In the end, it all depends on Merkel

Austria, the Netherlands, Denmark and Sweden on the one hand, Germany and France on the other: What is the next step with the reconstruction plan? Only one thing is clear: the EU’s ban on debt cannot be adhered to.

Difficult negotiations: Angela Merkel in conversation with Dutch Prime Minister Mark Rutte and Austria's Chancellor Sebastian Kurz in Brussels in February.

Ka word first from Ursula von der Leyen this time. On Monday she had tweeted within minutes of the advance of Chancellor Angela Merkel (CDU) and French President Emmanuel Macron for a 500 billion euro reconstruction fund and spoke of a “step in the right direction”. When the “thrifty four” – Austria, the Netherlands, Sweden and Denmark – presented their announced counter-draft this morning, von der Leyen was silent. But as the saying goes: Silence can also be very loud.

In any case, next Wednesday the EU Commission President wants to present her plan for reconstruction after the Corona crisis. Even if the exact sums are still open and will probably only be determined at the last minute, the main features of their initiative are already clear. The focus will be on a fund that will be financed through bonds that the European Commission will issue. And this fund should tie in with the multiannual EU budget for the years 2021 to 2027.

A large part of the funds is to flow as a grant to regions and sectors that have been badly affected by the (economic) crisis. These are not loans that need to be repaid. Von der Leyen plans to repay the debt made to finance the fund over a long period of time after 2027.

All of this largely corresponds to the initiative of Merkel and Macron, which von der Leyen brought into office last year. Merkel and Macron go a little further than von der Leyen when they want not just the majority but all of the funds in the fund as a grant. However, this can safely be understood as a maximum requirement in order to be able to achieve as much as possible in the upcoming negotiations. Von der Leyen also wants to add other elements to the fund – including a new program to support companies suffering from the crisis.

What matters is what they don’t say

The key questions in the discussion, however, are and will remain the financing of the fund and the terms on which the money is distributed. And this is where the alternative proposal now presented comes into play. First of all, there are two interesting things that the four countries, which until recently believed Germany to be at their side as allies, do not do: They no longer question the fact that the reconstruction fund is financed by bonds issued by the EU. That was by no means taken for granted lately. And they do not name a sum for the amount of the fund, so they do not necessarily ask for less than 500 billion euros.

What they are asking is a two-year expiration date of sorts for the fund. This is shorter than that envisaged by Merkel, Macron and von der Leyen, but above all more concrete. In particular, however, they demand that the loans taken out by the Commission are also passed on as loans, so that the recipients must repay them.

On the one hand, this is not surprising because it corresponds to the previous line of the four EU states. However, it is not trivial: After all, it takes some creativity – to put it mildly – to argue like Merkel, Macron and von der Leyen that grants financed with long-term loans are compatible with the EU’s ban on borrowing. On the other hand, of course, the Austrians and Dutch also know that Italy and Spain will hardly ever be able to service the loans from the fund in full. So if you want to help them, you can hardly avoid subsidies to a certain extent.

This is exactly what the debate should turn to after the Commission’s proposal was presented on Wednesday. Ultimately, from now on it is only a question of how high the proportion of loans and grants is. Despite all their confessions, they themselves no longer believe that the “four thrifty” can uphold the ban on debt.

It is all the more important for those who do not want to break lightly with such principles that they at least enforce clear conditions for the allocation of funds in return. There are approaches to this in the Merkel and Macron paper. Von der Leyen, in turn, wants to use the so-called European semester to set reform guidelines.

So far, however, the countries have always confidently ignored the recommendations of the EU Commission in this context. Austria, the Netherlands, Sweden and Denmark are calling for strong and binding reform commitments – and solid public finances. In the end, they shouldn’t be satisfied with less. The Italian idea that the EU will now turn on the money tap without any conditions must not prevail.

Interests of the Eastern Europeans

It is not a daring prognosis that the discussion about this will be difficult, especially since the EU heads of state and government and the European Parliament also have to tighten the budget for the years 2021 to 2027 themselves (including the controversial discounts for the large net payers such as the “thrifty four”, but also for Germany), and the rest of the structure of the reconstruction plan.

Then the concerns of Eastern Europeans also come into play. They have not presented their own papers, but of course they have their own interests – not least, they want to overturn the link between the allocation of funds and constitutional principles unanimously called for by Merkel, Macron, von der Leyen and the “thrifty four”.

In the next four or five weeks, none of this can be achieved. After all, the agreement must not only come unanimously, the reconstruction fund must also be approved by all national parliaments. It is likely that Germany, which will take over the EU Council Presidency in July, will have to forge a compromise. After all: seldom has it been so clear beforehand how one will determine the success or failure of a presidency in history.