Ursula von der Leyen’s first public announcement of a massive response to the coronavirus crisis was made in a reflexive panic, on a Saturday night in late March, as she came under a barrage of criticism from Italy, where daily Covid-19 deaths were just hitting their peak.
The European Commission president was already under severe pressure over the EU’s haphazard initial response to the health crisis — even though much of the blame lay with national capitals that reacted unilaterally, slamming borders shut and refusing even to come to Italy’s assistance when Rome initially requested help with protective gear.
A disastrous EU leaders’ summit — held by videoconference because of coronavirus lockdowns — had descended into a shouting match two days earlier, adding to the sense of chaos.
But that Saturday, March 28, anger suddenly exploded in Italy after the German news agency DPA published an interview in which von der Leyen dismissed corona bonds — a recovery instrument favored in Rome — as a “slogan.”
That set off a cascade of criticism, including a demand for “a clarification” from European Parliament President David Sassoli, an Italian. Italy’s prime minister, Giuseppe Conte, also lashed out, saying: “Europe needs to show whether it can live up to this call of history.”
The Commission rushed out a rare Saturday night statement. “To ensure recovery the Commission will propose changes in the [EU’s long-term budget] that will allow to address the fallout of the coronavirus crisis. This will include a stimulus package that will ensure that cohesion within the union is maintained through solidarity and responsibility.”
The news that von der Leyen had reached a decision on how to proceed came as a surprise even to some of the highest-level staffers who had been developing her options for responding to the crisis. But the haste of the announcement also masked the planning and preparation already well underway in the executive suite of the Berlaymont.
Up until that Saturday, no final decision had been made. Von der Leyen had earlier considered three options. The first was a temporary war budget that would effectively delay negotiations on the EU’s traditional seven-year financial blueprint — the Multiannual Financial Framework (MFF) — in favor of a one- or two-year emergency budget focused on the coronavirus response.
A second option, being pushed heavily by France, called for a standalone recovery instrument to be agreed by national capitals.
The third, strongly favored in Brussels, and the one ultimately endorsed by von der Leyen that Saturday night, would reinvent the MFF as a sort of supercharged defibrillator, intended to bring EU economies back to life — while also advancing the Commission’s broader agenda.
Ultimately, von der Leyen and her team would turn to a little-known and rarely used provision in the EU treaties allowing the bloc to borrow giant sums of money on the financial markets — and provide recovery grants — without adding to the burden of national ledgers, some of which already weigh heavily with debt.
To get there, however, the president would ultimately need to turn to Berlin and Paris, convincing Chancellor Angela Merkel and President Emmanuel Macron to develop just such a proposal, providing crucial political capital that von der Leyen and her advisers hoped would bring other countries on board — and avoid the historically bitter divide between North and South on economic policy.
This reconstruction of the development of the budget-and-recovery package that von der Leyen would eventually brand as “Next Generation EU” is based on reporting by POLITICO journalists in Brussels, Paris and Berlin, including interviews or confidential briefings with the plan’s key architects, as well as diplomats and officials who closely monitored the work.
It details the genesis of the €1.82 trillion budget-and-recovery package — with an unprecedented joint debt proposal at its core — that EU heads of state and government will consider in Brussels Friday when they meet in person for the first time since the lockdowns.
For the former German defense minister-turned-Commission chief, nothing less than her entire mandate is on the line.
If the EU leaders ultimately give their blessing, von der Leyen will get credit for leading the EU to a threshold moment. Some supporters of the plan view it as potentially a Hamiltonian leap forward in fiscal integration, akin to the establishment of U.S. federal debt.
But if von der Leyen’s proposal becomes embroiled in lengthy disagreements, or if a version of her plan is approved but ends up badly managed, or minimally effective, she will be the one who will bear the responsibility.
Skeptics say the plan is potentially just a giant Band-Aid that will heal one wound but hurt to pull off. Harsher critics insist that even the need for another recovery package is political fiction because Eurogroup finance ministers have already made available gargantuan amounts of credit through the European Stability Mechanism, the EU’s existing emergency borrowing facility.
Von der Leyen, however, goes into Friday’s summit with one big advantage: She has won the backing of Merkel, the EU’s most influential leader, who in recent days has emerged as the plan’s most formidable champion.
Summit debacle
The need for action was abundantly clear on Thursday, March 26, as leaders in capitals across the quarantined Continent jabbed angrily at each other on a videoconference. Officials in Brussels and national capitals watched along in dismay as the tele-summit turned into a shouting match. Some would later describe it as “emotional” and “horrible.”
