The EC has a busy week ahead, trying to shore up the level playing field (Brexit discussions, EC budget & Covid-19 recovery fund)

Every seven years, the EU sets a jointly financed long term budget into which all nations contribute and draw from. The EU is currently finalising this for the period 2021-2027 - it has been set at €1.07 trillion euros in constant prices (around 1.2 trillion euros at current prices). In addition, the EC has set up a Covid-19 recovery fund with a value of €750 billion- jointly backed debt from capital markets.

The budget funding is for commonly agreed policies and is a direct fiscal transfer from the richer countries to poorer countries. Poland and Hungary are among the largest net beneficiaries of this budget.

The Covid-19 fund is to finance the recovery from the virus-induced recession. There were concerns, for example, that richer countries were in a better position to take advantage of the EC temporary state aid framework than poorer countries. There is a divide opening up between the northern member states and the southern member states in particular. Countries with the highest spending powers have generally implemented more schemes under the EC temporary framework with Italy, Denmark, France, Netherlands and Germany having implemented the most. Most of this debt will be paid back by future EU budgets, where, again, richer countries contribute the most.

The financially conservative richer states, including France, Germany and the Netherlands, agreed to borrowing and spending measures that they had previously opposed before Covid-19, in part to ensure that Covid-19 did not undermine the Union.

To prop up the level playing field, these richer states are effectively lending their superior credit rating to the EU so that it can raise funds for the Covid-19 recovery pot which can be spent in the poorer countries to level the playing field. However, in return, these countries want all member states to commit to “rule-of-law conditions” – in order to reduce the potential misuse of funds by governments.

These rule of law conditions cover matters of independence of judiciary and non discrimination of sexual orientation. Poland and Hungary have stated that they are unable to sign up to these conditions as it would cause political tensions at home. The two countries, which are the only ones in the EU formally being investigated for potential rule-of-law violations, are jointly due to receive at least €180bn over seven years from the entire package.

The EU is exploring ways to set up the Covid-19 fund outside its usual structure to bypass the Polish and Hungarian veto. However, even if the EU succeeds, these countries would potentially lose out on access to the Covid-19 funding pot. The regular EU budget would still need the countries’ approval.

Whilst these discussions and workaround continue, there will be a delay to all countries accessing the Covid-19 recovery fund and the EU could be forced to operate on emergency monthly budgets as of January. Thus, richer states will continue to have more opportunity to take advantage of relaxed temporary framework rules and the gap between rich and poor broadens.

Furthermore, Poland and Hungary could be permanently excluded from accessing the Covid-19 funding. Whilst the Polish and Hungarian governments have been selling Eurobonds and have stated that they can borrow more on financial markets,, a big drop in EU funding may hinder the ability of both countries to rebound from the coronavirus pandemic and may further hit their currencies and drive up borrowing costs. This will further weaken the level playing field and give a boost to those that are arguing for a two speed Europe.

Thus, this is an issue that the EC needs to solve quickly as it has the potential to fundamentally undermine Europe’s economic union.