German Chancellor Angela Merkel. Picture: CHRISTIAN MARQUARDT/GETTY IMAGES
German Chancellor Angela Merkel. Picture: CHRISTIAN MARQUARDT/GETTY IMAGES

Brussels — EU leaders are preparing to get about the threat posed by Poland and Hungary’s block of a multibillion-dollar stimulus fund.

The eastern European nations are virulently opposed to the rule-of-law conditions attached to the aid package and continue to wield their veto. 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 forced the rest to think of a workaround solution, with Germany’s Angela Merkel holding the EU presidency and running the diplomacy during this critical time.

It would be to cut Hungary and Poland out of the €750bn  coronavirus-rescue fund, effectively stripping them of the power to stop the deal. Passing the EU’s $2.2-trillion spending plan that way, including the 2021-2027 budget, would offer a way to channel funds to hard-hit regions without delay.

“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 on Thursday. “So they must be aware that this can be a big problem for their own countries.”

He described this as a “fallback” option if the holdouts don’t relent. Spanish foreign affairs minister Arancha Gonzalez Laya warned in an interview with Bloomberg TV that Hungary and Poland were “walking on a very tight rope”.

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 focused on what is being called the “plan B”.

A December 10 summit of EU leaders is now 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 €180bn from the multiyear budget and the relief fund while still being subject to rule-of-law oversight.

Still, they remained defiant. Polish Prime Minister Mateusz 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.”

Compromise maybe?

Jaroslaw Gowin, the deputy prime minister, suggested on Thursday a compromise that could include a declaration on how to interpret the contested rule-of-law mechanism. He represents a more moderate, conciliatory wing of Poland’s conservative government.

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

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.

Still, 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.

Veto rights

Hungary has also financially positioned itself for the standoff. The government sold €2.5bn worth of Eurobonds in November, taking its annual foreign currency issuance to €6.5bn, 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.

Bloomberg

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