittedly, within the EU’s 2014–2020 budget, the European Commission ran up debts on financial markets –– and on behalf of EU nations. It was not just until recently that EU leaders have agreed to borrow a sweeping €750 billion. Just to recall that a recovery fund is a one-off event –– and EU nations will in the future need to agree unanimously on new borrowings. Furthermore, with the idea of a time- and scale-limited fund, EU leaders sought to block Eurobonds to sustain less advantageous countries in the Euro area whilst moving towards the transfer union, a solution that neither Germany nor other northern countries could accept.
Spanish diplomats suggested large-scale perpetual bonds, with EU governments being obliged to repay debt interests. In yet another effort to help public investments in the Euro area, the European Commission has for the past few years canvassed what it has named as Eurobonds. Nonetheless, these proposals came under fire from deep-pocketed countries in Europe’s north, fearful that they would need to repay loans if a crisis hit the whole bloc. Besides that, northern states felt concern that Eurobonds would pool borrowing power of Europe’s south and spread the burden of additional debt, eventually preventing the EU from passing a set of fiscal reforms to ease public finances in Europe’s most indebted nations. Thus, to oust the most radical ideas on Europe’s mutual bonds makes Europe unable to deepen fiscal federalism.
Also, with a new recovery fund in force, the EU-wide bloc can be stretched to the whole bloc, thus also countries that are not part of the monetary union. As EU nations agreed to repay all the new debts by 2058, Poland might in the future morph into a net payer, and no longer a net beneficiary of the EU funding.
EU-wide taxation is yet another factor en route toward federalism. Not incidentally, those who are in favor of new tax levies are liberal left-wing members of the European Parliament, a faction that is keen to see the European Union as a federation. Likewise, not only do the bloc’s parliamentary elites make efforts to strengthen the European Union, but they also notice an opportunity to extend powers of the European Parliament, mostly by limiting these of national governments. As the latter are donors to the EU budget, they are eligible to decide how their money should be spent. The EU’s efforts to boost its new own resources would thus curb the role of EU nations whilst boosting that of EU bodies –– like the European Commission or the European Parliament.
At the July summit, EU nations agreed that there should be a non-recycled plastic waste levy. In the summit conclusions, the European Commission gave a glimpse into new tax levies that might come into effect sometime in the future. But before this happens, all EU nations must give their go-ahead for this move. Thus, if a tax levy is disadvantageous for a country, or raises severe concerns over federalism, a state can bring the whole tendency to a halt.
A less ambitious European Union
At the latest EU summit, the EU said its next budget would total a record-high €1.8 trillion. Yet this included €750 billion worth of one-off recovery fund whilst the multiannual financial framework, or what is known as the EU’s budget, has seen some cuts. It is challenging to talk about federalism in Europe, as the EU’s core fiscal tool, or the multiannual financial framework, is far more modest than the past “seven-year” plans. This is tantamount to less money for the EU’s cohesion and agricultural policies within the budget as measured in constant prices. Though the recovery fund will cover these spending in a not-too-distant budgetary perspective, it is nothing but a one-off tool, distributed from 2021 to 2023. In any further talks, a reduced financial framework –– as agreed upon at the latest EU summit –– will serve as a basis for discussion. Besides, these may see yet another curb, with the necessity to repay the recovery fund by 2058. Thus, in short, the strategic time framework might bring a “collapse” of the EU’s multiannual budget in what might halt further integration.
What is worth adding is that the pressure to trim the EU’s financial appetite was amongst the UK’s demands before Brexit. Those that now share these demands are the “frugal” states of northern Europe, whilst Germany acclaimed this tendency at the July EU summit. As it seems, this might pose a challenge to France’s aspirations in what the French leader Emmanuel Macron reiterated oftentimes –– but even more to what the European Parliament expects. The latter mirrored this stance in a resolution it had adopted shortly after the end of EU talks. In the paper, EU lawmakers moaned about spending cuts in healthcare, scientific research, education, and digital transformation. According to what they said, this stands in stark contrast to the goals of the European Union whilst triggering a peril to new generations of Europeans, or impeding the implementation of the European Green Deal. Likewise, EU lawmakers stood against efforts to reduce the bloc’s ambitions in what was rather an act of their helplessness –– as they have a far less powerful voice than EU’s national governments. And the decisions above shape the bloc’s real –– not the declared –– capacity to follow an active policy.
There are some other examples of how national governments can prevent European integration processes from developing any further. Unlike was the case of the previous crisis, no permanent tools were ever adopted in the Euro area to safeguard the monetary union. Instead, a temporary and one-off recovery fund was brought to life –– as a mechanism highly controlled by EU nations. The European Commission no longer oversees how its allocation fund is disbursed whilst intergovernmental bodies now bear the brunt of supervising schemes introduced by beneficiary nations of the EU funding. An economic conditionality mechanism would allow a qualified majority in the Council of the European Union to unblock the flow of funds to member states and should any doubts arise, the European Council –– a body that comprises the heads of state and government of the EU nations –– makes the decision by consensus.
