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What will become of the EU after the pandemic?

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European Union – “Extraordinary times require extraordinary action”, European Central Bank President Christine Lagarde said last March, when announcing the ECB would embark on a new spending spree worth €750 billion to purchase sovereign debt from eurozone countries as an emergency response to the coronavirus pandemic. The financial crisis of 2008 and the European debt crisis after 2009 increased the role of the ECB and brought about the creation of the European Stability Mechanism (ESM) – a permanent rescue funding programme – and the European Fiscal Compact, which is a new treaty (called the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) with stricter rules for national budgets and new supervisory powers for the European Commission, to which draft budgets must be submitted every year by national governments. The sovereign debt crisis of 2010 also led to the beginning of a Banking Union for the euro area, giving the ECB new supervisory powers over banks. As has often been the case in the history of post-war European integration, new steps towards a more united Europe are taken in times of crisis. Since early on, there has been a sense, in particular among those in favour of some kind of United States of Europe, that European integration has to be always moving forward for the block not to fall apart, each new step making it necessary to take the next one. The Financial Times’ chief foreign affairs columnist Gideon Rachman calls this the “bicycle theory”, describing it as the idea “that unless the EU keeps moving forward, it will fall over and crash”. Thus, monetary union, it was hoped, would force increasing political union on member states. French socialist Jacques Delors, the 8th President of the European Commission, who headed the committee that proposed the euro to replace national currencies, made no secret of this ultimate goal, as he observed in an address to EU leaders in 1989 that with the European Monetary Union European countries were laying the foundation of a European political system.

As British economist Roger Bootle observed in a column published by the Telegraph on June 14, with its proposal for a Recovery Fund worth €750 billion, which was to be discussed by EU heads of states and governments on June 19, the EU is now heading towards fiscal union. As usual for the European block, it is doing so while in the midst of an existential crisis, the current one being caused not by Brexit, but by the economic effects of the coronavirus. However, the fundamental cause of this existential crisis is to be found elsewhere, as the author rightly points to the fact that “all along, there has been a dichotomy between those who saw the EU as being on a journey towards a United States of Europe and those who saw it as destined to remain a federation of sovereign states.” According to this leading City economist, the European Union will be crossing the Rubicon towards the federal model with its plan – supported by Germany and France – for a coronavirus recovery fund worth €750 billion, including €500 billion in non-refundable grants that would be financed with debt contracted by the European Commission, and possibly with future taxes levied by the European Union. And it will indeed be the first time the EU-27 pool their future debt and create an autonomous source of revenue levied by EU institutions. Up to now all revenues flowing into EU budgets have come from contributions by member countries. Furthermore, under the European Commission’s current proposal, the use of the money from this special recovery fund, which will come in addition to the 2021–27 Multiannual Financial Framework currently under discussion for a value of some €1000–1300 billion (depending on what is eventually agreed by the EU-27), will have to be in line with European policies and approved by the European Commission, which implies an additional transfer of power from national capitals to Brussels. Thus, at first glance it looks like the coronavirus pandemic is going to push European integration further along the path towards the vision of Italian communist Altiero Spinelli for a European super-state. This could see it drift even further from Robert Schuman’s Christian vision of Europe as a commonwealth of nations, which is preferred by Central European leaders, not least by those currently in power in Poland and Hungary.

The way economic and monetary policies can create the opportunity for a major push towards a European super-state is best illustrated by the European Commission’s insistence on linking the payment of EU funds from the Multiannual Financial Framework and from the coronavirus recovery fund to its own evaluation of respect for the rule of law in member countries, a move very strongly opposed in Warsaw and Budapest. In both capitals, it is felt that the European Commission and the European Parliament have instrumentalised the topic of the rule of law for their own political and ideological agenda, and this accusation has been supported recently by the European Commission’s attempt at using the Coronavirus Response Investment Initiative that came into force on April 1, allowing for the reallocation of cohesion funds for the fight against the economic consequences of the coronavirus pandemic, to blackmail Polish local governments which have adopted a Local Government Charter of the Rights of the Family or resolutions affirming their opposition to LGBT ideology. Governments in Warsaw and Budapest also consider that making such an official link between EU funds and the EC’s appraisal of the rule of law would be a blatant violation of the European Treaties, which stipulate specific conditions under which a country can be sanctioned if found not to be abiding by the rule of law, leaving the determination of such a fact to the remaining member states, and not to the European Commission or ultimately to the European Court of Justice. However, Poland and Hungary are not the only countries standing in the way of European integration and action that increasingly exceeds the terms of the Treaty of Lisbon.

