The European Council as a crisis manager and fusion driver: assessing the EU’s fiscal response to the COVID-19 pandemic

ABSTRACT

As with previous crises, the European Union’s (EU) reaction to the COVID-19 pandemic has again highlighted the European Council’s pivotal role in the EU’s institutional architecture and development. In creating the ‘Next Generation EU’ recovery package in July 2020, it provided the Union’s main instrument for coping with economic damage resulting from the pandemic. In both the run-up to and aftermath of this history-making decision, the European Council acted as the driver of a horizontal and vertical fusion of responsibilities: horizontally, it instructed and partly relied on other EU institutions; vertically, it satisfied and further developed close links between the EU and national levels of government. Scrutinising the different phases of a policymaking cycle (preparation, decision, implementation, control), this article highlights and puts into perspective the European Council’s key activities at each stage.

KEYWORDS:

• Covid-19
• crisis
• European Council
• fusion model
• NGEU

Introduction

The European Council summit from 17 to 21 July 2020 marked the second-longest in the history of the European Union (EU). In complex and at times heated negotiations, the 27 heads of State or Government agreed on what would become the Union’s most important fiscal response to the economic and political challenges posed by the COVID-19 pandemic. In addition to a new Multiannual Financial Framework (MFF) for the next seven years, leaders agreed on a debt-financed and grants-based pandemic recovery plan labelled ‘Next Generation EU’ (NGEU). In total, the European Council’s July package amounts to EUR 1.8 trillion.

NGEU is historic in several respects: With a volume of EUR 750 billion for the next five years, it implies a quasi-doubling of the EU’s fiscal resources. For the first time, it allows the European Commission to raise money on a large scale, while further suggesting the introduction of new EU ‘own resources’. Finally, NGEU directs the largest sums to member states hardest hit by the pandemic. The European Council’s agreement has thus effectively crossed a number of former ‘red lines’ regarding both the income and expenditure sides of the EU budget. National leaders such as the Dutch Prime Minister Mark Rutte argued that with this recovery plan the EU was ‘crossing the Rubicon’, potentially paving the way for a future European fiscal union (Smith-Meyer 2020).

In view of member states’ traditional resistance to common debt, why were they able to agree this time? Furthermore, considering national leaders’ concerns about the Commission gaining too much power, how did the European Council ensure its remaining in charge of EU fiscal politics? Answering these questions, this article argues, requires recognising the incentives, constraints and working patterns facing the European Council as the key actor in the EU’s institutional architecture. We argue that in order to cope with the massive economic and political challenges posed by the COVID-19 pandemic, the European Council promoted the horizontal and vertical fusion of tasks and responsibilities.

This fusion perspective helps explaining why national leaders agreed on a recovery fund in the first place and how they sought its realisation. Horizontally, the European Council instructed and partly relied on other EU institutions because of their policy expertise and legal competences. Vertically, national leaders satisfied domestic audiences, while at the same time seeking to expand their influence at EU level. As the only institution where the necessary fiscal resources, highest political authority and a need for unanimous decisions come together, the European Council has been the focal point of EU crisis management. Together, leaders’ balancing act between their ‘problem-solving instinct’ to tackle challenges together and their ‘sovereignty reflex’ to act as the guardian of national sovereignty have led to demanding and at times ambiguous EU governance structures (Wessels 2016, 18–20).

On numerous occasions the European Council went beyond its treaty-based role. By interfering in the legislative process for implementing NGEU, national leaders entered spheres usually reserved for other EU institutions. Moreover, the COVID-19 fiscal package was not finally endorsed until December 2020 when, due to a veto threat by Hungary and Poland, leaders revisited an already agreed conditionality clause to reach consensus. The European Council thus made a decisive contribution beyond the seminal July summit as leaders’ activities repeatedly enabled important compromises and helped to overcome political deadlock. At the same time, these agreements often came at the cost of legal complexity and political delay.

This article traces and explains the European Council’s role in the EU’s fiscal response to the COVID-19 crisis over the entire period from early 2020, when the virus started spreading rapidly across Europe, until early 2021, when member states applied for the first NGEU payments. By doing so, this contribution not only complements, but also goes beyond existing research which has mostly concentrated on the pandemic’s early phase up to the July 2020 summit (Smeets and Beach 2022) or on that summit itself (Wolff and Ladi 2020). Furthermore, we highlight the European Council’s key role as a crisis manager and ultimate decision-maker. In a longer-term fusion perspective, though, we show how the European Council’s limited but consequential steps add up to a transformation of the EU. Following this line of argumentation, national leaders act as a hidden constitutional architect for ‘more’ Europe (cf. Werts 2021, 1).

The European Council in the EU’s institutional architecture and political development

New intergovernmentalism and new institutional leadership

European integration scholarship often draws on (classical) intergovernmentalism or supranationalism to explain major EU reforms. More recently, scholars have suggested moving beyond these traditional theoretical approaches. One prominent account is the ‘new intergovernmentalism’ (Bickerton, Hodson, and Puetter 2015), which stresses the importance of deliberation and consensus in intergovernmental settings such as the European Council. While common challenges and (growing) interdependencies still lead member states to cooperate, they refrain from delegating new resources and competences to the EU level due to mistrust and problems of domestic justification. If delegation does occur, it involves ‘de novo bodies’ – newly created institutions ensuring member states’ broad representation – rather than supranational actors such as the Court of Justice of the EU, the European Parliament (EP) and the Commission (Bickerton, Hodson, and Puetter 2015, 705).

