EU: A Potential Budget Breakthrough

Published on December 3, 2020
SGH Insight
Senior officials from Poland have indicated to European Union officials that they might be ready to withdraw Warsaw’s veto of the 1.1 trillion euro budget and 750 billion NGEU fiscal package if EU leaders provide a declaration at their summit on December 10 that the disputed “rule of law” conditionality would only be used to safeguard the application of EU funds, and not to prosecute governments for breaches of democratic principles.

To be more precise, the “interpretive declaration” would be a clear statement from the European Council that the conditionality rule would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds.

Market Validation
(Bloomberg 12/9/20)

Poland, Hungary Say Deal Reached on $2.2 Trillion EU Stimulus

Poland and Hungary have agreed on a compromise with Germany to unblock the European Union’s $2.2 trillion budget and pandemic stimulus plan, a senior government official in Warsaw said. The compromise would end a standoff that saw Budapest and Warsaw threaten to torpedo the EU’s 750 billion-euro ($909
billion) pandemic aid fund and the 2021-2027 budget over objections to attaching rule-of-law conditions to cash. Polish Deputy Prime Minister Jaroslaw Gowin said an agreement had been clinched with Germany, which holds the EU’s
rotating presidency, that would now be presented to the rest of the bloc. A deal could be finalized by Friday by the end of a two-day summit of European leaders in Brussels, he said. The zloty jumped to the highest level against the euro
since September on news of the EU deal. The forint also gained.

Senior officials from Poland have indicated to European Union officials that they might be ready to withdraw Warsaw’s veto of the 1.1 trillion euro budget and 750 billion NGEU fiscal package if EU leaders provide a declaration at their summit on December 10 that the disputed “rule of law” conditionality would only be used to safeguard the application of EU funds, and not to prosecute governments for breaches of democratic principles.

To be more precise, the “interpretive declaration” would be a clear statement from the European Council that the conditionality rule would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds.

On the face of it, such a side letter should not pose a major problem for the EU (see SGH 1/30/20, “EU: Bracing for Loses, and Backstop Options”), and sources in Brussels suspect that Hungary may be on board with this compromise as suggested by Polish officials. Indeed, Hungary’s Prime Minister Viktor Orban was in Warsaw for consultations on Monday night, and Warsaw and Budapest have agreed before the talks with the EU not to accept any deal that would be unacceptable to the other.

While there are no guarantees, it appears the bitter dispute between the EU on one side and Hungary and Poland on the other could be reached on Monday, which is the last date by which EU institutions can reach an agreement on the 2021 annual budget, drawing on the 2021-27 long-term framework.

If there is no deal by Monday, that means Poland and Hungary will most likely have held out for a formal “leader’s declaration” at the December 10 summit.  That delay, however, should not pose a major problem if the political impasse has been addressed, entailing perhaps one to two months of the EU operating under a provisional budget over January and February of 2021.

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