Before the European Council meeting: See you next month!

Since the beginning of the pandemic, the EU has taken drastic measures - by European standards - to counteract the crisis:

• Three safety nets worth EUR 540 billion for employees, entrepreneurs and countries, presented by the Eurogroup and supported by the European Council, were approved and entered into force on 1 June. These include the Commission's 100 million EUR Reinsurance Program (SURE), support for enterprises through additional funding through EIB loans to EUR 200 billion, and the launch of the EMS using mild conditions, with an upper limit of 240 billion EUR or 2% of Member States' GDP. Unlike the 2012 project, the new EMS credit line has many benefits, such as a lower overall country fee (in the previous version: 1%, in the new version: 0,08% for 10 years or even -0,07, 7% for XNUMX years). It was originally anticipated that Cyprus would be the first Member State to use the EMS credit line, but it withdrew quickly. Similar discussions are currently taking place at parliamentary level in Italy, but the launch of the ESM does not seem to be the preferred solution for the ruling coalition.
• The new temporary EU New Generation instrument for 2021-2024 with a value of EUR 750 billion, which will be discussed on Friday with the MFF 2021-2027. The first version of the draft resolution fund presented by the Commission includes subsidies for EUR 440 billion, guarantees for EUR 60 billion and loans for EUR 250 billion. For the financing of this instrument, the EU would take out a long-term loan at a very low interest rate due to its strong credit rating. For example, based on the Commission plan, grants worth around EUR 83 billion for Italy, EUR 77,3 billion for Spain, EUR 39 billion for France and EUR 22,5 billion for Greece would be awarded. This money will not be for free. In order to gain access to this instrument, the Member State will have to develop a recovery plan under the National Reform Program, which will then be assessed under the European Semester procedure. The Commission, Council and European Parliament will exercise full control over the distribution of funds, although it is still unclear how this would work exactly. We only know that EU funds would be paid in installments depending on the progress made in implementing the recovery plan. At this stage, it is unclear whether the recovery plans would include structural reforms, but this will certainly be part of the political bargain between the "Savings" and the rest of the EU.
• Apart from these measures EBC as part of its quantitative easing programs, it implemented new monetary policy incentives totaling EUR 1,6 trillion.

About the Author

Christopher Dembik - French economist of Polish origin. Is a global head of macroeconomic research at a Danish investment bank Saxo Bank (a subsidiary of the Chinese company Geely serving 860 HNW customers around the world). He is also an advisor to French parliamentarians and a member of the Polish think tank CASE, which took first place in the economic think tank in Central and Eastern Europe according to a report Global Go to Think Tank Index. As a global head of macroeconomic research, he supports branches, providing analysis of global monetary policy and macroeconomic developments to institutional and HNW clients in Europe and MENA. He is a regular commentator in international media (CNBC, Reuters, FT, BFM TV, France 2, etc.) and a speaker at international events (COP22, MENA Investment Congress, Paris Global Conference, etc.).

Problems related to the Commission proposal

When the Commission first presented the 'New EU Generation' instrument, many overly optimistic commentators compared it to Alexander Hamilton's historical decision. After delving into the details, it seems that this was a missed opportunity rather than a real step forward in the context of European integration. The two main limitations of the proposed program are the fact that the overall amount is lower than the amount required due to the extremely difficult economic situation - around 0,9% of the EU's GDP per annum in 2021-2024 - and the fact that the timing of this assistance is very buggy. Due to administrative procedures, in particular approval, disbursements would take place with extremely long delay. It was anticipated that less than a quarter of all subsidies would be spent over the next two and a half years, and the peak implementation of these incentives was adopted for 2023-2024, which is too late in the context of economic recovery.

The Commission will also need to clarify (previously mentioned) the criteria for allocating funds. For now, it has only been stated that "they will be available to all Member States, but support will be concentrated in those parts of the Union that have been most affected by the pandemic and where the need for reinforcement is greatest". Finally, there is a clear misunderstanding of the Commission communication on new direct inflows to the EU budget (taxes) that will allow the loan to be repaid on a recovery plan. Since the EU is not sovereign in terms of taxation (Article 311 of the Treaty on the Functioning of the European Union), we see no way to increase taxes to cover the costs of the "New EU Generation".

No breakthrough in negotiations this week

The small amount of announcements from Member States before the meeting is surprising. This clearly means that intensive, closed-door negotiations at ministerial level will continue and no country wants to harm them. In some ways this is a rather positive signal.

In the past few weeks, there have been divisions among the "The Savings Four" - Denmark has softened its opposition to the Commission proposal by officially joining a camp of "skeptics", including Hungary. However, there is still a long way to go to reach an agreement and we believe that the "soft" July deadline mentioned by Chancellor Angela Merkel is not realistic. It should also be remembered that in many Member States a long parliamentary procedure on the "EU New Generation" has started or will soon start, which may significantly hamper the whole process. A few weeks ago, the constitutional committee in the Finnish parliament, which was the first to scrutinize the European Commission's proposal, ruled on the possibility of non-compliance with EU legislation - not a major obstacle that could not be avoided, but a "trick" towards the Commission and supporters of the recovery package.