Moreover, in a remarkable departure from the past, supranational actors are said not just to accept, but even further encourage such intergovernmental tendencies: ‘A key feature of the new intergovernmentalism is that supranational institutions, far from resisting this turn towards decentralized modes of decision and policy-making, have often been complicit of it.’ (Bickerton, Hodson, and Puetter 2015, 712) Whilst they are anxious to preserve some measure of influence on EU policymaking at all, supranational actors are satisfied with following member states’ instructions. The consequence is ‘further integration without supranationalisation’ (Fabbrini and Puetter 2016).

In another attempt to capture the EU’s recent political and institutional developments, Beach and Smeets (2020) suggest the metaphors of ‘machine room’ and ‘control room’: While national leaders in the European Council – the control room – remain in charge of the important decisions, they increasingly depend on the preparatory and executory work of supranational institutions in the machine room. Concurring with this assessment that EU policymaking has largely become more intergovernmental, the institutional leadership approach calls for scrutiny of a decision-making process in its entirety. This includes the translation of broad political priorities into legally binding acts at the ‘micro’ level, which involves a multitude of different EU actors (see also Smeets and Beach 2020; Smeets and Zaun 2021).

Following this suggestion, a thorough analysis of the preparation and implementation of major EU reforms in recent years demonstrates the limits of an exclusively intergovernmental perspective. So long as their intervention comes at the right time and they provide the policy expertise needed, supranational actors play an important part in EU policymaking. For instance, the Commission’s involvement was crucial in resolving the Eurozone crisis thanks to its expertise in macro-economic governance and banking regulation. Conversely, it hardly made any effective contribution to managing the migration crisis due to its lack of similar information advantages (Smeets and Zaun 2021). Yet, while recognising the complexity of realising major EU reforms, the notion of ‘machine’ and ‘control’ rooms still suggests strictly sequential processes resulting in concrete outcomes with separate, ‘detached’ and at times competing actors and institutional worlds manifesting at different stages of the policymaking process (Smeets and Beach 2020, 1139).

By contrast, for the remainder of this article we argue and show how the European Council has been present at all stages in the EU’s fiscal response to the COVID-19 crisis, albeit to varying degrees and in different ways. Moreover, our fusion perspective makes it possible to assess the forms of EU crisis management and reform as well as their implications. Hence, we make both a theoretical and an empirical contribution to the European Council’s role in the EU’s institutional and political architecture. A number of recent publications reflect growing academic interest in the European Council (e.g. Van Middelaar and Puetter 2021; Werts 2021). Compared to these publications, though, the fusion perspective goes beyond overviews of the European Council’s internal functioning and treaty-based competences, by instead analysing political leaders’ motivations to use this key institution and the impact of European Council agreements on the EU’s governance system. Methodologically, negotiating and realising the NGEU recovery package serve as a ‘typical’ or ‘pathway’ case (Gerring 2017, 56–58, 105–114) for the theorised role of the European Council as a fusion driver.

The European Council as driver of horizontal and vertical fusion

There can be no doubt that the European Council plays a prominent and often decisive role in EU policymaking. However, it is important to distinguish between its legal, that is formal and treaty-based competences, and its political, ‘real-world’ activities. The Treaty on European Union (TEU) assigns it the function of agenda setter, stipulating that ‘[t]he European Council shall provide the Union with the necessary impetus for its development and shall define the general political directions and priorities thereof’ (Art. 15 (1) TEU). The European Council also acts as the Union’s ‘constitutional architect’ because the heads of State or Government determine EU treaty revisions (cf. Art. 48 TEU). Moreover, ever since its creation in 1974 the European Council has acted as a ‘crisis manager’ by providing necessary resources and sounding out political compromises (Wessels 2016, 43–58).

With the Lisbon Treaty’s entry into force in 2009, the European Council gained official legal status and is now mentioned in EU primary law, along with the Union’s other key institutions. Although the Treaty prohibits it from exercising legislative functions (cf. Art. 15 (1) TEU), the European Council’s activities can reach EU daily politics, for instance when its conclusions give concrete instructions for other institutions to initiate or implement policies (see also Van Middelaar and Puetter 2021, 60). Such informal, legally non-binding but politically authoritative activity by the European Council has, in our view, contributed to frequently ambiguous inferences in academic literature about the EU’s institutional architecture and development.

As an example, within vast amounts of literature on the EU’s handling of the Eurozone crisis, different assessments emerged. While most accounts highlight the dominance of individual member states and the creation of intergovernmental crisis instruments such as the European Stability Mechanism (ESM) (Hodson 2021), others stress the prominent role of supranational institutions such as the European Central Bank (ECB) and the Commission as the ‘unexpected winner’ (Bauer and Becker 2014). Some scholars even suggested a return of the ‘Community method’, that is the interplay of supranational actors and decision-making procedures, given the Commission’s enhanced competences in macro-economic surveillance and banking regulation (Dehousse 2016). One reason for these supposedly conflicting assessments lies in their focus on various EU institutions at different stages of policymaking.

