The European parliament still needs to provide its final approval on the overall EU budget © Olivier Hoslet/EPA-EFE/Shutterstock

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Every seven years the process to pass the EU’s multiyear budget comes down to the wire. This time the stakes are greater than usual: the budget includes the bloc’s recovery fund — which at €750bn almost doubles Brussels’ financial firepower — and the cause of the current hold-up is two states’ objection to an unprecedented rule of law mechanism.

At a meeting of ambassadors on Monday, Hungary and Poland withheld their consent to sign off on the whole budget package because they oppose the new ability to withhold funds where a failure of the rule of law threatens the integrity of EU spending. Brussels power brokers are now scrambling for a way forward.

This sentiment of crisis should not obscure progress the EU has made this year — from a landmark agreement among national leaders in July on a pandemic recovery plan funded by common borrowing to an important accord on the budget with the European parliament last week.

The MEPs have reason to crow. “Who would have thought that the European parliament could achieve such a result?” says Valérie Hayer, MEP and budget negotiator for the liberal Renew Europe group. The extra spending they extracted from member states for the new budget amounts to less than 1 per cent of the total, but “we have won €16bn [while] in 2013 we won zero, and in 2006 we won only €4bn in fresh money,” she says.

More important is substance. One commission insider points out that MEPs managed some “rectification” of cuts to pan-European spending made by leaders in July. The funding for EU-level health programmes was tripled compared with the July deal, says Ms Hayer.

Compared with earlier budgets, there is also gradual change in where the money goes. For the first time, the total sums allocated to agriculture or “cohesion” subsidies to poorer regions do not exceed spending on everything else. “No [budget] has ever been so green,” says Ms Hayer, pointing to the 30 per cent target for climate-friendly spending and a new 10 per cent target of spending respecting biodiversity, added at MEPs’ behest.

Despite some activists’ warnings against “greenwashing”, Green party MEPs have for the first time decided to support the budget. The new targets and a commitment to revise how they are calculated, says Green MEP Philippe Lamberts, give parliamentarians “real leverage” over future spending.

New, too, is the budget package’s commitment to new revenues going directly to the EU, so-called “own resources”. National leaders committed in July to finding these to pay for the new common debt. The final accord with parliament “converted a political commitment into a legal commitment”, says Ms Hayer. While national parliaments have a say, there is now a legally binding timetable for when the European Commission must propose and leaders must deliberate on new sources of funding. Inside the commission, heavier taxation of carbon emissions is mentioned as a particularly promising route.

The effect of the new MEP intake from last year’s European elections is being felt in all these dimensions. The question remains whether they will also prevail on the rule-of-law mechanism — where “the parliament fought and did well to fight”, in Ms Hayer’s words — or whether the whole package will be sent back to the drawing board.

Unlike the budget, the rule of law provision only requires a qualified majority of countries and will pass unless there is an attempt to reopen the legislation. Any “move to dilute” the provision by governments “will be opposed by the European parliament which, importantly, still needs to provide its final approval on the overall EU budget”, says Mujtaba Rahman, managing director of Eurasia Group, in a research note. In the absence of consensus, the old budget will be rolled over month by month — but the rule of law mechanism will apply.

That endgame means Hungary and Poland may be too late to get their way. Still, while all sides decide whether to call the others’ bluff they cast “a cloud of uncertainty over the bloc’s economic recovery,” says Mr Rahman.

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