The crisis this time was the novel coronavirus pandemic — killing thousands and paralyzing economies across Europe — but the battle lines that emerged between EU leaders were hauntingly familiar: North vs. South in an angry fight over debt.
During the videoconference, Conte, facing the worst outbreak, insisted on a giant recovery initiative anchored by joint debt, a concept strongly endorsed by Spanish Prime Minister Pedro Sánchez and at least six others. But other leaders, including Merkel at that point, rejected the idea as something out of a fiscal fantasyland.
Indeed, Merkel seemed to accuse colleagues of conjuring debt obligations for German taxpayers. In remarks to reporters, Merkel referred to “some member states who have imagined or are imagining corona bonds.” Austrian Chancellor Sebastian Kurz and Dutch Prime Minister Mark Rutte also voiced firm opposition.
The video summit, intended to showcase EU unity, dragged on three hours longer than expected. After the meeting, Portuguese Prime Minister António Costa called comments by the Dutch finance minister “repugnant.”
The anger stemmed in large part from lingering resentment over the handling of the eurozone debt crisis, and the still palpable fury in some Southern countries over the harsh austerity measures that were imposed as conditions for help.
But some of the key supporters of the budget-and-recovery package say the memories of the debt crisis proved extremely useful. The lessons from the last time around made the ultimate solution — a recovery initiative tied to the EU budget — the obvious answer within the small circle of technocrat-wizards who built Next Generation EU.
It was “a no-brainer,” several said.
Revenge of the budget wonks
Convincing national leaders of that obviousness, however, would prove no small trick.
To avoid a complete breakdown during the miserable March 26 videoconference, Council President Charles Michel, a former Belgian prime minister, turned to an age-old trick: He stalled for time.
Michel negotiated changes to his written conclusions that seemed to leave all options on the table, including, crucially, a joint debt program. He also convinced heads of state and government to task eurozone finance ministers with the responsibility of drawing up further recovery initiatives.
Leaders set a two-week deadline, and on April 9 the Eurogroup met late into the night and finally approved an initial package of measures, including expedited access to credit through the ESM — at no cost to EU countries — for expenses directly tied to the health crisis. They also approved a Commission-proposed mechanism to support national unemployment insurance schemes.
Inside the Berlaymont throughout March, there had been a growing realization that nothing would return to normal and that the proposals already in the works by the Eurogroup would not be sufficient. “It was becoming clear that the economic damage would be unprecedented,” one senior Commission official said.
A small group of top advisers had begun meeting several times per week to brainstorm an economic response, and kept at it even as the building emptied out and all but essential staff worked from home.
Included in these confidential talks, often led by von der Leyen herself, were her Cabinet chief Bjoern Seibert, who arrived with the president-elect from Berlin last summer. Also present was von der Leyen’s French deputy head of Cabinet Stéphanie Riso, who may be best-known in the Brussels bubble for her work on the Brexit task force, but is also a veteran of the financial crisis and a budget wonk, having served as head of the MFF unit at the directorate-general for the budget.
DG Budget chief Gert-Jan Koopman — a Dutch former senior Commission competition official — also attended the sessions, as did Commission Secretary-General Ilze Juhansone — who has experience with MFF negotiations from her days as Latvia’s ambassador to the EU. Others involved in the confidential talks were Maarten Verwey, the Dutch head of DG ECFIN, and Jean-Paul Keppenne, head of the Commission’s legal service.
By mid-March, the group had their three options on the table.
The idea of a temporary war budget was quickly rejected, due to concerns that such a deep crisis would require long-term investment.
The second option to create a standalone fund — outside of the EU budget — was trickier to argue against, as it had the backing of Paris.
The third option was to revive negotiations on the MFF and reinforce it with extra funds.
Veteran Commission officials, especially those scarred by the eurozone debt crisis, quickly viewed the French proposal as highly problematic, knowing it would be incredibly difficult and time-consuming to create and agree on the structure and governance of a new funding facility from scratch.
With the death toll rising and member states sniping at each other, the Commission needed a silver bullet — an option that would be credible in all capitals and could be implemented quickly.
While the circumstances of the pandemic seemed other-worldly, the budget wonks pointed out that the MFF was in fact designed to do extraordinary things under the most ordinary of circumstances — to allow the EU27 countries to pool financial resources, to set and to execute common political and policy goals, and exercise oversight over it all.
“I am convinced that there is only one instrument that can deliver this magnitude of tasks behind the recovery, and that is the European budget clearly linked to the recovery fund,” von der Leyen said after a videoconference of EU leaders in April. “The budget is time-tested,” she said. “Everybody knows it. It is trusted by all member states and it is per se designed for investment, for cohesion and convergence.”