Against these competing assessments, we suggest taking the perspective of vertical and horizontal fusion (cf. Wessels 2016, 8–20; 248–250, 2021). Vertical fusion refers to an integral dynamic within the EU’s multi-level constellation. Following a ‘problem-solving instinct’ in the face of common threats, national leaders realise that on many occasions it is the European Council alone that represents an adequate arena within which to deal with the challenges member states are facing. Here, we concur with the new intergovernmentalism in that we also consider strong member-state interdependencies, for instance coming from large exogenous shocks and international crises, to trigger governments cooperation. This problem-solving attitude, though, does not lead to some kind of federal state. Instead, following a ‘sovereignty reflex’ (cf. Art. 4 and 5 TEU) due to a general mistrust of other EU actors and legitimisation problems in their domestic arena, national leaders refrain from transferring autonomous power resources to supranational institutions. However, other than new intergovernmentalists would expect, leaders merge national and EU-level competences, sharing responsibilities between different levels of government. As members of the European Council, leaders want to preserve their ultimate control over the newly established instruments, but they do not oppose common supranational procedures per se.

Such tension leads to a pattern which we call horizontal fusion, reflecting power dynamics within the EU’s multi-institutional architecture. The Treaty’s legal wording and even more so the use of decision-making rules in the real world do not enable one single institution to deal alone with the preparation, decision and implementation of specific policies. Instead, we see a complex common management of pooled competences and shared instruments. Importantly, this double fusion results from both the European Council actively pursuing the merging of competences and other EU institutions’ treaty-based competences constraining the European Council’s leeway. Thus, our fusion perspective also rejects interpretations of the Commission as a mere ‘agent’ for the ‘principal’ European Council or of the EP being an institution of secondary importance only (Wessels 2016, 87–94).

Because of its unique political authority, large (financial) resources and central position in the EU’s institutional architecture, we regard the European Council as the driving force behind this double fusion. We expect it to be particularly visible and influential in situations of crisis due to their high levels of threat. Other than the case of ‘Brexit’, during the pandemic no EU treaty basis, institutional procedures and political responsibilities were predetermined. Instead, the COVID-19 crisis required political ‘improvisation’ against the background of urgency and uncertainty (Van Middelaar 2021).

In terms of methods and data, we analyse the European Council’s activities during the pandemic crisis following different stages of a classic policymaking cycle, distinguishing between preparation, decision, implementation and control. These phases appear chronologically and build on each other. In reality, of course, they might overlap or even appear in reverse order: the European Council’s return to the conditionality clause and its final endorsement of the MFF and NGEU in December 2020, after the implementation of its July package had already started, is a case in point. Nevertheless, for analytical purposes and to test the proposed fusion model, we stick to the chronological four-stage sequence. We rely on primary sources such as European Council conclusions, EU policy documents and relevant legal acts. These we triangulate with secondary literature and information gained from newspaper reports together with some 20 semi-structured interviews and background talks with experts who were closely involved not only in negotiating the recovery package, but also its realisation (see also Wessels, Schramm, and Kunstein 2022).¹

The European Council as a crisis manager and fusion driver during Covid-19

In the ensuing sections, we show how the European Council moved from a national focus on the pandemic with deep divisions about financial measures to a joint crisis assessment requiring a strong European response. The European Council’s activities in mid-July 2020 culminated in the creation of NGEU. Despite this agreement, the European Council later returned to the negotiation table to provide political guidance and clarification. National leaders also installed several control mechanisms domestically to manage delivery of the new funds.

Overall, the period from early 2020 to early 2021 shows a very active European Council, meeting up to three times per month. National leaders adopted comprehensive conclusions with detailed instructions for other EU institutions and intervened in the EU’s legislative process to an unprecedented extent. Next to its concrete decisions, the European Council’s framing of the pandemic as an existential crisis requiring a common response including fiscal solidarity, was decisive for the transformation of the EU system. At the same time, the prominent role and impact of the European Council at times came at the cost of complexity, delay and rather weak democratic control.

Preparation: from national reactions to a common understanding of the crisis

In early spring 2020, when the new coronavirus started spreading rapidly across the EU, national reactions prevailed (Wolff and Ladi 2020). On 11 March, Austria became the first country to close its border with Italy, the EU’s earliest corona hotspot. During the following weeks, other member states followed, de facto putting an end to the free movement of people inside the Schengen area. Border closures and local lockdowns led to interruptions of supply chains and a massive decline in economic activity. In fiscal terms, member states supported their businesses and employees to an extent far exceeding measures adopted during the global financial crisis of 2008. However, their different fiscal resources risked undermining fair competition inside the single market.

At their first European Council summit since the outbreak of the virus in Europe on 10 March, the heads of State or Government noted the pandemic’s severity and its implications for public health, economic activity and social cohesion.² However, whilst they committed to a common crisis response, no concrete steps were agreed. At this stage, national leaders largely delegated economic and financial options to the Eurogroup, the gathering of finance ministers from Eurozone countries (cf. Smeets and Beach 2022). Moreover, the ECB on 18 March launched a EUR 750 billion programme for the purchase of public sector securities to give member states fiscal space given their rising expenditures. The Commission was equally quick to react, suspending state-aid provisions and national deficit rules.

