The EU's historic coronavirus stimulus is now at risk: Here’s what you need to know

  • Hungary and Poland have been under investigation for potentially disrespecting European values, including by influencing the judiciary and undermining press freedom.
  • They have not vetoed a deal that would link the disbursement of EU funds to the respect of European core values.

LONDON —The EU's historic plan to prop up its economy has suffered a "big setback" after Hungary and Poland vetoed the deal. 

This is threatening to derail the distribution of much-needed funds at a time when the region is battling one of the deepest crises in modern history.

The 27 EU leaders agreed in July to borrow funds jointly, via the European Commission. It was an unprecedented move and ended long-standing opposition from more fiscally-conservative nations, such as Germany and the Netherlands, to commit to joint borrowing.

In negotiations with the European Parliament earlier this month, the deal was tweaked so that the disbursement of funds would be tied to commitments on the EU's core values — known as the rule of law.

However, Hungary and Poland — which have been under investigation for potentially disrespecting these European values, including by influencing the judiciary and undermining press freedom — oppose this new link and decided to veto the agreement at a meeting on Monday.

Analysts at consultancy firm Eurasia Group said this was a "big setback" to the overall plan.

"Even in the event of a December deal, there will be a significant delay in when funding reaches vulnerable member states, probably the third quarter of 2021 at the earliest," they said in a note on Monday.

The funds were expected to be made available from January onward.

Highly-indebted nations such as Italy and Spain, which have also sharply hit by the public health emergency, are struggling to provide financial support to their populations. Their weaker financial positions led them to ask for a European-wide support package in the immediate aftermath of the pandemic.

The stimulus plan is a combination of a seven-year budget made of 1.074 trillion euros ($1.28 trillion) and an additional buffer of 750 billion euros (to be raised from public markets). The latter will be divided into 390 billion euros to be handed out in the form of grants, and 360 billion euros in loans.

Hungary and Poland are expected to be among the financial beneficiaries from the plan.

"I ask everyone in the EU to live up to their responsibility. It is not the time for vetoes but for acting swiftly and in the spirit if solidarity," Germany's Europe minister Michael Roth said on Tuesday at a press conference.

"Our people would pay a very high price for a blockade," he added.

'Serious but not hopeless'

But analysts are still expecting the impasse to be overcome at some point.

"This is a game of chicken, which falls into the category serious but not hopeless," Daniel Gros, a German economist, told CNBC Tuesday.

He noted that in contrast to the start of the crisis, countries such as Italy and Spain now face "very favorable market access conditions," meaning these countries "can afford to wait" for the European funds.

"Poland and Hungary would lose more than Italy and Spain from the delay," he added.

The two countries experienced fewer coronavirus' cases than their southern neighbors in the spring, but are also facing a sharp uptick in infections during the second wave. 

"The only way forward might be an even greater focus on preventing corruption and related problems while highlighting the centrality of Article 7 (used to remove voting powers to members states that breach the EU's values) for dealing with actual rule-of-law issues such as judicial independence," analysts at Teneo, a consultancy firm, said in a note on Tuesday.

Their comment suggests the mechanism of linking disbursements to the rule of law might be watered down to bring Poland and Hungary on board.

An EU official, who didn't want to be named due to the sensitivity of the negotiations, told CNBC on Tuesday that "it is not the end of the story."

The same official added that the process is entering a "political phase now." This indicates that German Chancellor Angela Merkel and French President Emmanuel Macron could lead negotiations with the Hungarian and Polish leaders.

 

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