EU economics chief ‘worried’ about delays to Covid stimulus after Hungary and Poland veto – CNBC

Paolo Gentiloni, European commissioner for the economy, speaking at Forum The European House – Ambrosetti in September, 2020.

Michael Green | CNBC

LONDON — The EU’s economics chief is worried that a $2 trillion stimulus plan will not be delivered as quickly as planned, threatening a recovery in the region.

The leaders of the 27 EU member states agreed in July to borrow funds jointly via the European Commission — an unprecedented move that ended long-standing opposition from more fiscally conservative nations such as Germany and the Netherlands to commit to joint borrowing during the Covid-19 pandemic.

This deal, which encompasses investments totaling 1.8 trillion euros ($2.13 trillion), was tweaked last month to link the disbursement of the funds with commitments to the EU’s core values — known as the rule of law.

However, Hungary and Poland, which have for years been under investigation for allegedly disrespecting European values, opposed the new link and vetoed the agreement.

“I am confident on the outcome, I am rather worried on the delays that, in any case, we are risking,” said Paolo Gentiloni, EU commissioner for economic affairs. 

The massive fiscal stimulus is a combination of a seven-year budget made of 1.074 trillion euros and an additional buffer of 750 billion euros, which will be raised from public markets. These funds were scheduled to be distributed from January onward and were welcomed by financial markets at the time of their announcement.

European nations have been significantly hit by the coronavirus pandemic, in particular highly indebted nations such as Italy and Spain. They have struggled with combating the economic fallout and asked for an EU-wide solution in the immediate wake of the public health emergency.

EU nations are facing more favorable market access conditions than earlier this year, but the longer the delay in releasing the funds the worse it will be for their economies. Certain infrastructure investments, for instance, might remain on hold until the money arrives.

“I am confident we will [overcome the impasse] in the next days or weeks. We should not have too much delay because as [ECB President] Christine Lagarde was just saying, we need a swift approval of these funds,” Gentiloni told CNBC’s “Squawk Box Europe” on Thursday. 

Speaking to European lawmakers on Thursday, Lagarde said the stimulus package “must become operational without delay.”

A ‘difficult moment’

The European Central Bank is expecting an 8% decline in gross domestic product for the euro area this year. This would be the worst contraction in the region’s history.

“We are in a difficult moment because we have to decide whether the fundamental principles of rule of law are deeply rooted in our mind or not,” Manfred Weber, a conservative lawmaker at the European Parliament, told CNBC Thursday.

“If you spend so much money,” he said in reference to the 1.8 trillion-euro fiscal plan, “then it is our conviction that you have to link this to the fundamental basic principles of independence of judiciary and freedom of media.”

The 27 European leaders will have a virtual discussion Thursday evening, but they are not expected to immediately solve the budget impasse.

A senior EU official, who did not want to be named due to the sensitivity of the talks, said it is up to Poland and Hungary to explain how they want to overcome the dispute.

“It is not up to us to come up with proposals,” the official said Wednesday.

However, analysts at Gavekal Research believe the budget fight might provide some “tangible payoffs.”

“A worry for investors would be the EU caving in on this fight and letting both Poland and Hungary off the leash,” they said in a note on Thursday morning, adding that “this looks to be a good fight that may deliver tangible payoffs in terms of better policy outcomes.”