Hungarian Prime Minister Viktor Orban leaves the end of the two-day European Union summit at the European Council building in Brussels.
Johanna Girone | Agence France-Presse | Getty Images
London – The European Union’s historic plan to support its economy suffered a “major setback” after Hungary and Poland vetoed the agreement.
This threatens to derail the distribution of much-needed funds at a time when the region is grappling with one of the deepest crises in recent history.
The 27 European Union leaders agreed in July to jointly borrow money, Via the European Commission. It was an unprecedented move and ended a longstanding opposition from more financially conservative countries, such as Germany and the Netherlands, to committing to joint borrowing.
In negotiations with the European Parliament earlier this month, the deal was amended so that the disbursement of funds tied to commitments on the core values of the European Union – known as the rule of law.
However, Hungary and Poland – which are under investigation for possible disrespect for these European values, including influencing the judiciary and undermining press freedom – opposed this new connection and decided to veto the agreement at Monday’s meeting.
Analysts at consultancy Eurasia Group said this was a “major setback” to the overall plan.
“Even if an agreement is reached in December, there will be a significant delay when financing reaches vulnerable member states, perhaps the third quarter of 2021 at the earliest,” they said in a note on Monday.
Funds were expected to be saved from January onwards.
Indebted countries like Italy and Spain, which have been hit hard by the public health emergency, are struggling to provide financial support to their people. Their weak financial situation led them to request a European support package in the immediate aftermath of the pandemic.
The stimulus plan is a combination of a seven-year budget of 1.074 trillion euros (1.28 trillion dollars) and additional reserves of 750 billion euros (collected from the public markets). The latter will be divided into 390 billion euros in grants and 360 billion euros in loans.
Hungary and Poland are expected to be among the financial beneficiaries of the scheme.
“I ask everyone in the European Union to shoulder their responsibility. This is not the time to veto, but to act quickly and in a spirit of solidarity,” German European Minister Michael Roth said on Tuesday at a news conference.
“Our people will pay a very high price for the blockade,” he added.
But analysts still expected the impasse to be overcome at some point.
“This is a game of chicken, which falls into a dangerous category, but it is not hopeless,” German economist Daniel Gross told CNBC on Tuesday.
He noted that, unlike the onset of the crisis, countries such as Italy and Spain are now facing “very favorable market access conditions,” which means that these countries “can wait” for European funds.
“Poland and Hungary will lose more than Italy and Spain because of the delay,” he added.
The two countries saw fewer coronavirus cases than their southern neighbors in the spring, but they also face a sharp increase in infections during the second wave.
“The only way forward may be to focus more on preventing corruption and related problems while highlighting the centrality of Article 7 (used to remove voting powers for member states that violate EU values) to deal with actual rule of law issues such as, analysts at the consultancy Teneo said In Tuesday’s note, “It’s judicial independence.”
Their comment suggests that the mechanism for linking payments to the rule of law may be relaxed to include Poland and Hungary.
“This is not the end of the story,” an EU official, who asked not to be named due to the sensitivity of the negotiations, told CNBC on Tuesday.
The same official added that the process is entering a “political stage now.” This indicates that the German chancellor Angela Merkel And the French president Emmanuel Macron Can lead negotiations with Hungarian and Polish leaders.