However, as both the ECB President (Lagarde 2020) and the Commission President (Von der Leyen 2020) emphasised, determined action on the part of national leaders was needed to send a strong message of political solidarity and cohesion. Monetary measures by the central bank alone would not be enough to calm the financial markets and ensure economic recovery. Inside the European Council, though, several coalitions of member states had emerged, each with their own priorities and advocating different kinds of measures. On 25 March, nine member states, in a letter to the European Council President Charles Michel, called for the introduction of ‘corona bonds’ thus suggesting the mutualisation of national debt.³ Such instruments were strongly opposed by other, primarily Northern countries, reflecting different national priorities and approaches at the time.

Against this background, after a meeting extending from 7 to 9 April, the Eurogroup agreed on the first fiscal measures.⁴ Despite its rather modest scope, the package worth EUR 540 billion, largely involving loans and guarantees for enterprises and state expenditures, was explicitly framed as an instrument for the fight against the pandemic. Newspaper reports revealed how some members of the European Council such as France’s President Emmanuel Macron and Germany’s Chancellor Angela Merkel directly intervened in the Eurogroup negotiations, convincing reluctant peers via phone to endorse their finance ministers’ package (Chazan et al. 2020). The Eurogroup’s report also contained the task for the Commission to explore options for new fiscal instruments including an EU ‘Recovery Fund’.

Despite their disagreement so far on concrete fiscal measures, national leaders in their three video conferences in March 2020 established a shared crisis narrative according to which the corona pandemic was an exogenous and ‘unprecedented […] shock affecting all our countries’, for which nobody was to blame, but which required a ‘comprehensive response’ in the spirit of solidarity.⁵ This was the clearest indication to date of an emerging problem-solving instinct inside the European Council. Officially endorsing the Eurogroup’s corona package, the heads of State or Government on 23 April ‘agreed to work towards establishing a recovery fund’, the precise size, financing and governance of which had still to be decided. Moreover, the Commission was asked ‘to analyze the exact needs and to urgently come up with a proposal that is commensurate with the challenge we are facing’.⁶

Discussions gathered further pace when on 18 May, Macron and Merkel suggested the creation of an EU recovery fund (France Diplomacy 2020). According to this French-German initiative, the Commission should be entrusted, backed by member-state guarantees, to raise EUR 500 billion in the financial markets and distribute these funds in the form of grants to those European regions hardest hit by the pandemic. To win over the Northern, fiscally conservative member states, the recovery fund was designed as a one-off instrument for the fight against the pandemic.⁷ Due to its channelling through the MFF, there would be no joint liability for the recovery fund on the part of member states.

Nine days later, on 27 May, the Commission presented its ‘official’ proposal for an EU recovery plan, together with a revised template for the next MFF, which had to be agreed before the end of 2020. Termed ‘Next Generation EU’, the Commission largely built on the French-German initiative. To the suggested EUR 500 billion in grants, it added a further EUR 250 billion in loans.⁸ With their personal involvement, national leaders along with the French President and German Chancellor in particular, had given much-needed political weight and spin to the upcoming Commission proposal and the now intensifying intergovernmental negotiations.

Our data and analysis suggest here the early manifestation of a horizontal fusion between the Commission and (some) European Council members, sounding out what kind of proposal was likely to meet the support of a sufficiently large number of member states. While several proposals for a European recovery instrument were circulating early on both within the Commission and the EP, the same holds true for member states. To increase the prospects of consensus inside the European Council and enable individual governments to sell a common fiscal response to (reluctant) domestic audiences, close coordination between the Commission and national administrations proved essential. It was thus no coincidence that Macron and Merkel, as the European Council’s two most powerful members, presented their plan about one week before the Commission made its official proposal.

Decision: the difficult road to a comprehensive package

Most press reports welcomed the Commission’s proposal and stressed its historic dimension. Among member states, reactions were at first more mixed: Southern countries, which were particularly hard hit, emphasised the need for a massive EU stimulus and for grants instead of loans. The Spanish government even suggested a recovery fund totalling EUR 1,500 billion (Zalan 2020). By contrast, Northern countries insisted on more modest measures. Teaming up as the ‘Frugal Four’, Austria, Denmark, Sweden and the Netherlands suggested using existing instruments and the disbursement of loans rather than grants (Lofven 2020). In view of these differing numbers and positions on the scope of any future EU recovery plan, no agreement was possible at a European Council summit in mid-June.

Following the Commission’s proposal, an intensive phase of member-state negotiations started. Merkel, whose government since 1 July was holding the rotating EU Council Presidency, was particularly active, meeting numerous national leaders as well as the Presidents of the European Council, the Commission and the EP for bi- and multilateral consultations. Similarly active were the French President as well as the Italian and Spanish Prime Ministers, while the Dutch Prime Minister Rutte emerged as the unofficial spokesperson of the ‘frugals’ (cf. Drachenberg and Vrijhoeven 2021). Expectations were high for the next European Council summit scheduled for mid-July, with Merkel calling for an agreement on the recovery plan before the summer break. It was widely assumed that if leaders failed to reach an agreement at that summit, the prospect for a common fiscal response to the COVID-19 crisis would strongly diminish. The dilemma between a problem-solving instinct – in view of the historic recession caused by the pandemic and a risk of the EU, or at least the single market, falling apart – and the sovereignty reflex due to member states’ different fiscal conditions, needs and approaches had reached its high point in early July.