And because — coincidentally — the crisis had struck just as the current long-term budget was about to expire and a new one was in the process of being negotiated, the officials could also argue that the MFF was a timely option that could be customized to meet the emergency circumstances.
One big challenge remained: how to fund an increase to the MFF.
Merkel’s pivot
Many leaders had been arguing that the budget proposed in February was not even sufficient to maintain the EU’s existing programs under normal circumstances. And now far more money was needed. At the same time, with economies cratering, national governments would hardly want to send more money to Brussels.
The Commission’s budget wonks, however, pointed out that there is another, rarely used way to get extra money for the EU budget — theoretically giant sums of money — by using the MFF to borrow on the commercial market.
In 2010, the bloc triggered Article 122 of the treaty, which governs EU financial assistance under exceptional circumstances.
That allowed the Commission to borrow funds on the markets — using the gap between budget spending and the maximum legal amount the EU can call upon from member countries, known as the Own Resources ceiling, as a guarantee. The program, called the European Financial Stabilisation Mechanism (EFSM), ultimately provided financial assistance to Ireland, Portugal and Greece.
The officials seized upon this institutional memory: While the EFSM program was far smaller than they believed would be needed for the coronavirus crisis, they argued they could replicate the legal basis to design a larger crisis program.
By April 7, European Budget Commissioner Johannes Hahn was publicly floating the idea of using the headroom — the space between budget spending and the ceiling — to raise money for the recovery.
On April 15, von der Leyen made it official, declaring at a press conference that “the principle — leveraging money that is guaranteed by the member states — the Commission has done before. This is a huge advantage, so it’s known territory … never, ever before at that size, but it has the mechanism, it is well-known, a trusted one and a proven one.”
Five days later, Merkel told reporters that she could envision raising money via Article 122 of the treaty.
Merkel’s stunning shift, from guardian of fiscal austerity to a champion of a joint debt program, stemmed partly from a recognition of the steep risk to the EU posed by glaring differences in how countries were positioned to respond to the crisis.
Berlin could, and did, quickly unleash more than €1 trillion in aid to its own businesses and citizens, but other countries faced the prospect of a potentially smothering debt load and far longer struggle to bounce back.
Merkel’s pivot also occurred, not coincidentally, at the onset of the German presidency of the Council of the EU, and amid the chancellor’s own effort to cement her legacy as she enters the backstretch of her fourth and final term.
But while Article 122 would solve one issue — how to raise the money — another equally sensitive debate was still raging over how to disburse emergency funds.
On April 19, Spain issued a much-discussed non-paper prepared under the direction of Economy Minister Nadia Calviño, herself a longtime Brussels budget wonk who served as director general of DG Budget, arguing that the recovery fund should distribute grants that would then not add pressure to national balance sheets, rather than just loans at attractive rates.
Berlin-Paris to the rescue
Commission officials had lobbied capitals for weeks to convince national leaders that they should fall in behind von der Leyen’s plan for a pumped-up MFF, and ultimately succeeded at a virtual summit on April 23 when the European Council specifically instructed the Commission to devise a recovery instrument to be attached to the budget.
Seeking to reassure leaders, von der Leyen predicted a plan would be ready by early- to mid-May. That prompted a pointed reminder from Merkel, von der Leyen’s political mentor, who told the Commission president: “Don’t forget to talk to us” — a reminder that the capitals don’t take well to surprises.
In the end, von der Leyen did more than just confer. Recognizing the historic North-South split, and the still palpable acrimony, she asked Merkel and Macron to give her political cover by putting together a proposal, relying on the age-old Brussels wisdom that if Berlin and Paris can reach an agreement, the rest of the EU is likely to go along — or at least it will limit the resistance.
As the EU’s most prominent leaders, Merkel and Macron have cautiously cultivated their relationship since 2017 when Macron improbably managed to demolish the French political establishment and win the presidency running as an independent. Given the two leaders are at such different stages of their political careers, and such different temperaments, it has not always been easy.
But there was little doubt that history would judge their handling of the coronavirus pandemic, and they turned to two of their most trusted advisers to hammer out a plan. The so-called sherpas — Uwe Corsepius, an old hand in Berlin who also served a stint as the secretary-general of the European Council, and Clement Beaune, Macron’s Europe adviser.
The two officials talked constantly, supplied with a steady stream of technical assistance from Brussels. Although Corsepius speaks French and Beaune speaks some German, they negotiated in English — to keep the playing field level. It is an approach also followed by their bosses, who officials said had held at least four videoconference calls over the three weeks of talks.
