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EU Deal Not The Federalist Success It Appears – OpEd

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By Dr. John C. Hulsman*

About the only sure thing I have learned in professionally analyzing the EU over the past 20 years is that things are never as they seem. Such is surely the case for the just-concluded EU summit meeting, where the pivotal issue of the European recovery fund from the COVID-19 pandemic was on the table.

The first illusion is that the deal reached is a true compromise, wherein both the federalist centralizers and the confederalist nationalists split the difference. Once you get into the weeds of the agreement, a very different picture emerges. On its surface, the deal must be thought of as a significant federalist victory in general, and one for French President Emmanuel Macron in particular.

Back in May, Macron managed the considerable feat of convincing the ever-cautious German Chancellor Angela Merkel to radically shift course. Using the undoubted economic perils emanating from the coronavirus as a rationale, Macron swayed Merkel into agreeing that, unlike during the Greek debt crisis, common European bonds must be issued to bolster the collapsing continental economy and safeguard the European project itself. Macron’s quiet but pivotal diplomatic victory directly laid the foundations of this past week’s surface federalist triumph.

With Germany, France, Spain and Italy all arrayed on the federalist side (the last three have been hardest hit by COVID-19, accounting for fully 100,000 of the bloc’s 130,000 deaths due to the virus so far), they were always going to carry the day diplomatically.

Following the strong Franco-German lead, the European Commission (always reflexively for more centralized power) put forward its initial COVID-19 recovery plan on May 27. It proposed a stimulus of €750 billion ($866 billion), with €500 billion being in the form of non-repayable grants and €250 billion in low-interest loans.

Though trumpeted as a one-off, the COVID-19 recovery fund will set the historical precedent of issuing joint European debt, the “Eurobonds” dreamed of by federalists for decades. To finance the €750 billion in spending, the European Commission will use its AAA credit rating to borrow funds from international capital markets. It is beyond clear that the federalists, taking their lead from the plain-spoken Macron, are using the pandemic crisis as a centralizing opportunity.

However, the “frugal five” Northern European countries (Austria, Denmark, Sweden, the Netherlands, and new member Finland) were very nervous about handing hundreds of billions of euros over to profligate southerners, as well as the undoubted overall centralizing thrust of the program. Digging in, their opposition turned what was supposed to be a two-day event into a five-day diplomatic marathon.

The compromise proposal, put forward by European Council President Charles Michel, called for a slightly higher percentage of loans and a lower percentage of grants in the overall plan (now €390 billion in grants rather than €500 billion), even as the overall size of the fund remained the same.

Watering down the frugal five’s call for strict conditionality for the package (the primary recipients will be hardest-hit Italy, Spain and France, not countries with a reputation for fiscal discipline), the deal vaguely allows any member state to monitor the spending plans for the funds dispersed for projects in any other country. But, while they can bring the matter of profligacy up before the European Council, crucially there is no veto — there can only be a delay in the fund’s appropriation. This would seem to take fiscal accountability off the table. All in all, this would seem to amount to a decisive federalist victory.

However, this is the second illusion, as the actual reality is that the federalist project finds itself drinking in the last chance saloon. Three basic counterintuitive facts must guide our political risk way here. First, despite huge pressure, the frugal five held together as — now that the UK has exited the EU — the new anti-federal force. Indeed, throughout the process the frugal group has even added a new member. This newly cemented coalition has a very different view of the EU’s future from the starry-eyed centralists in Brussels and it is going nowhere.

Second, the seemingly symbolic point of member states being allowed to look at the books of other members’ national spending plans for common EU funds is going to drive the southerners crazy, as frugal northerners make sure the money they have handed over (a massive €209 billion in Italy’s case alone) is being spent wisely. Chronic north-south divisions, far from being lessened by the deal, have instead been greatly exacerbated.

Third, and finally, what if the needy three (Italy, Spain and France) spend the money unwisely? To put it mildly, it is entirely plausible, given the historical record, that such an outcome arises. If this comes to pass, pressured by their own populists, the frugal five will not be giving the southerners another nickel. And then the EU will be facing an existential crisis.

So, while the trumpets are sounding for Macron’s centralizing victory, it is best to keep in mind that — in the federalists’ immediate triumph — they may well have just sowed the seeds for the ultimate destruction of their dream.

  • Dr. John C. Hulsman is the president and managing partner of John C. Hulsman Enterprises, a prominent global political risk consulting firm. He is also senior columnist for City AM, the newspaper of the City of London. He can be contacted via www.chartwellspeakers.com.

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Arab News is Saudi Arabia's first English-language newspaper. It was founded in 1975 by Hisham and Mohammed Ali Hafiz. Today, it is one of 29 publications produced by Saudi Research & Publishing Company (SRPC), a subsidiary of Saudi Research & Marketing Group (SRMG).

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