The European Council meeting from 17 to 21 July turned out to be the second longest in the EU’s history, a few hours short only of the Nice summit in December 2000. During five days and four nights, national leaders negotiated both NGEU and the next MFF. The European Council thus had to manage and reconcile both legal rules and political expectations. The fiscal resources at stake, their redistributive implications and decision-making rules requiring unanimity made negotiations complex. Already in more ‘normal’ times, deliberations on the EU’s long-term budget had become strained (cf. Laffan and De Feo 2020). During the July 2020 summit Drachenberg and Vrijhoeven (2021, 17) counted no fewer than ten potential points of conflict, half of which were related to the MFF and included budget size, the balance between policy areas, the existence and size of national budget correction mechanisms (‘rebates’), the use (or not) of new EU ‘own resources’ and a new rule of law conditionality. The other half originated from NGEU and included the recovery plan’s size, the balance between grants and loans, the allocation criteria for funding, the length and modalities of the payments as well as governance of the recovery plan.

As has become common since the introduction of the ‘British rebate’ in 1984, richer member states, notably the frugals, asked for reductions in their budget contributions. At the insistence of some member states and following pressure from the EP, the Commission had incorporated a rule of law conditionality in its MFF proposal, which provided for enhanced oversight of a country’s spending of EU funds and simplified ways of sanctioning. A number of member states, primarily Hungary and Poland, opposed this conditionality. Finally, a group of net beneficiaries had organised themselves as the ‘Friends of Cohesion’, advocating the largest shares from the EU cohesion policy and opposing cuts in the overall MFF. Negotiations were further complicated by the decision-making rules underlying the various budget instruments: While both the MFF and the ‘own resources’ decision enabling Commission borrowing required unanimity among member states, the rule of law conditionality formally did not concern the European Council but was a matter of the EU’s two co-legislators, the Council of the EU and the EP. At the same time, the different national interests, legal requirements and a de facto need for consensus opened room for compromises in the form of package deals and side payments.

Ultimately, agreement on both the MFF and NGEU proved to be possible. The European Council endorsed a seven-year budget worth EUR 1,074 billion. This was about the same size as the previous MFF but entailed – compared to the Commission proposal – larger rebates for net contributors and cuts to Union programmes related to research, innovation and infrastructure. To finance NGEU, member states temporarily lifted the EU’s income ceiling and suggested introducing new own resources (hence ‘EU taxes’). NGEU’s proposed level of EUR 750 billion remained although the ratio of grants and loans was subjected to a balancing adjustment. Without much controversy, national leaders endorsed the Commission’s formula for calculating the maximum financial allocation available for each member state. This endorsement reflected both the preparatory work undertaken by the Commission and leeway granted by the European Council for technical matters. Nevertheless, provisions on the rule of law conditionality were watered down, now stating that ‘[t]he European Council will revert rapidly to the matter’.⁹ Differences on core aspects of national sovereignty such as a country’s judiciary turned out to be too large to bridge entirely even at this moment of high interdependence and political pressure.

The European Council’s final conclusions comprise 68 pages, 20 pages longer than the conclusions from the previous budget cycle agreed in 2013. Following long-established patterns in its practices (cf. Van Middelaar and Puetter 2021, 59–60; Werts 2021, 18–23), the European Council did not just agree on ‘general political directions’ (Art. 15 (1) TEU) but took concrete decisions on major tasks and procedures. With their 33 points and an Annex containing another 153 points, the July 2020 conclusions detail ways in which national leaders plan to finance and spend the Union’s budget over the coming years, specifically via the Recovery and Resilience Facility (RRF) – the centrepiece of NGEU – as well as other programmes foreseen in the MFF. The length of this July marathon session raises the question of whether or not the EU’s fate should be placed in the hands of an institution which apparently finds it so difficult to reach consensus.

Implementation: the emergence of a modified community method

European Council conclusions are political commitments and as such legally not binding (cf. Van Middelaar and Puetter 2021, 60). They need to be transferred into concrete legal acts by the EU’s two legislative bodies, the Council and the EP. Even for European Council standards, the July conclusions were extremely detailed, giving concrete instructions for other EU institutions about the next steps. However, between mid-July and mid-December 2020, the EP especially sought ways of using its role as a co-legislator whose consent was needed for the approval of the MFF and which decided, on equal terms with the Council, on the rule of law conditionality. Only two days after the European Council’s July agreement, the EP had already criticised cuts in the MFF and the ‘intergovernmental approach’ taken in the EU’s COVID-19 crisis management.¹⁰ Substantively, the EP sought an increase to funding for programmes considered to have a ‘European added value’, such as culture and education as well as tightening (again) the formulations on the conditionality clause. Although in formal terms the EP merely had to be consulted and informed on the ‘own resources’ decision and the RRF, respectively, its members tried to increase their influence by threatening to veto the overall package.

