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EU coronavirus recovery fund plans face political bear traps

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Via Financial Times

EU plans for a trillion-euro economic recovery fund risk becoming snarled in the political wrangling over its forthcoming seven-year budget, underscoring the bloc’s challenges in seeking a route out of the coronavirus-induced slump. 

Ursula von der Leyen, the European Commission presidents is planning to tell leaders this week that they should re-engineer the bloc’s multiannual financial framework (MFF), which runs from 2021 to 2027, to turn it into a vehicle to fuel the post-coronavirus recovery. 

But Pierre Gramegna, Luxembourg’s finance minister, told the Financial Times that linking the recovery fund too closely to a deal on the MFF would be risky because of leaders’ recent inability to make progress advancing the broader budget talks. He echoed a proposal by France to instead create the fund via a new vehicle outside the MFF that he claimed could be up and running within months. 

“If we were to embark on a discussion that says ‘let’s link this recovery fund to an agreement on the whole MFF’, which we have been discussing for 18 months to no avail, that would be the best way to bury the recovery fund,” said Mr Gramegna. “If we want to be credible we need to be able to deliver on this before the summer.”

Eurozone finance ministers agreed in their last meeting on a €500bn package of emergency relief measures aimed at curbing the economic fallout from the coronavirus crisis. They also agreed to start work on a so-called recovery fund, but there is no consensus among governments on what this would look like or how large it will be. 

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Ms Von der Leyen last week said the seven-year MFF should be the “mother ship” of this recovery plan and held out the prospect of trillions of euros of investment to fund a post-pandemic rebound. She will test appetite for her ideas on a video conference call of EU leaders on Thursday. 

The commission last put forward proposals for the MFF starting in 2021 two years ago. Since then, member states have failed to converge on a plan for how much funding should be handed to the budget, which is squeezed by the UK’s departure from the EU, and on how the money should be allocated between programmes. 

Under the ideas being developed in the commission, states would agree to increase the so-called headroom in the EU budget to permit the commission to borrow to fund an investment-led recovery plan. This would involve boosting the gap between the maximum ceiling the union can raise from member states and actual spending, which would permit extra borrowing by the commission. The money raised via the MFF reboot could be used to leverage up investment in member states alongside grants.

Officials warn that it would take some time to get member states’ parliaments to agree to such a headroom boost, even if it won universal endorsement. In addition, some EU diplomats and officials ask what will be on the table to bridge the gap before the MFF kicks in next year. Mr Gramegna argued it would take too long to agree the change as part of a wider EU budget agreement that also resolves the long-running dispute over member states’ contributions. 

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“To put it simply: if we want to increase the guarantee that the EU as such can give, increase the borrowing capacity of the commission, it is completely irrelevant if the total MFF is 1 per cent or 1.06 per cent or 1.11 per cent of GDP,” he said. “We must avoid getting entangled in a discussion that involves the whole lot of issues that are included in the MFF, where the risk is that a lot of other issues will block it.”

There are similar concerns in Paris, which has put forward a proposal under which mutualised debt would be issued for a limited time, potentially by a special vehicle backed by the member states. Bruno Le Maire, the French finance minister, has suggested EU countries could strike a deal on technical details of the fund in as little as six months, and that access to the cash would vary depending on how hard hit a country is. Some officials say it could be possible to merge elements of the French plan into the commission’s ideas. 

One EU official warned that there were no guarantees that setting up a brand new vehicle to operate the recovery fund would be any quicker or easier than striking a deal on the MFF. Eurozone ministers themselves have declared that the MFF needs to “play a central role” in Europe’s recovery.

Anything that involves joint borrowing by a new European entity could run foul of northern member states that have dug in against the idea of so-called coronabonds. This means that some northern member states are more attracted to the MFF route, which uses established commission borrowing powers — albeit on a much larger scale than before. 

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“If the recent meetings of the eurogroup and the European Council have shown one thing, it is that a recovery fund financed by mutualised debt is not a realistic option at all,” said one EU diplomat. “The answer will be more along the lines of a recovery fund linked to the MFF, which the commission is working on.” 

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