Why the EU’s historic coronavirus stimulus is at risk

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Hungarian Prime Minister Viktor Orban leaves at the end of the two-day European Union (EU) summit face to face at the European Council building in Brussels.JOHANNA GERON | AFP | Getty Images

LONDON – The EU’s historic plan to support its economy suffered a “big setback” after Hungary and Poland vetoed the deal.It threatens to derail the distribution of much-needed funds at a time when the region is grappling with one of the deepest crises in modern history.

The 27 EU leaders agreed in July to borrow funds jointly, via the European Commission. It was an unprecedented move that ended long-standing opposition from more economically conservative countries, like Germany and the Netherlands, to committing to joint loans.

During negotiations with the European Parliament earlier this month, the deal was tweaked so that the disbursement of funds was linked to commitments to core EU values ​​- known as the rule of law.

However, Hungary and Poland – which have been investigated for potential non-respect of these European values, in particular by influencing the judiciary and undermining press freedom – are opposed to this. new link and decided to veto the deal at a meeting on Monday.

Analysts at consulting firm Eurasia Group said it was a “big setback” for the overall plan.

“Even with a December deal, there will be a significant delay before funding reaches vulnerable member states, possibly the third quarter of 2021 at the earliest,” they said in a note Monday.

The funds are expected to be made available from January.

Highly indebted countries like Italy and Spain, which have also been hit hard by the public health emergency, are struggling to provide financial support to their populations. Their weaker financial situation led them to ask for a European-wide support package in the aftermath of the pandemic.

Our people would pay a very high price for a blockade.

Michael Roth

German Minister for European Affairs

The stimulus package is a combination of a seven-year budget of 1.074 trillion euros ($ 1.28 trillion) and an additional buffer of 750 billion euros (to be raised on public markets). The latter will be divided into 390 billion euros to be distributed in the form of grants, and 360 billion euros in loans.

Hungary and Poland are expected to be among the financial beneficiaries of the plan.

“I ask everyone in the EU to live up to their responsibilities. This is not the time for vetoes, but to act quickly and in a spirit of solidarity, ”German Minister for Europe, Michael Roth, said on Tuesday at a press conference.

“Our people would pay a very high price for a blockade,” he added.

‘Serious but not desperate’

But analysts still expect the deadlock to be overcome at some point.

“It’s a chicken game, which falls into the category of serious but not desperate,” Daniel Gros, a German economist, told CNBC on Tuesday.

He noted that unlike the onset of the crisis, countries like Italy and Spain are now facing “very favorable market access conditions”, which means these countries “can afford to wait. »European funds.

“Poland and Hungary would lose more than Italy and Spain because of this delay,” he added.

Both countries saw fewer cases of the coronavirus than their neighbors to the south in the spring, but also face a sharp rise in infections in the second wave.

“The only way forward might be to focus even more on preventing corruption and related issues while emphasizing the centrality of Article 7 (used to remove voting power from Member States that violate EU values) to address real rule of law issues. as judicial independence, ”analysts from Teneo, a consulting firm, said on Tuesday.

Their comment suggests that the mechanism for linking disbursements to the rule of law could be watered down to get Poland and Hungary to participate.

An EU official, who did not want to be named due to the sensitivity of the negotiations, told CNBC on Tuesday that “this is not the end of the story.”

The same official added that the process is now entering a “political phase”. This indicates that German Chancellor Angela Merkel and French President Emmanuel Macron could conduct negotiations with the Hungarian and Polish leaders.

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