A wave of new restrictions and acrimonies
EU countries will decide on yet another matter being of crucial importance to receive the EU funding. At the July EU summit, member states agreed to condition European funds in respect for the rule of law and a set of other EU values under Article 2 of the EU Treaty. Member states initially agreed to dismiss the Commission’s proposal to proceed accordingly to the Reverse Qualified Majority method for voting that means that a minority of votes would be sufficient to approve the Commission’s proposal to punish the state. It was assumed at the summit that such a proposal would be processed by a qualified majority in the EU Council to go ahead. This ended successfully for Poland and Hungary, as both are accused of violating the rule of law. Despite that, this might all be tantamount to a Pyrrhic victory if EU nations went to proceed the issue as both Poland and Hungary will find it difficult to spot a “blocking majority”. It would be a huge challenge even if other Central European states –– including Bulgaria, Croatia, and Romania, often said to erode the rule of law – joined the club.
Tying the EU funding with the rule-of-law benchmarks might deprive mainly Central European nations of fresh money flows. Thus, these are the biggest losers of the July meeting, with their place at the bottom of Brussels’s pyramid of power.
In the light of the July summit conclusions, both types of conditionality –– economy- and value-motivated –– will only boost the role of intergovernmentalism while both the European Commission and the European Parliament are likely to decline in importance. This poses a hurdle to federalism and brings a mounting risk of new spats between EU nations alongside the North-South and East-west axes. Voting in the Council usually bears a strong political hallmark –– besides what is already on the table, there often emerge other negotiating issues that could turn into a political tender spot. Also, this will put any government seeking to unlock the EU funding in a somewhat awkward position. As for other nations, these will meddle in internal reforms that might be beyond the EU’s competence whilst lobbying for other Brussels-negotiating themes to make them align with their interests.
Hierarchy of power
The European Council summit in July 2020 corroborated one: Germany and France have taken the reins in the European Union and now enjoy a strategic advantage over other countries. Both were behind the idea of a recovery fund, a new tool to be linked to the EU’s multiannual financial framework. At the summit, Emmanuel Macron and Angela Merkel took the lead as the architects of the deal and chief negotiators, sometimes even overshadowing the president of the European Council. They tempted those nations chiding the EU proposals with an array of concessions –– like large increases to the rebates that so-called the “frugal” EU countries could receive. Others got specifically dedicated handouts –– like the Brexit Adjustment Reserve, or the funding to countries and sectors worst-hit by the UK departure –– with Ireland being on top of the list to avail it.
It is hard to deny that Paris and Berlin snatched an outstanding victory. Germany had seen its first notable success shortly before it took over the rotating presidency of the Council of the EU. Furthermore, Berlin and Paris have reaped a basket of financial benefits –– in the form of grants from the recovery fund. What surfaced most at the summit was the need to take into account the effects of the pandemic, which was to curb the fund’s earlier distribution criteria (also known as “historical”) referring to the country’s population, its GDP per capita, and the unemployment rate. With this, EU nations sought to help Europe’s south whose economies have been hardest hit by the pandemic. Under the Commission’s before-the-summit proposals, these were notably Spain and Italy to grab most of the grands whilst Poland would have been, too, as long as the “historical” criteria would apply. According to a Bruegel think-tank analysis, Italy and Spain stood to receive most during the summit, albeit this was far less than what earlier forecasts had indicated. Just for the sake of comparison with what was suggested before the summit, Spain will receive over €9 billion less in grants, while Italy will see its grant values drop by roughly €1 billion. Almost all EU nations observed the same tendency –– with Poland marking the largest slump, as the country got €11.4 billion less. By contrast, France and Germany received more grants under the European Recovery and Resilience Facility –– €20.4 billion and €12.4 billion, respectively.
The July summit unveiled what could be named as a hierarchy of different groups of EU nations. At the top of the list are France and Germany –– both of them being chief negotiators that earlier had reaped an array of major political and financial benefits. Those ranked next were countries in Europe’s north, or the so-called Frugal (or Stingy) Five: the Netherlands, Sweden, Denmark, Austria, and Finland. The Frugal Five were all resistant to handing out too much of the recovery fund, and add more loans (then grands) that countries would need to repay. The frugal states got rebates used to cap their overall contributions to the EU budget in a move that forces other, economically weaker countries, also Central European ones, to put money from their own pocket to sustain the allowance for Europe’s richest. Furthermore, financial revenues have increased from collecting European duties. This brings most benefits to the Netherlands whose maritime ports occupy a pivotal role for imports of goods into the European Union. Countries of Europe’s south came third; they had surfaced as chief beneficiaries of the EU recovery fund. Just to say that those that grabbed most of the grants were Italy (some €84 billion), Spain (€71 billion), with France (over €50 billion) and Germany (more than €47 billion) that followed. Poland came fifth, with €27 billion worth of funding yet this was far less that what other states had received.
