European project and Ursula von der Leyen face an existential threat in Covid-19

Ursula von der Leyen delivered a stark message to the EU’s commissioners on Thursday evening at their first in-person meeting for many weeks. She told her socially distanced colleagues that they had an opportunity to forge a viable reconstruction plan for a European economy ravaged by the coronavirus crisis. But they had precious little time at their disposal and only one shot to get it right.

One important detail was tellingly absent from the commission president’s private presentation in a windowless room in Brussels’ Berlaymont building: the hugely divisive question of the size of the recovery fund which she will shortly propose.

Ms von der Leyen is planning an audacious bid for new powers as she seeks to put her institution at the centre of efforts to revive the European economy, asking member states for unprecedented latitude to raise funds in the markets. But the former German defence minister faces the central test of her short presidency as she seeks to bridge bitter splits within the EU over the plan.

Southern European governments are pushing for the EU to be handed new firepower of upwards of €1.5 trillion to deal with the crisis. But countries in the north are sceptical of such grand ambitions.

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After calls with more than 20 leaders over the weekend, Ms von der Leyen has identified a proposed “landing zone” for the size of the recovery fund - or “instrument” in EU parlance - a commission official familiar with the talks said.

While earlier leaks had suggested the commission would borrow about €320 billion to fund the recovery instrument, the official said the figure would be “considerably larger” than this, with the majority of the funding distributed in the form of grants rather than loans.

“This is a completely new construction that we are setting up - it is of enormous importance,” says Ms von der Leyen in an interview . “Before the last European Council meeting [in April,]when we were tasked with this, there was nothing out there that provided an answer, taking into account all the opposing views.”

Decade

Even after a decade in which the EU has bounced from one crisis to another, from the threat of Grexit to the reality of Brexit, the decisions to be taken over the coming weeks will be a defining moment for the European project.

The coronavirus crisis has magnified the economic and political divisions between north and south that have long threatened to tear apart the EU. In particular, the mood in Italy has shifted sharply over the past three months, with even some strongly pro-European voices questioning the country’s long-term future within the EU.

Under Ms von der Leyen’s plans to rebuild Europe from the coronavirus-induced slump, which will need to find backing among all 27 EU member states, the commission would be permitted to issue hundreds of billions of euros of debt to seed a recovery fund. The aim is to drive growth in countries whose public finances have been devastated by the crisis.

It is a daunting personal challenge for the commission president to construct a proposal that is not immediately rejected out of hand by large swaths of Europe – especially after an uncertain start, during which the EU was accused of failing to quickly grasp the enormity of the crisis.

Ms von der Leyen, who took office on December 1st, has struggled to quell divisions among her own commissioners, while some officials argue she and her small and close-knit circle of key advisers have found it difficult to get to grips with the complex bureaucratic machine she helms.

"The delivery of this recovery plan will be the moment of truth for this European Commission - the moment when it will determine its fate," says Pascal Lamy, a former head of the World Trade Organisation who was cabinet chief to Jacques Delors when he led the commission from 1985 to 1995.

“They are talking about exceptionally allowing the EU to borrow and run a deficit to finance the recovery. This really would be crossing the Rubicon for member states.”

Recriminations

Since the crisis erupted in March, the nature of Europe’s common economic response has been the topic of angry recriminations among member states. Southern states, including Italy, have accused Germany and its allies of failing to show sufficient solidarity. Meanwhile, frugal states in the north have chafed against calls for large-scale common debt issuance.

Sovereign bond yields have been kept under control by the European Central Bank, which is on track to purchase nearly €900 billion of extra bonds this year, and ministers have agreed on a €540 billion package of emergency relief measures including potential credit lines from the European Stability Mechanism.

But Christine Lagarde, the central bank's president, has insisted the answer to the crisis cannot rest with monetary policy alone. A highly contentious ruling on ECB policy by Germany's constitutional court has raised new questions about the outlook for monetary policy and intensified demands for a convincing fiscal response by member states.

Paolo Gentiloni, EU economics commissioner, said he fears the crisis could exacerbate economic divergence within the bloc, given the widely differing fiscal firepower available to different member states.

“This common crisis risks having more and more uneven consequences, and this presents risks for the level playing field of the member states, and for economic convergence, especially in the euro area,” says Mr Gentiloni.

“The commission is asked to make a proposal capable of bridging different positions and to reach a consensus – which is easy to say but is not very easy to achieve.”

At a summit in late April, European leaders agreed that instead of setting up a bespoke fund to fuel the recovery, they would put the commission centre stage by giving it new borrowing capacity and linking the spending into the EU’s 2021-2027 budget - known as the multiannual financial framework (MFF).

“We realised we need a uniting principle – and the only instrument that is out there that is trusted, established and proven is the MFF,” says Ms von der Leyen. “The recovery fund discussed at the time was contested – some wanted it and another part did not want it at all. And for me the main worry was we had no MFF yet.”

Guarantees

Under the commission’s ideas, member states would provide it with guarantees to borrow hundreds of billions of euros on the open market. It would deploy the money in the form of cheap loans, as well as grants and guarantees, to encourage investment in projects and companies.

This money would be injected into member states via a radically overhauled MFF, but linking the recovery fund into budget talks represents a gamble given these have been at a stalemate for over two years.