Generally, the Council of the EU carries responsibility for implementing any mandate as formulated by the European Council (cf. Wessels 2016, 92–94). However, ministers must be aware that they and the EP will ‘jointly exercise legislative and budgetary functions’ (Art. 14 (1) and Art. 16 (1) TEU). Consequently, lengthy negotiations took place between the Council and the EP in autumn 2020. To reach an agreement, the institutions used the ‘trilogue’ procedure which makes possible confidential negotiations between selected members of the (German) Council Presidency, EP lawmakers and Commission civil servants. Merkel and her ministers played a crucial role at that point: On the one hand, as a member of the European Council, Merkel sought to maintain and implement the essence of the July deal, keeping all member states on board. On the other hand, German policymakers knew that they had to win over the Council and especially the EP in matters that these two institutions considered important and where their consent was needed.¹¹ On 10 November, the Council and the EP reached a compromise on the MFF expenditure side and additional funding for EU ‘flagship programmes’ via a re-allocation of financial resources. Since no major change was necessary to the MFF compared to the July agreement, one gets the impression that in exercising strategic foresight the European Council had already anticipated that such offers to please the EP would become necessary in the implementation phase. The EP and the Council adopted the Regulation at the next MFF meeting on 16 and 17 December, respectively.¹²

A second legislative act concerned the creation of the EUR 672.5 billion RRF as the NGEU centrepiece. The EP and the Council reached their preliminary agreement for this in a trilogue on 18 December 2020, with the respective Regulation adopted – unanimously – by the Council on 11 February 2021.¹³ The 148-page Regulation establishing the RRF sets binding rules not only for financing the Facility, but also its objectives, allocation processes and payment modalities. Regarding governance, this Regulation instructs the Commission to assess within two months national Recovery and Resilience Plans (RRPs) and to recommend, within the same time period, the disbursement of funds on the basis of achieving previously agreed ‘milestones and targets’. Reflecting this horizontal fusion of tasks and responsibilities, the Regulation also provides for a ‘dialogue on recovery and resilience’ (Art. 26) between the relevant EU institutions, notably the Commission and the EP.

The third and most controversial issue concerned the ‘regime of conditionality to protect the budget and Next Generation EU’, as stipulated in the European Council’s July conclusions (Annex, Point 23). The main point of contention here were the rules on the suspension of payments for a member state failing to comply with the EU’s rule of law principles. Hungary and Poland did not accept the procedures established in the corresponding Regulation, which the Council had adopted on 16 December 2020 against their votes.¹⁴ Both countries then threatened to veto the ‘own resources’ decision, which required unanimity, and thus to block the entire financial package. This threat led members of the EP and the Commission to develop a ‘Plan B’ including EU treaty provisions on ‘enhanced cooperation’, which allow for legal acts to be adopted and applied by some member states only (de la Baume and Burchard 2020).

Another intervention by national leaders made such a Plan B obsolete. To reach consensus, the European Council on 10–11 December agreed on formulations allowing for a specific reading of the legally binding Regulation. Notably, they established the possibility of a legal challenge, determining that ‘the guidelines [on the way the Commission will apply the Regulation] will be finalized after the judgment of the Court of Justice [of the EU] so as to incorporate any relevant elements stemming from such judgment’.¹⁵ The heads of State or Government also reiterated the possibility of referring to the European Council should an affected member state so desire.

On 17 December, the EP declared that the European Council conclusions on the conditionality clause for the protection of the Union budget were ‘superfluous’ since the matter had already been ‘clearly defined in the legal text of the said Regulation’. Furthermore, the EP recalled the European Council to ‘not exercise legislative functions’ and ‘therefore, that any political declaration of the European Council cannot be deemed to represent an interpretation of legislation’.¹⁶ This issue has yet to be settled and hence remains a point of controversy for the recovery package’s further implementation. On the one hand, agreements between the Council and the EP as well as the European Council conclusions on the rule of law cleared the path for the adoption of the necessary implementing acts of the recovery package, implying a broad EU institutional involvement and a horizontal fusion of tasks. On the other hand, this consensus again came at the cost of substantive coherence and legal certainty. It also delayed the initial schedule for implementing the July European Council conclusions.

Control: enhanced oversight and the need for coordination

The control stage of the EU’s fiscal response to the pandemic, in turn, illustrates the vertical fusion of competences and procedures. On the one hand, the need for every member state to ratify the ‘own resources’ Regulation secured broad parliamentary involvement and, to a certain extent, public scrutiny. The channelling of NGEU through the MFF and the lifting of the EU’s income ceiling enabling Commission borrowing, makes the recovery plan a temporary measure subject to member state endorsement. Any new or prolonged form of EU borrowing will again require unanimous agreement from the European Council. In view of the large financial resources involved and the need to react quickly, the EU budget was the most obvious instrument since it was immediately available and facilitated a legally ‘clean’ release of EU funds. Other than what has been suggested by the new intergovernmentalism, member states do not necessarily prefer intergovernmental arrangements outside the EU’s regular legal framework. Rather, European Council members seem to prefer established instruments, as long as they make possible a fast and targeted response to the problem identified and allow for effective control mechanisms on the part of national leaders themselves.

