Question of the week: Will the EU’s recovery fund be delayed?
A: On the face of it, the EU’s joint fiscal stimulus efforts are on track. The ESM credit line has been operational since June, and the Commission will begin to issue debt for its €100B SURE unemployment insurance fund next week. The launch of next year’s €750B EU Recovery Fund, however, is now threatened. In a nutshell, the fund has been taken hostage in the long-standing feud between the EU and Poland and Hungary over the rule of law. Specifically, core Europe is worried about what they consider to be a slide towards semi-authoritarian rule in the two large Eastern European economies, and a majority want disbursements from the recovery fund to be linked to compliance with the "rule-of-law" and “democratic principles”. Needless to say, Warsaw and Budapest are not keen on this, setting up a confrontation which could, at worst, derail the Recovery Fund. As far as we understand, Poland and Hungary won’t be able to veto the conditions attached to the Recovery Fund itself. But they can veto the budget, in effect blocking the Commission’s plan to issue joint debt to supply the fund with the money it needs. The latest draft proposal submitted by Germany has been deemed too lenient by Northern Europe, and too tough from the point of view of Poland and Hungary, setting up an impasse that could drag on.
Based on the current timeline, the Recovery Fund will start releasing funds by the middle of next year, with governments set to submit their spending plans by the end of April, at the latest. In reality, however, the timing is more truncated than this, because the Commission will need to start raising the funds early next year, and it can’t do that without the budget being approved. We suspect a compromise will be reached, but the stakes are raised. If Poland and Hungary stand their ground, the EU faces a choice between watering down any requirements to the point of uselessness or taking the current Article 7 proceedings to their extreme, stripping the two large Eastern European countries of their voting rights. It seems to us that sentiment in the European parliament is edging towards the latter option, which would set up a spectacular political drama, even by European standards.
Senior Eurozone Economist