Central European nations remained last in the EU hierarchy. The recovery fund was designed to deflect the EU funding flows away from Central Europe, to pump money into south of the monetary union, or the bloc’s hardest-hit provinces. This was to be achieved by cutting down on the EU’s multiannual financial framework and “historical” criteria for disbursing cash under the recovery fund. During negotiations the grants allocations for the Visegrad Group nations were chopped to an average of 30 percent.
What grapples the Euro area
At the summit southern countries saw a cut in grant allocations, albeit far less drastic. What gave them a big headache was that many of them failed to fully return to their pre-crisis balance sheets and the path of development they had embarked on before the 2010 Euro area crisis. With these, perhaps a new economic recession will weigh heavily on the monetary union and its stability –– the more so as no adequate reforms had been in place to get the Euro zone ready for any fresh crises. The recovery fund is not a full guarantee to shield these nations against a new wave of trouble. It is unlikely to ensure adequate structural reforms in these countries, nor will it be an effective step to restore the competitiveness of their economies. As was the case of the previous crisis, it was particularly painful to restore their competitiveness as it involved what is known as internal devaluation mainly by reducing wages, and not investments to improve the technical quality of production. The ensuing years are unlikely to offer an answer on how to tackle high debt levels –– perhaps the biggest threat for the monetary union and its stability. With its structure, the recovery fund will aggravate the debt much further. The monetary union is neither a political federation nor a unitary state –– thus investors tend to voice concerns over crisis-induced high indebtedness across Europe’s south. The Euro area remains a source of political and economic disintegration.
Constant efforts toward a federal-style Europe are not the way to manage new EU-wide crises, and notably, it is tough to distinguish any democratic-related progress. Scholars have long pointed to what they referred to as the EU democratic deficit. Giving more power to EU bodies does not entail bigger competences being handed to electoral institutions, notably the European Parliament. Even if steps are taken to boost the federalization of EU law, and there is some slight progress in the bloc’s fiscal federalism, that of democratic federalism does not follow suit.
In lieu of that, the European Union is keen to step up any measures to restrain a repertoire of competencies that the EU nations have, notably smaller or less powerful ones. Those who come under fire are conservative cabinets in Central Europe that face alleged rule of law breaches. State officials in both Poland and Hungary often prove this conditionality applies arbitrarily, a proof of double standards within the bloc. As a political tool, it is used to stigmatize any governments that Western Europe does not like –– those that have Christian democratic perceptions of European values and are brave enough to stand against German and French ideas. If right-wing voters throughout Central Europe believe the EU institutions –– alongside some Western European states –– unfairly judge their state authorities, this might spark off a wave of reluctance toward European integration, and potentially even encourage demands to leave the bloc.
Since at least the first Euro area crisis, Berlin and Paris have consolidated their grip on power, with the bloc’s financial and legal tools to influence other EU nations and the July summit being the best example. The talks unveiled a lack of trust between the EU member states as well as to the bloc’s institutions. This brings a tendency of intergovernmental bodies to “manually control” anti-crisis measures, a move that limits the EU’s effectiveness that might ignite new conflicts between its countries.
This article was originally published on The Warsaw Institute Review, issue no. 13, 2/2020.
Conclusions, Special meeting of the European Council (17, 18, 19, 20 and 21 July 2020), General Secretariat of the Council, Brussels, 21 July 2020.
 European Parliament resolution of 23 July 2020 on the conclusions of the extraordinary European Council meeting of 17-21 July 2020 (2020/2732(RSP)).
D.M. Herszenhorn, F. Eder,Charles Michel, the budget deal and the art of the terrace tête-à-tête, „Politico”, 24.07.2020,https://www.politico.eu/article/charles-michel-the-mff-budget-deal-and-the-art-of-the-terrace-tete-a-tete/[27.07.2020].
Z. Darvas, Having the cake, but slicing it differently: how is the grand EU recovery fund allocated? Bruegel, July 23, 2020,https://www.bruegel.org/2020/07/having-the-cake-how-eu-recovery-fund/[27.07.2020].
 Z. Darvas, op. cit.
F.W. Scharpf, Governing in Europe: Effective and Democratic? Oxford: Oxford University Press 1999; V.A. Schmidt, The European Union: Democratic Legitimacy in a Regional State?, “Journal of Common Market Studies”, 2004, Vol. 42, No. 5, pp. 975–997, V.A. Schmidt, Democracy in Europe. The EU and National Politics, Oxford – New York: Oxford University Press 2006; T. Risse, M. Kleine, Assessing the Legitimacy of the EU’s Treaty Revision Methods, “Journal of Common Market Studies”, 2007, Vol. 45, No. 1, pp. 69–80.
All texts published by the Warsaw Institute Foundation may be disseminated on the condition that their origin is credited. Images may not be used without permission.