New institutional leadership goes viral EU crisis reforms and the coming about of the covid recovery fund
Abstract
This article reconstructs the coming about of the 750 billion EU Covid Recovery Fund. We provide an embedded process-tracing analysis of the dynamics from mid-March 2020, when the idea of ‘Corona-bonds’ was parachuted onto the Heads’ Agenda, up until the ‘historic’ deal on the Multiannual Financial Framework and Recovery Fund of 21 July. Where most media accounts and scholarly assessments focus on the high-level deal making between political leaders, we trace the proceedings inside the EU's institutional machinery, which produced the solutions and laid out the groundwork for a deal. The reconstruction assesses the role and influence of the EU institutions – the European Commission in particular – in producing this major step. We show that the process was characterized by a handicapped European Council, which hampered the ability of member states to oversee and control developments. The conclusions discuss the implications of our findings for our understanding of (institutional) leadership and policy making during crisis.
Introduction
On 21 July 2020, after 5 days of continuous negotiations, the Heads of States or Governments of the European Union (EU), reached an agreement on a new Multiannual Financial Framework (MFF) and a 750 billion Covid Recovery Fund (named ‘Recovery and Resilience Facility’, RRF). The deal was hailed a historic breakthrough – a Hamiltonian moment even – as it was the first time the member states agreed to a form of debt mutualization through the joint issuance of European debt (Financial Times, 2020; Politico, 2020f; Ludlow, 2020d1). In terms of the size and set-up this was an unprecedented step in European integration. What was most revolutionary was the principle of borrowing for spending, which allowed the European Commission to go out on the financial markets to acquire debt, guaranteed to be paid back by the member states, and hand it out in the shape of grants instead of only loans (within the context of Community programs). While there are some caveats to calling this the first ‘EU bond’ – the RRF is intended as a temporary, one-off measure and there is no mutualization of existing national debt – this is nevertheless a ‘quantum leap’ in European integration, both financially and institutionally.2 In an EU that is supposedly characterized by reluctant member states coming up with ‘too little, too late’ type of solutions (Börzel, 2016; Jones et al., 2016; Mody, 2018), how do we explain such a major step?
The deal was also remarkable in terms of the remarkably short negotiation process. The idea had its first appearance under the label of ‘Corona bonds’, which landed on the table of the Heads at their second video-tele-conference of 17 March 2020. However, the idea was dismissed almost immediately by the Northern member states, including Germany, and by Commission President von der Leyen (Politico, 2020a, 2020b). The stage appeared to be set for a lengthy process of intergovernmental bargaining resulting in a lowest common denominator type of solution. Nevertheless, only 4 months later, on 21 July 2020, the EU member states agreed to what was in essence a similar solution: a massive financial support package, to be financed through an unprecedented sharing of financial debts and obligations.
Moreover, while there had been intense negotiation about the overall size of the package, the division between grants and loans, the conditions (if any) that should be attached to financial assistance, the principle as such of the EU entering the financial markets and issuing debt on behalf of the member states sailed through with remarkable ease. As will become clear from our reconstruction, the speed and scope of the developments from March to July also took many insiders by surprise. The Covid crisis had somehow provided the momentum for agreeing on a 1.82 trillion euro financial package that, all things considered, had less to do with addressing the immediate consequences of the Covid crisis, and was more about building what the Commission likes to refer to as, the ‘Next Generation European Union’ (NGEU).
This article goes beyond the headlines to explore the forces at work behind the scenes that produced this unprecedented outcome. We contend that the existing literature has difficulty accounting for the speed and scope of the reform. In the literature on crisis management and policy change, crisis and reforms are not considered a happy couple (Boin et al., 2017, p. 134). In the classic Kingdon model, three independent streams: the problem stream, policy stream and political stream, need to come together to open a policy window for change (Kingdon, 1984, p. 21, see also Ackrill et al., 2013). It requires ‘enlightened’ leadership and a very deep crisis to overcome bureaucratically anchored resistance to reform (Kamkhaji & Radaelli, 2017, p. 717). Moreover, this leadership needs to have a sufficiently broad and strong political mandate that authorizes them to drive forward policy reforms (Keeler, 1993, pp. 437–438). Sometimes a crisis can provide such a mandate, but in more occasions, a crisis constraints leaders, forcing them to focus on fire-fighting (Keeler, 1993, p. 440). In general, crises only provide a very limited window of opportunity to ‘punctuate the equilibrium’ and push through substantive reforms, before pre-crisis routines kick back in (Jones & Baumgartner, 2005, p. 326).
Also, within the field of EU studies, there are many theories and explanations for why the EU fails to meet crises with reforms, with few approaches able to explain successful reforms. Evaluations of the EU's performance in dealing with these major challenges have been predominantly negative (see e.g., Bastasin, 2012; Dinan et al., 2017). Different integration theories – liberal intergovernmentalism, new intergovernmentalism, post functionalism and the failing forward thesis – all provide their own explanation for why the EU fails to deliver on major reforms (Bickerton et al., 2015; Hooghe & Marks, 2019; Jones et al., 2016; Moravcsik, 2018). Post functionalism highlights domestic contestation as the constraining factor, liberal intergovernmentalism highlights incompatible national preferences. Liberal intergovernmentalism and failing forward both point to a process of distributive intergovernmental bargaining resulting in lowest common denominator (LCD) outcomes. New intergovernmentalism stresses the dominance of intergovernmental actors and action channels, which limits the potential for major policy renewal by supranational policy entrepreneurs.