In the end, Berlin and Paris reached a deal that was hailed as historic: a proposal for €500 billion in joint debt, guaranteed by all 27 member countries through the EU budget, that would be used to issue recovery grants to the regions and sectors in greatest need.
“It’s really the fruit of three years of work,” a French official said. “Had Merkel and Macron not built a working relationship, experienced blockages, gotten used to working together — we know that when we negotiate a text it can be difficult, but we also know that it’ll go better because we are now used to negotiating together.”
By the weekend before Merkel and Macron would unveil their plan on May 18, it was clear to officials in the Commission that France and Germany had a deal to close. Within days, it was done.
A German official said that the chancellor recognized after the high death toll in Italy, and the angry reactions to the corona bond debate, that a big initiative would be needed — one that would clearly show the EU working together. That required a bit of spadework on the chancellor’s part to bring along senior members of her conservative family, the Christian Democratic Union/Christian Social Union. But Merkel’s steady management of the crisis gave her the clout to pull it off.
Macron agreed to attach the recovery initiative to the EU budget — abandoning the initial French proposal for a standalone instrument. And Merkel agreed not only to use the EU’s collective fiscal firepower to borrow €500 billion, but also to disburse the money in the form of grants, not solely loans, which would only add to the burden of heavily indebted countries like Italy.
Mindful that the rest of the EU would resist any Franco-German diktat, regular updates were provided to other capitals, especially Rome and The Hague. In return, officials with knowledge of the talks said Rutte agreed not to torpedo the idea outright.
One official involved said the French and German negotiators were careful to avoid words and phrases that could easily detonate an explosion.
“We have reforms, but we didn’t include ‘conditionality’ because it’s one of those triggering words, so we avoided it,” the French official said. “We’re not talking about conditions like the Troika but we both think that it’s important for the balance of this recovery fund that it be tied to reform commitments. And that’s not illegitimate, we are significantly increasing the budget, €500 billion is half the budget over seven years, it’s logical to know what is going to be done with the money.”
In Brussels, von der Leyen’s team could hardly have been happier. The Franco-German proposal would serve as the anchor of the recovery initiative, with von der Leyen pushing the number higher by adding in a €250 billion loan program.
Magic financial framework
On May 27, von der Leyen rolled out her new proposal, a recovery instrument of €750 billion, attached to a €1.1 trillion budget plan.
Officials involved in the talks said the final number, debated constantly over many weeks, was von der Leyen’s decision: big enough to send a reassuring message to citizens and financial markets but also one that skeptical countries like the Netherlands, Austria, Denmark, Sweden and Finland would not reject outright.
They are still griping, of course. But by bolting the recovery plan to the EU’s larger budget, von der Leyen also succeeded in widening the negotiating framework so that leaders are not just discussing the recovery but also the broader political and policy agenda, as well as each country’s particular concerns about the traditional structure of the MFF.
After a series of initial consultations, Michel has proposed a revised package, trimming the budget plan to €1.074 trillion but leaving the size of the recovery fund intact while also making some adjustments, such as calling for faster repayment of the joint debt. Rutte, in particular, is still pushing for bigger changes, including to reduce the portion of money to be distributed as grants, and for a mechanism that requires unanimous approval by EU countries of the reform plans linked to disbursements.
But heading into Friday’s summit, the months of work by von der Leyen and her budget wonks, the alliance between Berlin and Paris, Michel’s maneuvering, and Merkel’s new place at the helm of the Council of the EU have quieted many of the rumblings along the EU’s North-South fault line.
On Monday, Merkel stood with Conte at her retreat outside Berlin in a striking show of German-Italian solidarity — a warning to critics of the recovery plan that they may be perceived not just as frugal but as something worse.
“It is important that what we now have as a recovery fund is massive, is something special and is not reduced to dwarf size,” Merkel said.
“It is not possible to commit to every detail in advance, but it must be a special effort that makes it clear that Europe wants to stick together at this difficult time,” she added. “There is a political dimension to this beyond the figures, and that is what the project must be measured against.”
Merkel, noting that Germany and Italy support the plan, warned that other countries had yet to sign on. “I cannot say today whether we will come to an agreement on Friday or Saturday,” Merkel said. “But it would definitely be good for Europe.” It would also be good for von der Leyen.
Matthew Karnitschnig, Bjarke Smith-Meyer, Hans von der Burchard, Jacopo Barigazzi and Paola Tamma contributed reporting.
Source: politico.com
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