Finance

Charles Michel readies spoonfuls of sugar to get budget deal done

The budget deal buy-off bonanza is now underway.

To clinch a unanimous agreement among the EUs 27 national leaders on an ambitious, €1.85 trillion budget-and-recovery package, European Council President Charles Michel must find an array of delicious morsels to satisfy every taste, and allow each head of state and government to return home a winner.

It is no easy trick considering that some demands are contradictory — an exercise that one senior EU official on Thursday called trying to “square the circle.” But after a briefing for diplomats Wednesday night, the contours of Michels plan are now visible, even if some of it requires more than a bit of budgetary sleight-of-hand.

“There are still many differences, but I have a feeling that a deal is possible,” one senior diplomat said after Wednesday nights dinner briefing. “Of course, it depends on how deep are Michels pockets for gifts.”

Fortunately, Michel has goodies in his pockets, up his sleeves and, it seems, in every drawer of his desk.

Initial reactions from EU diplomats briefed on the plans suggested some member countries are skeptical, given the still big disagreements, but also open to persuasion.

First, there is the gift of a reassuring message for countries hard hit by the coronavirus like Italy and Spain: the overall size of the crisis recovery effort will hold firm at €750 billion as proposed by the European Commission. Thats intended as a strong signal that the EU is rallying together, and that Michel is committed both to “ambition” and to preserving the core “architecture” which calls for the EU to take on an unprecedented amount of joint debt to finance recovery grants.

But then, in a nod to continuing opposition to the grants program among the so-called frugal four — Austria, Denmark, the Netherlands and Sweden — Michel is open to adjusting the Commissions proposed mix of €500 billion in grants and €250 billion in loans, to lower the amount of grants and raise the amount of loans.

At the same time, Michel aims to slightly “reduce” the size of the EUs new seven-year budget, the Multiannual Financial Framework, which the president now envisions totaling between €1.05 trillion and the €1.094 trillion he had proposed in February — less than the €1.1 trillion asked for by the Commission. But the possible reduction is a token gesture in the context of adding the €750 billion in recovery programs. Still, it is another important signal that will allow fiscal conservatives to claim the EU is tightening its belt.

But wait: those reductions will have to largely avoid touching agriculture programs and so-called structural and cohesion funds that are considered vital to countries in Central and Eastern Europe. In one of his budgetary magic tricks, Michel will aim to reduce spending for planned programs that dont yet exist, or to limit increases that were expected for others.

Meanwhile, the countries that contribute a lot more to the EU budget than they receive will get to keep their rebates — the gimmicky financing formulas that effectively reduce their overall obligations. Preserving the rebates, for which Michel and his team have yet to devise precise calculations, will allow leaders including Dutch Prime Minister Mark Rutte to claim victory in limiting their taxpayers obligations to Brussels even as the U.K., a big contributor and pioneer of EU budget discounts, has quit.

Of course, the eventual obligation to repay the recovery debt will mean every EU country ultimately pays in more, but Michel is counting on the urgent need to rebound from the shock of the pandemic to temper any gripes about that. And even there, Michel has a bit of sugar to add: possibly by following German Chancellor Angela Merkels suggestion of starting debt repayment no later than 2027, a year or more earlier than the Commission had envisioned.

For critics of the Commissions relatively rudimentary “allocation key” — the method for dividing up recovery funds — Michel and his team have another little treat: the Commission formula — which controversially includes pre-COVID unemployment rates — will be used only in the initial years to speed recovery of the economy, but then be replaced by a new formula tied to the real decline in national economic outputs.

Michel will formally present his new proposal, known as a “negotiating box,” sometime late next week. But what was clear from briefings by EU officials and diplomats aware of his thinking is that the Council president is less fixated on any particular part of the package than on simply getting leaders to say “Yes” when they come together for a summit starting July 17.

“Europe is home,” the senior EU official said. “And everybody needs to feel comfortable in the home.”

Summer deals a must

Merkel, during a press conference Thursday to mark Germany taking over the EUs rotating Council presidency, repeated her insistence that a deal must be reached this summer, and she joined in Michels effort to sprinkle a bit of positive pixie-dust over the process.

“Everybody knows that time is of the essence, because we all know that security for financial possibilities also gives us good psychology for economic development,” Merkel said.

She added, “I am going to Brussels on 17 July with the will to reach an agreement. But there must be an agreement in the course of the summer anyway. I cannot imagine any other option. And in that respect, we will work very, very hard to send a real signal of determination as the European Council.”

Initial reactions from EU diplomats briefed on the plans suggested some member countries are skeptical, given the still big disagreements, but also open to persuasion, and that some of Michels initial messaging was well-received.

“Its good that he doesnt deviate from the Commission original [recovery] proposal which is already a compromise,” said a diplomat from a southern European country. “The MFF has been already reduced so we dont see as a reasonable option” further cuts, the diplomat added.

Some officials from frugal countries reiterated their staunch opposition to the grants concept.

A second diplomat said Michels approach “is the only thing he can do … you have to cut somewhere.”

“The positions now seem to be far apart,” the second diplomat added. “But if theres a will theres a way.”

Some officials from frugal countries reiterated their staunch opposition to the grants concept – a bargaining posture that could be difficult to maintain once Merkel and French President Emmanuel Macron, who are both supporters of the idea, begin to put on the squeeze. Still, the frugals show no sign of conceding any ground until many of theirRead More – Source