When the ECB announced an additional €650 billion of bond purchases in June, this came after a May ruling by the German Constitutional Court that called into question the conformity of such actions with the European treaties and the ability of the European Court of Justice (ECJ) to interpret treaties in ways that clearly go beyond the original intent of the signatory countries. “The constitutional court has found that the actions and decisions of European bodies overstep their legitimate competence, and therefore have no validity in Germany”, German judges stated in their ruling of May 5. This ruling concerned an earlier public sector asset purchase programme put in place in 2015 by the ECB, for which the Central Bank has spent €2 trillion with the participation of the German Bundesbank. However, if the ECB is unable to comply and to convince German constitutional judges that it acted according to the treaties – it was given until August 5 to do so – and the Bundesbank subsequently has to dispose of its share of the purchased public assets, that will call into question the German Central Bank’s participation in future purchase programmes of the European Central Bank, including those which have been announced up to now as a response to the economic consequences of the coronavirus pandemic. As Ambrose Evans-Pritchard wrote in the Telegraph on May 17, “the European Court (ECJ) has acquired the habit of claiming powers that are not rooted in any Treaty text, advancing Monnet federalism by an odd mixture of bravado and stealth. The EU assumed it could get away with this because the German policy class has been broadly complicit – up to a point – but Europe has now run into the unyielding resistance of the German constitutional court.

The Polish and Hungarian governments immediately applauded the German ruling. In an interview for the Magyar Nemzet conservative daily, Hungary’s justice minister Judit Varga described as “extremely important” the fact that a ruling by the ECJ has been overturned by the German Constitutional Court, as it reaffirms the fact that nations have the final say when there is a conflict of competence between the EU and a member state, and that the European Union is not the United States of Europe. Polish PM Mateusz Morawiecki said in an interview with the German daily Frankfurter Allgemeine Zeitung that the ruling was “one of the most important” in the history of the EU and that it established that “the Federal Constitutional Court, just like the Polish Constitutional Court, took the position that the ECJ does not possess unlimited authority.” The head of Poland’s own Constitutional Court, judge Julia Przyłębska, reacted to the German ruling saying that “National constitutional courts are the courts which have the final word.” This should be understood in the light of the ECJ’s heading for a clash with the Polish Constitutional Court on the subject of the reforms of the judiciary recently introduced by a PiS-dominated parliament, namely on the question of whether the ECJ can order the suspension of the Polish Supreme Court Disciplinary Chamber created in accordance with a law passed by the Polish Parliament. The case of a temporary order issued on April 8 by the ECJ, at the behest of the European Commission, is still waiting to be reviewed by the Polish Constitutional Court, but in an earlier case adjudicated on April 20 the Polish Constitutional Court defended its exclusive right, in accordance with the Polish constitution, to invalidate or suspend the law which had created that Disciplinary Chamber, and it denied the Supreme Court the right to do so based on a November judgment from the ECJ, stating that this would violate both the Polish Constitution and European law. This conflict, and also the continuous interference of EU institutions in Poland’s and Hungary’s internal affairs, in matters which, in the opinion of the leaders of both countries, should normally fall under their exclusive national competences as per the European treaties, cannot but stiffen their opposition to the idea of linking EU funds to the European Commission’s perception of conformity with the rule of law. The EC’s insistence on such a link is therefore bound to make an agreement on the next MFF and on the coronavirus recovery fund much harder to achieve.

Poland and Hungary are not, however, the strongest opponents to the European Commission’s proposals to mitigate the economic crisis. The so-called Frugal Four (the Netherlands, Austria, Denmark, and Sweden), who advocated a more modest EU budget before the pandemic, oppose the very idea of offering EU members non-refundable grants financed by common debt and European taxes. They responded to the May Franco-German proposal for a €500 billion recovery fund with a non-paper in favour of an alternative proposal excluding any kind of debt mutualisation and non-refundable grants. Apart from a “modernised MFF” there would be a temporary Emergency Recovery Fund with a sunset clause after two years. This one-off Recovery Fund would be used for “lending on favourable terms to the benefit of the Member State in need, while limiting the risk to all Member States and providing sound incentives”, and this would be done “in line with fundamental principles for the EU budget”. Such an approach has also won the support of the Czech Republic, whose Prime Minister, Andrej Babiš, considers that common debt that will be used for special COVID-19 grants and which will have to be repaid through national contributions to the EU budget would penalise those countries that have been successful in dealing with the pandemic. Babiš also rejects the idea that countries which ran big budget deficits before the coronavirus pandemic should now get non-refundable grants to finance their economic recovery. Hungary’s Viktor Orbán has also expressed strong reservations over the fact that according to the European Commission’s proposal, the wealthier countries of Western Europe will get a bigger share of those special grants, which goes contrary to the traditional philosophy of the EU’s cohesion policy. “It is a moral problem that overall the rich countries would receive more money than the poorer ones and this cannot remain as it is”, Orbán said, adding that Hungary is asking for adjustments and does not reject the proposal altogether, although it is not too keen on the idea of financing the recovery fund through European debt. As an example of a necessary adjustment, the Hungarian Prime Minister cited Portugal, which is similar to Hungary both in wealth and population, and which would receive 30% more money under the current proposal. At the same time, after having been said to have changed its traditional stance against the idea of non-refundable grants to hardest hit countries after the Franco-German proposal was announced, marking a big shift in Germany’s traditional stance on anything that resembles debt mutualisation, Finland confirmed on June 9 its opposition to the European Commission’s proposal, which means that the famous “Frugal Four” are actually five (not counting the Czech Republic and Hungary). Furthermore, the Finnish Parliament even expressed concerns that such a proposal in its current form could be in breach of EU treaties. It is also to be noted that the “Frugal Five” (the “Frugal Four” plus Finland) all want rule of law considerations to be taken into account in the payment of EU funds and loans.