Consequently, the Regulation establishing the RRF introduced a complex structure for the use and control of these new resources, representing a further step in horizontal and vertical fusion. At the heart of its governance are national RRPs according to which each member state had to draft detailed schemes for how it seeks to use its allocated funds and submit these plans to the Commission by the end of April 2021. The Regulation stipulates that 37% of the money must be directed towards the ecological transition to support the EU’s ‘Green Deal’, while another 20% is to be targeted towards digitalisation.¹⁷ The July European Council conclusions already emphasised the RRPs’ ‘national ownership’ to identify investments and gain domestic support for the planned reforms. Our interviewees also confirmed that the realisation of the RRPs primarily lies with national administrations due to their large resources and expertise in securing effective spending of the new EU funds ‘on the ground’.

At the same time, the Regulation established a close link with the EU level, stating that ‘the European Semester for economic policy coordination is the framework to identify national reform priorities and monitor their implementation’.¹⁸ Especially for member states with smaller administrations, drafting and implementing the RRPs presents considerable challenges. The European Council thus made sure it could rely and further build on already established patterns of communication with the relevant EU institutions and units, such as DG Ecfin of the Commission and the General Secretariat of the Council, who are experienced in the use of EU financial instruments. Moreover, in practice national governments drafted their RRPs in close consultation with the Commission, not least due to time pressure.¹⁹

After submission, the Commission assesses the RRPs according to a pre-defined scoreboard. They are then being approved within four weeks by the Council of the EU. In the RRPs, member states and the Commission have agreed on milestones and targets for the effective use of the funds. Pre-financing with 13% of the allocated money for each member state can be followed on a half-year basis with a further 17% by the end of 2026 if in the interim agreed benchmarks have been met. To assess compliance with the milestones and targets, the Commission must seek opinion from the Economic and Financial Committee (EFC),²⁰ which brings together senior officials from national finance ministries and central banks as well as the Commission and ECB. In addition, member states established another committee consisting of national civil servants²¹ with a veto power vis-à-vis Commission proposals. Thus, while most technical work regarding the national RRPs has been delegated to the Commission, the final approval is left with intergovernmental bodies.²²

Finally, on the insistence of some member states and as a remarkable expression of their sovereignty reflex, national leaders installed an ‘emergency break’ according to which every government can put the expenditure practices of another government on the European Council’s agenda. In that case, the Commission is not allowed to decide on any further payments ‘until the next European Council has exhaustively discussed the matter’.²³ Accordingly, next to the revisited interpretation of the rule of law conditionality, we find another case of the European Council acting as ultimate decision-maker and in practice a court of last appeal.

We see more illustrations of a horizontal fusion of institutional procedures: With its monopoly for submitting the national RRPs to the Council and as the guardian of credible commitments regarding milestones and targets, the Commission has received further powers in core areas of national economies and welfare. In accordance with the Community method, member states take final decisions on Commission proposals with the possibility of applying majority voting. However, contrary to what the Community method would suggest, the EP has no direct say at this stage. In addition, involving both the EFC and the European Council as highest court of appeal exhibits strong intergovernmental fallback options.

Conclusions

This article has traced the European Council’s prominent role in all phases of the EU’s fiscal response to the COVID-19 crisis. For analytical and illustrative purposes, we have distinguished between preparation, decision, implementation and control stages. In view of the pandemic’s abrupt outbreak and different national fiscal capacities, it took national leaders three months to frame a crisis narrative and prepare their common response. Deciding on a recovery plan building on common debt and a revisited long-term budget, the European Council established powerful financial instruments. Implementation required the inclusion of other EU institutions due to their legal competences and policy expertise, through which conclusions can pass into law by being transferred into legal acts. Finally, the control phase implies a close monitoring on the part of the EU level and, in turn, a constant exchange of activities between national and European actors.

We interpret the transformation of the EU system in the context of the COVID-19 recovery plan as the expression and consequence of a horizontal and vertical fusion of responsibilities: Horizontally, the realisation of the fiscal package, especially its drafting, the identification of key objectives and the package’s translation into legal acts, required the involvement of all EU institutions. Vertically, implementation made necessary national parliaments’ agreement as well as interaction between national and EU administrations. The European Council as main actor was both an active driver of this fusion, not least due to a general distrust among its members and the need for domestic approval, and a prisoner of legal and institutional constraints, notably the underlying decision-making rules requiring unanimity.

Despite our focus on the European Council in EU fiscal politics, we do not consider the recovery plan a unique case of the fusion thesis. Firstly, the European Council during the COVID-19 crisis played a similarly prominent role in other policy fields such as border controls (cf. Wolff and Ladi 2020): From the (rapid and uncoordinated) closure of national borders due to the spreading virus to the re-establishment of free movement inside the Schengen area, to the closure of the EU’s external borders for other world regions, the European Council, together with the Commission, sought to find the right balance between public health, economic activity and personal freedom. Secondly, with regard to the recovery plan, the European Council used and developed existing EU instruments. It is true that NGEU represents an innovative tool which had not been considered possible before the pandemic. At the same time, the European Council channelled NGEU through the EU’s long-term budget, thus securing political continuity and legal certainty. We consider the linkage of path-breaking innovations with existing instruments also to be possible in other policy fields.

