The European Council must look for compromise in COVID-19 recovery proposals

Christopher Wratil, Lecturer in European Politics at UCL, analyses the proposals for the EU’s economic recovery from COVID-19, and explains what a compromise between the varying positions could look like.

As European countries take steps to come out of lockdown, the European Council must now decide how to deal with the fallout from COVID-19. Between a Spanish non-paper circulated in April, the Macron-Merkel initiative of mid-May, the position paper by the so-called “Frugal Four” (the group of Austrian, Danish, Dutch and Swedish governments) and the Commission’s “Next Generation EU” proposal, a multitude of proposals on how the EU should address the crisis are floating around Brussels and the national capitals.

At the center of these proposals is the idea of an “EU recovery fund” that would help member states with loans and/or grants. The extent to which support should come with conditionality strings attached (e.g. economic reforms, rule of law) is also debated intensely.

It should not come as a surprise that these issues are at the core of the controversy, given that they already divided the EU into “North” and “South” during the eurozone crisis. Then, Northern “creditors” made their loans to Southern “debtors” conditional on drastic economic reforms, resulting in deep economic austerity in the South. As the EU has only just recovered from the deep antagonism between North and South during the last few years, much is at stake now if member states fail to design COVID-19 mitigation measures that find broad support across the union.

Further points of contention concern how much money should be spent to support the member states’ recovery, if the money must be spent on certain purposes (e.g. on healthcare or the EU’s legislative priorities), whether the EU level or the member states will spend, and how potentially necessary EU-level funds for expenditure or interest payments will be raised (e.g. a carbon border tax). 

So what can we expect to happen in the next months? Which proposal – if any – is most likely to prevail? The answer to these questions depends on how we perceive intergovernmental bargaining in the EU.

One conventional wisdom regarding intergovernmental bargaining is that of the Franco-German engine of integration which claims that if Germany and France agree on something, they are able to get their proposal more or less unamended through the Council. Underlying this wisdom is the assumption that large member states are particularly influential in intergovernmental bargaining. However, most quantitative empirical studies looking at hundreds of EU decisions have found little to no support for this view of intergovernmental negotiations. In fact, some research finds that small member states are particularly successful in defending their preferences in the EU.

At first sight, this seems to be in line with the alternative wisdom of the national veto which contends that agreements will mostly reflect the preferences of the government that wants the least change from the status quo and is able to effectively block any more ambitious proposals leaving it worse off compared to the status quo. But interestingly the literature has found that many negotiations on single issues end with significantly more ambitious proposals than that endorsed by the most “conservative” government – even when the government could have exercised a formal veto.

Instead, the perception of intergovernmental bargaining in the EU that has received the most empirical support is one that stresses compromises between governments that lie somewhere between the most extreme proposals advocated. These compromises emerge from logrolling and vote-trading across issues: the most conservative governments on some aspects are not the most conservative on others and trade their agreement on issues where they want little change for concessions by others on issues where they desire change. While making predictions for specific situations from this model is not trivial, on average the Council will adopt proposals that reflect some compromise between governments with those governments being more influential to whom an issue is more important.

For the EU’s COVID-19 recovery, this means we can expect the final proposal to be some compromise between the Spanish and the Frugal Four’s paper, which are the most extreme proposals on the table. While the Spanish proposal advocates to help with grants, the Frugal Four only want to issue loans “on favourable terms“. The Spanish proposal does not mention any conditions, but the Frugal Four stress a commitment of member states to reforms, adherence to the rule of law and the need to protect spending from fraud. As far as size, the Spanish non-paper envisions additional spending from the EU level of at least 1 to 1.5 trillion euro. The Frugal Four’s paper avoids any specific number, but it can be assumed these governments prefer a significantly smaller size.

Given these two proposals, what would a compromise look like? Interestingly, the Franco-German proposal is such a compromise in several respects. It foresees spending of 500 billion – somewhere midway between the Spanish and the Frugal Four’s proposals. While it sides with the Spanish position on providing grants rather than loans, it calls for an expiry date of the fund and for the money to be spent by the EU level rather than the member states themselves. Arguably, this would provide for more control and conditionality preferred by the Frugal Four. Whereas the Spanish proposal envisions European taxes to finance interest payments – from a carbon border tax to a single market tax, the Franco-German proposal is more cautious. It mainly mentions “fair taxation”, particularly of the digital economy, which seems closer to the Frugal Four’s position.

Another compromise possibility is the proposal presented by the European Commission yesterday. It resembles the Franco-German proposal in the idea of providing about 500 billion in grants and allocations, and specifies how this amount could be spent through EU programmes and instruments. Hence, in the key question of whether the response should entail grants it matches the Franco-German proposal. At first sight, it seems more ambitious on setting up new EU-level taxes, but it also promises soft conditionality to the Frugal Four by integrating large parts of the grant side into the European semester as well as through potential clauses on the rule of law.

If any proposal has a chance of being adopted by the Council, it will likely be one that looks similar to the Franco-German proposal – not because this proposal comes from the two largest member states, but because it is a genuine compromise between more extreme positions advocated by others. The Frugal Four can stop any proposal if they want, but they would play against the Council’s culture as a compromise machine. This could backfire in future negotiations when they desire more progress than others (e.g. on the environment) and need concessions from Germany, France or Spain. They will think twice before taking this risk.

NoteThe views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.

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