EU Clears Key Hurdle for 1.8 Trillion-Euro Spending Package

(Bloomberg) -- European Union negotiators reached a preliminary deal with the bloc’s lawmakers on a mechanism linking recovery funds to the adherence to democratic standards, moving a step closer to a broader accord on the bloc’s 1.8 trillion-euro ($2 trillion) budget and stimulus package.

The EU is under pressure to finalize the emergency package so that it will be operational next year, as lockdowns across the continent paint a grim picture of Europe’s economic outlook and dims prospects for a quick rebound. The stimulus plan is expected to add 2% to the EU’s economic output over the following years, according to the European Commission.

While leaders agreed on the broad outlines of the unprecedented package in July, they left key details to be fleshed out later, including the contentious link between EU funds and rule of law.

“We have witnessed months and even years of rule-of-law talks dragging on without conclusion between EU member states,” said European lawmaker Petri Sarvamaa, who was negotiating on behalf of the Parliament. “This will not be the case anymore with the new budgetary clause.”

The new mechanism will apply when rule-of-law breaches affect -- or risk affecting -- the management of the EU budget. If the commission, the bloc’s executive arm, recommends freezing the distribution of funds, it would require a weighted majority of countries to approve the proposal.

Under the compromise proposal, EU governments would have one month to decide on approving a commission proposal, with the option to extend this period for two months in exceptional cases.

“Introducing this conditionality is a major step and a clear signal that the EU stands ready to protect its citizens’ interest,” EU Budget Commissioner Johannes Hahn said.

The deal on the rule-of-law mechanism clears the first of two key hurdles in getting an overall deal and allowing the EU’s 750 billion-euro recovery fund to be up and running in January as planned. Still, lawmakers and EU governments remain at odds over increases to the bloc’s budget, with the Parliament asking for a bigger overall package.

Potential Vetoes

Hungary and Poland, two countries under rule-of-law probes, oppose the EU’s plan to link funding to democratic standards. Hungarian Justice Minister Judit Varga said on Thursday that the move may jeopardize the bloc’s spending package.

“It’s time for the European Parliament to start being part of the solution and for it to stop threatening the approval of the bloc’s budget,” Varga said in a Facebook post. She called Thursday’s preliminary deal “irresponsible and mistaken” and said that EU institutions will have to bear a “historic responsibility” if they went ahead with it.

At stake is whether the EU can swiftly deliver hundreds of billions in much-needed funds to combat the steepest recession on record, while making sure the money isn’t misappropriated by countries where democratic checks and balances are weak.

The EU requires only a qualified majority of nations to impose the rule-of-law conditions on the funds, but the commission requires the unanimous approval of all member states (and a majority of EU lawmakers) to borrow from the markets. That means that in practice Hungary or Poland could veto the plan.

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