Two points deserve special emphasis. The first relates to the political circumstances of the COVID-19 crisis: As an exogenous shock affecting all member states, the pandemic arguably facilitated the emergence of a common crisis narrative. However, a comprehensive fiscal response was far from obvious but rather required political leadership, especially on the part of the two largest member states – France and Germany – who, together with the Commission, paved the way for a recovery plan, which was eventually endorsed by all member states. Furthermore, the time overlap of negotiations on a new MFF, which had to be agreed before the end of 2020, and discussions about a COVID-19 fiscal instrument turned out to be a ‘lucky coincidence’,²⁴ enabling members of the European Council to link several issues to package deals.

The second point relates to further implications of the European Council’s prominent role as a crisis manager and fusion engine. The complex and at times heated negotiations during its July summit remind us that failure was possible, with unknown consequences for the EU’s economic recovery and political cohesion. Despite its appeal to the media and academics alike, the EU’s regular dramatisation of policymaking contains the risk that necessary decisions are delayed and then taken only at high political costs.

Overall, the EU’s fast and comprehensive fiscal response to the COVID-19 crisis, thanks to the European Council’s role and activities has important theoretical and empirical implications: Firstly, and other than parts of the literature – notably the new intergovernmentalism – would expect, the Commission has gained (further) powers and authority. Importantly, though, this power does not come with any formal or unconditioned transfer of competences from national to EU level. Rather, raising EU debt, allocating the money to member states and controlling national spending requires collaboration by a number of EU institutions. Effective coordination, notably of the European Council and the Commission, will be crucial for the success of the recovery plan. Secondly, the performance-oriented drafting and assessment of national RRPs and the continuous approval of EU funds following the achievement of milestones and targets need the close interaction of national and EU levels. Our fusion perspective does not consider different levels of government as separated or even detached from each other, as the new institutional leadership approaches suggest. Instead, in promoting the horizontal fusion of tasks and responsibilities, the European Council stressed that effective implementation of NGEU requires national ownership, in other words the realisation of jointly agreed guidelines and principles according to member state-specific requirements.

Acknowledgments

Previous versions of this article were presented at the European University Institute in Florence, the Annual Doctoral Conference of the CEU in Vienna, and the ECPR Joint Sessions in Edinburgh. For helpful comments and suggestions, we would like to thank Rachel Epstein, Robin Huguenot-Noël, Stella Ladi, Jan Lepeu, Moritz Neubert, Laura Polverari, and Sarah Wolff as well as the editors and two anonymous reviewers from the Journal of European integration. For expert editorial support, we would like to thank Roland Parr.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors have no funding to report.

Notes

1. We conducted a first round of expert interviews in late 2020 and early 2021 to scrutinise development and delivery of the recovery package. In April 2022, we pursued a second round of interviews to enquire about the implementation of NGEU and experts’ experiences. We obtained further information in the context of an Executive Training Seminar organised by the European University Institute in Florence during May 2021. Our interviewees and interlocutors comprised civil servants from the European Commission and the Council of the EU, national policymakers, officials from the national administrations of seven EU member states, as well as various think tankers based in Brussels. To obtain relevant information, we guaranteed confidentiality to all interviewees.

2. Conclusions by the President of the European Council following the video conference on COVID-19, 10 March 2020.

3. The document is available at https://www.governo.it/sites/new.governo.it/files/letter_michel_20200325_eng.pdf

4. Eurogroup: Report on the comprehensive economic policy response to the COVID-19 pandemic, 9 April 2020.

5. European Council: Joint statement of the members of the European Council, 26 March 2020.

6. European Council: Conclusions of the President of the European Council following the video conference of the members of the European Council, 23 April 2020.

7. Interviews with civil servants from the German finance ministry (26 November 2020) and the German federal government (8 January 2021).

8. European Commission: Europe’s moment. Repair and prepare for the next generation, 27 May 2020.

9. European Council: Conclusions, 17–21 July, Annex Point 23.

10. Resolution by the European Parliament of 23 July 2020 on the conclusions of the extraordinary European Council meeting of 17–21 July 2020 (2020/2732(RSP)).

11. Interview at the German Permanent Representation in Brussels, January 2021.

12. Multiannual financial framework for 2021–2027 adopted. Council of the EU, 17 December 2020.

13. EU recovery package: Council adopts Recovery and Resilience Facility. Council of the EU, 11 February 2021.

14. Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council of 16 December 2020 on a general regime of conditionality for the protection of the Union budget.

15. European Council: Meeting (10 and 11 December 2020) – Conclusions, Point I. 2c.

16. Resolution of 17 December 2020 on the Multiannual Financial Framework 2021–2027, the Interinstitutional Agreement, the EU Recovery Instrument and the Rule of Law Regulation (2020/2923(RSP)).

17. Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility, Recitals 23 and 26.

18. Regulation (EU) 2021/241, Recital 4.

19. Information gained via civil servants from the Commission and several national administrations, May 2021.

20. Regulation (EU) 2021/241, Recital 52.

21. Regulation (EU) 2021/241, Art. 35.

22. Interviews with civil servants from DG Ecfin and the EFC, April 2022.

23. European Council: Conclusions, 17–21 July, Point A19.

24. Interview with civil servant from the German finance ministry, 26 November 2020; interview with civil servant from the Commission, 4 December 2020.