First the Hype
Before diving into the multi-pronged failure, let's take a look at the mainstream media hype.
The Wall Street Journal reports European Union Leaders Agree on Spending Plan for Recovery.
European Union leaders agreed on a €1.8 trillion ($2.06 trillion) spending package aimed at containing an unprecedented economic downturn by resorting to new measures that could ultimately deepen the bloc’s economic integration.
The package, built around the bloc’s first-ever issuance of hundreds of billions of euros of common debt, came together early Tuesday after four days of talks among the bloc’s 27 leaders—the bloc’s longest summit in 20 years. German Chancellor Angela Merkel and French President Emmanuel Macron were forced to compromise on what would be spent and how much would be handed out in grants.
Whoa. Hold on.
The deal was not €1.8 trillion although that is what the EU would like everyone to believe.
€1.0 trillion of that was a multi-year budget through 2027. That's a normal operating budget of about €167 billion a year.
Of the remaining €0.8 trillion in stimulus, €390 billion is in the form of grants, the rest of the stimulus is loans.
Surprise Not: EU Reaches "Fist-Banging" Deal
Moreover, and as discussed earlier today, in Surprise Not: EU Reaches "Fist-Banging" Deal thanks to rebates, not even the €390 billion is real the rest is smoke and mirrors as is the €1.0 trillion.
Not even the total package is correct. The EU rounded up €1.75 trillion to €1.8 trillion. Hey why not? It's standard operating procedure.
A Deal But What Cost?
Please consider the Eurointelligence take A Deal But What Cost?
The real story of this morning’s deal is not the €390 billion in grants, but the price the EU had to pay to get there. The EU made three big sacrifices. The rule of law linkage to the budget is now effectively gone. The system of unfair rebates is not only maintained but enlarged: like Margaret Thatcher before, the frugals got their money back. Most important for us is the annihilation of the funds earmarked for various categories of investment, notably the climate change transition which is down from €30bn to €10bn, and a 50% cut in the funds earmarked for research. Several other categories of investments were also culled.
The EU took money from the climate change budget, research budget, and other budgets then put that money into the Covid bucket in the form of grants.
Frugal Four Demands
Recall that Sweden, Denmark, Austria, the Netherlands and Finland, collectively known as the "frugal four" insisted no more than €400 billion in grants.
Note that the "frugal four" is really "five". The EU played down the dissent from five countries to four, something I just noticed.
Eurointelligence explains the methodology to the the number below the Frugal Five demands.
One way they managed to get the total grants number down below €400 billion is by re-assigning various hybrid forms of finance as country loans. This is how the loan component of the facility went up from a previously-proposed €250 billion to €360 billion.
Stripping the grants components to its essential core, the grants part of the restructuring facility and the increase in the structural funds to eastern Europe, we arrive at volume of 0.7% of GDP for three years, give or take a decimal point. The money will be spent in roughly equal proportions each year, with 70% earmarked for 2021/22 and the remaining 30% in 2023.
US vs EU Comparison
The EU stimulus is spread out over three years: €136.5 billion in 2021, €136.5 billion in 2022, and €117 billion in 2023. €136.5 billion isn't much.
The EU is about the size of the US.
The US will allocate $4 trillion or more and it will all be up front.
Viktor Orbán is the Deal Big Winner
If anybody got everything they wanted from this EU budget, it was Viktor Orbán. All of the concrete rule-of-law linkages were taken out, replaced by a vague but unspecified commitment. Angela Merkel even made a promise to Orbán that she would support the end of the Art.7 procedure against Hungary.
Viktor Orbán is the prime minister of Hungary.
Under Article 7, the EU suspended Hungary's voting and representation rights.
Article 7 is enacted when the EU identifies a member that persistently breaches the EU's founding values (respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities).
The frugals’ other big victory is the rebate. The Dutch rebate went up from €1.57 billion to €1.92 billion. And Austria’s rebate doubles to €565 million. The notion of rebates has plagued the EU ever since the days of Thatcher, not so much for financial reasons but because it poisoned the debate by focusing all attention away from the common good and onto what countries pay in and what they get out.
David Sassoli, the president of the European Parliament, had threatened that MEPs would not support a budget that failed to address the following: climate change transition; new categories of own resources; the linkages to rule of law; and ending the rebates. This budget failed on all accounts.
Another Dramatic Huff and Puff Bluff Coming
Another big huff and puff bluff is on the way.
The European parliament may even reject the budget once or twice for added drama. Then Macron and Merkel will bang their fists and parliament will magically pass this deal at approximately 1 second to Midnight.
How the EU Works
Nothing is easy because all 27 nations have to agree to get anything done.
Merkel had to buy Orban's vote or he alone would have killed the deal.
Then Macron and Merkel had to use smoke and mirrors to buy out the frugal five known as the frugal four.
Germany used to be a part of the frugal six but Merkel does not want any major failures on her watch.
Guess what? This was a major failure in at least three ways.
This Deal Will Weaken the EU
In case it's not obvious, resentment over this deal will further weaken EU.
But hey, we got a deal!
There is only one time in the history of the EU where a deal was not reached. Congratulations to the UK.