EU Plans to Skirt Veto on Virus Fund; Poland Sends Mixed Signals

European Union leaders are preparing to get around the threat posed by Poland and Hungary’s block of a multi-trillion dollar stimulus fund as Warsaw showed signs of cracking.

The two eastern European nations are opposed to the rule-of-law conditions attached to the aid package and continue to wield their veto, though Poland is getting nervous. The clock is ticking to the end of the year, when the lack of unanimity will trigger an emergency budget for the bloc.

That has concentrated minds on a workaround solution, with Germany’s Angela Merkel holding the EU presidency and running diplomacy during a critical time.

The plan would be to cut Hungary and Poland out of the 750 billion-euro ($908 billion) coronavirus-rescue fund, effectively stripping them of the power to stop the flow of much needed stimulus to the continent’s battered economies. It would also leave the bloc without a fully-functional regular budget.

“If they don’t respect the rules in our game on the European level then we do it without them,” Manfred Weber, the head of the European People’s Party caucus in the European Parliament, told Bloomberg TV Thursday. “So they must be aware that this can be a big problem for their own countries.”

He described this as a “fall-back” option if the holdouts don’t relent.

United Front

A lot is riding on whether Hungary and Poland keep holding the line, but back in Warsaw the ruling coalition appears divided. Deputy Prime Minister Jaroslaw Gowin suggested a compromise on Thursday that could include a declaration on how to interpret the contested rule-of-law mechanism.

But he represents a more conciliatory wing of Poland’s conservative government. Hardliners in the ruling Law & Justice party have the upper hand and show no indication that they would cave.

Indeed, his comments come hours after his boss -- Prime Minister Mateusz Morawiecki -- said there would be no capitulation. The question is whether Gowin could be testing the ground for a climbdown.

While receiving billions of euros in aid, Hungary and Poland have been in conflict with the EU for years, yet only now is it really coming to a head. Their nationalist leaderships have depicted Brussels as liberal western elites interfering in their politics, while at the same time the governing parties have taken control of the courts, public media and other democratic institutions.

Warsaw and Budapest insist they can do without the money and Hungary appears ready to allow EU nations to skirt the need for the approval of all 27 member states. Officials in the bloc are now more and more focused on what is being called the “Plan B.”

A Dec. 10 summit of EU leaders is now the likely venue where the standoff will be resolved, though the timing of it all can affect the next seven-year budget.

Poland and Hungary are accused of falling short of EU democratic standards and face a situation where they could lose a combined 180 billion euro ($218 billion) from the multi-year budget and the relief fund while still being subject to rule-of-law oversight. Still, they remained defiant.

Morawiecki said his country can raise debt on financial markets cheaply.

“The reconstruction fund is essentially constructed from credit,” Morawiecki said answering online questions late on Wednesday. “Yes, it’s a low-interest loan, but today we can also place a very low-interest loan on the market -- by issuing bonds.”

Poland’s borrowing costs have dropped after the country’s central bank slashed interest rates to nearly zero and launched a bond-buying program in the spring to help mitigate the impact of the pandemic lockdown.

The Cost

The yield on the benchmark 10-year zloty bond now stands at 1.27%. That compares with negative borrowing costs for loans that would be extended from the EU’s recovery fund based on current yield levels.

But if the EU shuts off the taps, it would require the government to borrow “tens of billions of euros” in the next six years, said Mateusz Milewski, a debt trader at MBank SA in Warsaw. And while neither Poland nor Hungary are in immediate financial danger, the lack of an EU backstop could hit the zloty and forint and drive borrowing costs higher.

“If Poland were to cover the lack of EU funds with its own issuance, we would have to deal with considerable leap in yields,” Milewski said.

Hungary has also financially positioned itself for the standoff. The government sold 2.5 billion euros worth of Eurobonds last month, taking its annual foreign currency issuance to 6.5 billion euros, the highest since at least 1999.

Prime Minister Viktor Orban’s government is ready for further talks, while reserving its right to veto, Cabinet Minister Gergely Gulyas said. Meanwhile, the EU’s climate goal opens another battle front with coal-dependent Poland and Hungary ahead of the summit.

If there is a deal to be made, one can expect all those hot-button issues to get tackled at once and for a fudge to be found that will somehow square the circle between financial aid, environmental responsibility and the EU’s rule-of-law toolbox.

©2020 Bloomberg L.P.

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