While southern nations want as much of the money in the recovery fund as possible to be delivered in non-repayable grants, northern states oppose vast amounts of borrowed money being handed out without an obligation to repay it. For their part, eastern countries that are reliant on EU regional development programmes fear spending will be diverted to Europe’s troubled south.

The commission official familiar with the weekend’s talks says that in the “landing zone” that will probably be proposed by the commission, the share of grants will be larger than that of loans, given the EU’s recently agreed €540bn package had been composed entirely of loans to member states.

Meanwhile, member states are preparing for a complex debate over how and when the debt will be paid back. The commission is planning to ask member states to grant it fresh revenue streams - so-called “own resources” - to help it service its borrowing, for example a tax on plastics, but this will be a tough sell to national treasuries.

Capitals will have to settle rules determining how the money is distributed between member states, as well as reform conditions attached to EU grants.

Ms von der Leyen also needs to get the European Parliament on board and has been holding intensive talks with political leaders in recent days. She suggested after the April summit that she wanted at least €1 trillionof firepower at her disposal, but last week the parliament warned her not to use “financial wizardry and dubious multipliers” to achieve an ostensibly impressive figure.

Debate

Ms von der Leyen has had little time in office to prepare for the politically charged task now under way. She was catapulted unexpectedly into the commission presidency last year after a fractious EU debate failed to build consensus behind figures such as European Parliament centre-right leader Manfred Weber, who had campaigned for the post.

Several officials and diplomats said she faced problems early in the crisis because she had little experience of EU structures and was immediately thrown into an emergency driven by areas controlled by member states, especially health and border security.

“At the beginning she was very wobbly, primarily because the crisis hit in the areas where the commission has no competence,” says one official.

Ms von der Leyen takes a hands-on-approach to the role, in contrast to previous commission president Jean-Claude Juncker, a self-proclaimed delegator. She chairs daily operational meetings on Brussels’ response, which involve not just the institution’s political chiefs but also civil servants working on priority projects who are called in to give updates on progress.

Yet this attention to detail has come alongside what some critics see as a lack of political co-ordination at the top of the commission and over-reliance on a small group of trusted advisers – some of whom came with her from Berlin – to lead a 32,000-strong bureaucracy.

“I think the biggest issue is that she surrounded herself with two to three people and is not listening to other people,” says one EU official.

National diplomats express frustration at their inability to access the latest documents setting out draft commission plans and long wait times following requests for information - although dialogue on the budget has stepped up markedly in recent weeks.

Recently, hackles have been raised by the commission’s decision to aggressively investigate leaks of internal documents, including draft ideas for the recovery plan. One EU diplomat says the clampdown broke Brussels’ normal working method, whereby leaks amount to informal “consultations” on proposals with national delegations. Another describes it as a “witch hunt”.

A commission spokesperson last week insisted there was “absolutely nothing exceptional” about the commission investigating a leak. But another diplomat argues that the inquiries point to frustration on Ms von der Leyen’s part at not being able to assert more top-down control of her institution.

Officials note that Ms von der Leyen has never been a prime minister, which puts her in a different position to Mr Juncker, who had sat round the EU’s summit table with other leaders since the 1990s as Luxembourg prime minister. She has struggled at times to assure a unified message from her team, which includes political heavy hitters including Mr Gentiloni, a former Italian prime minister, who with French commissioner Thierry Breton put forward distinct plans in April for a purpose-built European fund to issue debt.

Expectations

The upshot has been miscued expectations about what the EU will do and greater visibility of the political and geographical faultlines that run through the highest echelons of the commission.

Ms von der Leyen has emphasised the sheer volume of work the institution has done under her leadership – the commission has taken more than 260 measures in response to the crisis, including 140 approvals for national state aid, an authorisation scheme for medical exports, guidance on border closures and a relaxation of euro zone rules for national budgets.

One of her flagship programmes, a €100 billion EU scheme to support national short-time work, was signed off by governments on Friday, barely a month after it was proposed.

“Where we have the prerogative we were able to act faster than anybody else,” Ms von der Leyen says. Without early steps such as suspending the bloc’s budget rules and loosening state aid requirements, she adds, “none of the member states would be at the point they are today. They needed it desperately and we delivered this in record time.”

Her biggest challenge lies ahead, however. The president and budget commissioner Johannes Hahn are planning to sign off on the recovery plans on May 27, after which the focus will shift to European Council president Charles Michel and the member states, who must negotiate the budget and recovery package proposed by the commission.

Angela Merkel, the German chancellor, has sent signals that she is prepared to significantly step up Berlin's contributions to the EU's common response, which gives some observers hope that a breakthrough is possible. But if the commission misjudges its proposals and they land badly in national capitals, it would poison the ground.

A summit on the MFF in February showed just how multi-faceted the divisions between member states are, as budget talks broke up without progress following overnight talks. Red lines during those talks - such as northern states’ insistence on retaining budget rebates - have not been erased.

“I hope everyone understands there is no question of doing a kind of middle ground modest window-dressing proposal,” says one senior EU diplomat. “This is a question of survival for the internal market and the European project.” – Copyright The Financial Times Limited 2020