international analysis and commentary

Next Generation EU, Merkel’s latest trick: good for Europe


Yes, she did it again. With the clock ticketing on the last days of her presidency of the Council of the European Union, Angela Merkel managed to pull the rabbit out of the hat as she struck a deal with Hungary and Poland on the €1.8 trillion budget and recovery fund that the 27 EU members had already agreed on in July. It would probably be too rhetorical to say she saved Europe, again. Most likely, she “Merkeln-ed”, as German teenagers’ often say – meaning wait and things will happen.

Angela Merkel with German teenagers in 2016


It’s not always an appreciative refrain but managing the patience to wait can be a virtue, and definitely a strategy. Europe appears to be using this strategy against its own fragilities, hoping that, in the end, it will all work out. This implies avoiding the most divisive issues and finding non-linear solutions, slaloming through challenges. It is not bread for radical minds, but the way you look at the practice changes the nature of the results. As Jean Monnet, the first president of the European Coal and Steel Community, ancestor of the current EU, famously said, “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”

It is the case of the scheme Merkel negotiated with Hungary and Poland to overcome the rule-of-law fight over the Recovery and Resilience Facility, the centerpiece of the COVID-19 recovery package known as Next Generation EU. The two countries blocked the budget to protest the link of EU payments to the respect of rule of law. The veto was unreasonable and unacceptable, considering Europe’s ambition to be the model of liberal democracy, however it is also impossible to ignore Budapest and Warsaw’s violations (LGBT free-zones, media control and all but independent judiciary systems) which were well known and repeatedly pointed out by the Commission and its institutions.

The solution proposed by the German Chancellor is typically “Merkeln”: Hungary and Poland dropped the veto in exchange for the possibility of recurring to the Court of Justice of the EU to establish if the rule-of-law checks are correct. What this means is that for a number of months, possibly a year or more, while the Court is deciding (and it has a number of other issues to rule on, including some cases regarding Poland and Hungary themselves), the Next Generation EU funds will be distributed in spite of possible violations of rule of law.

Many observers have described the process, and the outcome, as a failure of Europe, the evidence of tensions at the very heart of the Union, which water it down to just a market and a bureaucratic institution rather than a free space of common values. Those are understandable critics, but quite unfair and short-sighted.

The Recovery and Resilience Facility itself is in fact the most tangible proof of how far Europe has gotten in the past decade. Less than ten years ago, financial institutions basically let Greece default over its public debt just to put in place a scheme of loans that would finally bring the country to its knees while paying interests to the lenders. While the crisis propagated, and deeply misjudged economic recipes were offered to suffering countries, voices started to rise in the Continent asking for a mechanism of sharing public debts in order to alleviate balance sheets and to level playing conditions: Germany and the so-called “frugal” allies kept brutally dismissing the idea. Eurobonds remained Europe’s biggest taboo just until the arrival of the coronavirus; even now, many prefer to pretend they never agreed to mutualize the (new) debt. But much of the €750 billion of the recovery fund come exactly from there: For the first time, the Commission is borrowing capital from financial markets that it will then provide as loans or grants to member states.

Merkeln after Merkeln, European bonds are a reality and are starting to work. The new European Stability Mechanism (ESM) will also soon be in place, equipped with a recently approved backstop procedure to raise the amount of funds available for European banks that could suffer capital crises because of massive amounts of non-performing loans (and it may be just a matter of time, after the effects of the COVID-19 crisis will have fully taken their toll on small and medium enterprises, before we realize how big the problem can get).

Yes, the ESM is still an intergovernmental organization not fully included in the Treaties – which means it is still a private institution, not responding completely to public interests – but its troubled reform opens up a new space for reflection: We are starting to act, albeit timidly, as a European banking union.

Despite all their imperfections, both the ESM and Next Generation EU are important seeds in the making of Europe as we dreamt of it. For all the suffering that COVID-19 has brought, it also made very clear that no country (and no person) can make it on its own, and that we are much more interdependent than what we liked to think. The unprecedented €750 billion recovery package, in fact, is not just financial aid to member states, rather it is an instrument to deliver fundamental changes in the Union, promoting a better Europe for, as the name suggests, next generations of citizens. Loans and grants to the 27 countries will have to address structural reforms agreed with the Commission and, even more important, must be spent for enacting the Green New Deal (at least 37% of the total amount) and the digital transition (20%).

Skeptics may point out that Green New Deal and digital transformation are little more than empty expressions, and they would not be totally wrong. The responsibility to fill them with real projects and changes lies on governments, and it will not be as easy as providing frameworks. Some governments may fail, some are already late in delivering the Commission their detailed plans, some lack the skills and the determination to manage the execution of the plan, others will use the money poorly or for different purposes, opening up never ending debates over the failure of the plan. We already know it. It is already accounted for and, most of all, it will not be a setback.

At least if we will manage to look at it with the right lenses: harsh with current mistakes, but enough far-sighted to know that they are part of a process – a process made of crises and their solutions, that time after time keep forging a stronger Europe.