Poland, Hungary Risk $220 Billion by Digging In on Stimulus

The rift between the European Union and its two budget holdouts is getting wider, with Poland and Hungary rejecting appeals to lift their veto and the rest of the bloc plotting to carve out a stimulus plan that excludes them.

Budapest and Warsaw are growing more entrenched in their positions while the vast majority of other member states are determined not to give in to demands to revise a 1.8 trillion-euro ($2.2 trillion) spending package, two diplomats familiar with the ongoing discussions said. The bloc’s leaders will now most likely have to tackle the matter when they meet on Dec. 10.

A senior European Commission official said one option to bypass the veto is to create a bridge fund, which would allow the EU’s executive arm to raise jointly backed debt and channel the stimulus funds to the other 25 countries. If the EU goes down that route, Poland and Hungary stand to miss out on at least 180 billion euros in aid payments from the stimulus plan, according to Bloomberg calculations, and the drumbeat of questions about their membership of the EU will start to grow.

The dispute hinges on the refusal of the two eastern nations to countenance a link between disbursements from the bloc’s budget and virus-recovery fund and adherence to democratic standards. The countries are already under formal EU probes over the erosion of rule of law, making them prime candidates for funding cuts if the strings attached to the aid are formally adopted.

At a meeting of EU government envoys in Brussels on Wednesday, Germany, which holds the rotating presidency of the bloc, informed member states that there are no signs of a possible compromise, according to a diplomat familiar with the private meeting.

Veto threat notwithstanding, Germany said it will continue negotiations with EU lawmakers, aimed at striking an agreement in principle this week on the mechanics and operational details of next year’s budget. While no breakthrough is expected, the objective is to have the structure in place, so that if the veto is lifted, the new budget can be quickly deployed. In practice, diplomats have all but resigned themselves to the prospect that the EU will have to operate under emergency monthly budgets as of January.

In the meantime, contingency plans are under way.

Completing the technical preparations for the budget and stimulus plan will mean that if and when consensus is reached, the package is ready to be deployed. Until then, the EU would be operating under emergency monthly budgets, meaning a partial shutdown and the progressive suspension of all but essential payments. With cash in short supply, Poland and Hungary will be toward the back of the queue for emergency funds, one diplomat briefed on the matter said.

Separately, the EU is preparing a plan to launch its celebrated recovery fund without Polish and Hungarian participation.

Bridge Solution

That solution could still replicate the recovery fund’s system of national guarantees to allow the commission to borrow jointly on behalf of its members. So the EU could still raise 750 billion euros in stimulus, though officials would have to decide whether to decrease the total to account for funds that would have gone to Hungary and Poland, or whether the remaining nations should get extra money.

If such a proposal is made in January and endorsed quickly by the participating nations, then the timing of the first disbursements of the recovery fund -- currently foreseen in early summer 2021 -- could still be feasible, the commission official said, while cautioning that it is difficult to speculate how long such a process would take.

On a call earlier this week with a group of EU leaders and European Council President Charles Michel, Polish Prime Minister Mateusz Morawiecki was resolute in his opposition to the proposal, three diplomats said. The quarrel risks raising fundamental questions about the future of the EU, envoys from France and Spain envoys warned at a private meeting in Brussels on Friday.

Poland and Hungary can’t count on much support even among their neighbors, with eastern Europe severely hit by the second wave of the coronavirus pandemic. Even the small Balkan nation of Slovenia, whose Premier Janez Jansa has been an outspoken supporter, has toned down its rhetoric, and seems happy with the money allocated in the spending plan, one of the diplomats said.

©2020 Bloomberg L.P.

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