In Poland, the government of Mateusz Morawiecki has shown much more support than his Czech and Hungarian counterparts for the idea of European debt, which will have to be repaid by increased national contributions to the EU budget in the years 2028–50, and even for the idea of new taxes that would feed directly into the EU budget. Morawiecki repeated his support in an opinion published on the Euractiv website on June 17, two days before the planned summit of the European Council: “The EC proposal involves not only the unprecedented amount of aid. In this context, comparisons to the Marshall Plan seem accurate. However, the crux of the matter would lie in the fact that ⅔ of the funding are grants for the countries, while ⅓ are low-interest loans. The member states will thus not be left to fend for themselves in the face of a crisis. Using its credit rating, the EU may pay joint liabilities based on new, own sources of revenue.” However, Poland does agree with Hungary and the Czech Republic that poorer countries should not be asked to finance the economic recovery of wealthier ones, and that wealth should be taken into consideration for the allocation of the special funds. For that matter, a common stance was agreed on by V4 leaders on June 11, a week ahead of the June 19 summit. Yet, besides the question of a fair distribution of funds, the Czech Republic and Hungary remained much more critical of the European Commission’s current proposal than Poland and Slovakia.

It should also be recalled that the Recovery Fund and its proposed sources of financing are supposed to be a one-off solution to today’s specific situation, so that its adoption in the form proposed by the European Commission does not have to imply that borrowing by the European Commission and EU taxes would become permanent sources of autonomous revenue for the EU. On the other hand, in the absence of an agreement on an ambitious recovery plan in the near future, some countries which have been particularly hard hit by the pandemic risk plunging into depression and financial crisis, with a domino effect on their trading partners. For example Italy, which would be the number one beneficiary of grants from the recovery fund, is the second largest export market for Austria, a leading member of the “Frugal Four”, so that a financial and economic meltdown in Italy would certainly have a negative impact on Austria itself. Moreover, this would have the potential to unleash a new euro crisis ten years after the Greek crisis. Such a crisis could have fatal consequences for the monetary union, as Italy’s GDP accounts for 15% of the eurozone’s total wealth, compared to only 2% in the case of Greece. Apart from the risk of Italy being thrown out of the eurozone or the monetary union crashing down altogether (with the additional threat of the Bundesbank having to pull out of the ECB’s bond purchase programmes), there is a serious risk that Italy might soon follow the UK on its way out of the European Union, as opinion polls show that resentment towards the EU, which had been running high since the migration crisis of 2015, is now on the rise again in Italy because of the perceived lack of solidarity of European partners when the Italian health system was overcome by COVID-19 patients in March and April. For the first time ever, opinion polls in April showed that about half of Italian voters would now be in favour of Italexit. The Visegrád Four should bear this in mind at a time when Italian Prime Minister Giuseppe Conte is desperately calling on his country’s right-wing opposition to join him in his efforts to convince Visegrád partners to support the European Commission’s current proposal for a recovery fund.

Notwithstanding all the threats and uncertainties affecting the future of the European Union, many of which have been made worse by the coronavirus pandemic and its economic consequences, there is a chance to be seized by Central European countries in the current crisis. This chance is linked to the goal declared by many European leaders of relocating some industries to the Old Continent, so that European countries do not find themselves in the same situation as with the coronavirus pandemic, having to import vital goods such as face masks and respirators, and in many cases being unable to step up their own production at a sufficient pace when foreign manufacturers are unable to respond to rising demand and have to give priority to their home markets. With lower wages and production costs, the countries of the former Eastern Bloc which now belong to the EU are in a good position to benefit from such relocations of Europe’s industry and see their economic weight grow in the future Union. And that in turn would give them more political clout in the future to defend their Schumanesque vision for a united Europe as a commonwealth of nations.


This article was originally published on, for the Felczak Institute.