Leadership is considered a crucial, but at the same time a rather elusive, factor in the literature. It is generally assumed that ‘entrepreneurial’ (Young, 1991, p. 285) and/or ‘transforming’ (Burns, 1978, p. 20) leadership is necessary to drive major policy reforms. Through negotiation skills and process management, such leaders are able to ‘raise’ the motives and ambitions of the led. This is also why such leadership tends to create its own opposition. Major policy reforms target sensitive and salient policy-domains, for example in the area of fiscal and socioeconomic policymaking, of which established, political and bureaucratic actors are reluctant to diminish their control (Genschel & Jachtenfuchs, 2014). While some leaders might be pressured, or even personally inclined, to strive for a fundamental overhaul of existing policies and institutional arrangements, in the post-crisis phase such pressures and inclinations tend to evaporate quickly as other priorities take over, leading to stalled reforms. Some authors even argue ‘that crisis management and reform leadership cannot be the province of the same executive’ (Boin et al., 2017, p. 139).
Within the field of EU studies, this transforming (‘raising’) leadership effect is generally operationalized as leading to the transfer of competences to the EU level (see e.g., Müller & Van Esch, 2020; Tömmel & Verdun, 2017). Yet when crisis reforms involve the transfer of competences in politically sensitive issues, they have to be dealt with by the highest political authorities. In the EU the highest political level is the European Council (EUCO), consisting of the Heads of State or Government of the member states). As a result, major crisis reforms are considered to be ‘Chefsache’, that is, ‘matters for the bosses’. Many EU scholars have argued that, because of a series of major crises, the centre of gravity has shifted systematically towards the Heads, with a primary focus on the German Chancellor (Blyth & Matthijs, 2011; Bocquillon & Dobbels, 2014; Bulmer & Paterson, 2013; Puetter, 2014; Van Middelaar, 2019). Initial accounts of the Covid Recovery Fund also gave primacy to German Chancellor, Merkel, and to a somewhat lesser extent French President, Macron, for championing the initiative, primarily through the Franco-German proposal of 18 May 2020 (see e.g., Genschel & Jachtenfuchs, 2021, p. 364).
However, as will become clear from our empirical reconstruction, this Franco-German ‘initiative’ was shaped by Commission proposals that had been developed and discussed within EU institutional cycles and shared with these same member states beforehand. In general, what existing research misses is the increased autonomy and discretion that crises grant to the unseen bureaucratic hands behind the scenes that structure and manage the process on behalf of the leaders, helping them to translate vague ideas into workable solutions. The European Council might be the locus of decision making on major crises reforms, but it is ill-equipped to come up with substantively meaningful and legally sound solutions fitting within the EU framework (Smeets & Beach, 2020a, p. 1143). For this it is highly dependent on input from the EU institutions, first and foremost the European Commission, but also the European Council President's Cabinet, the Council Secretariat and the Commission and Council's Legal Services. The relevant question then becomes, who is providing input to (‘feeding’) the leaders?
We contend that major crisis reforms require the involvement of multiple actors (political, institutional) at multiple levels (political, technical) and multiple stages (agenda setting, negotiation, endgame) of the decision making. This article traces the role and influence of the EU institutions in managing major crisis reforms. In the Analytical framework section we present our analytical framework, delineating the main actors, their activities, the levels and stages in a crisis reform process. The third section 3 is the central part of the article, dedicated to the empirical reconstruction of the RRF negotiations. We will use the method of embedded process tracing (EPT) to disentangle the dynamics at different levels of the negotiations about the Covid Recovery Fund. In fourth section we relate our findings to the general literature on crisis reforms and policy change, while also drawing comparisons to past cases of major EU crisis reform. While the literature has been able to identify the main conditions for effective reform, we explain how these conditions play out at the process level, which to a large extent determines their effective contribution to producing major policy reform. In the case of the Covid Recovery Fund, the activities of EU institutional officials significantly shaped the deal and steered process and thus helped to produce a more ambitious outcome than governments left to themselves would have been able to agree on.
Analytical framework: Actors, levels and stages
How to get from crisis to reforms? In this section, we flesh out the main actors, their activities, the levels and stages of the decision making in which these actors are operating, and how these activities jointly affect the outcome. This article uses process tracing methods to reconstruct the causal pathway between the initial cause (major crisis) and the final outcome (ambitious reform) (Gerring, 2017, p. 105).3 Process-tracing is an in-depth case study method that can empirically assess processual causal claims (Beach & Pedersen, 2019). Process tracing typically utilizes an abductive research design, drawing on existing theorizing to identify central concepts that are expected to be causally relevant (actors, levels and stages). The process tracing analyses then seeks to unpack empirically a causal process by tracing the activities of these actors (at various levels and stages) and how these activities are related. In our EPT design, the empirical analysis is embedded in the sense that we go beyond the usual, publicly available sources: official documents and press reports, typically complemented by some on-off, ex post interviews. Instead, we had regular, in-depth conversations with insiders from the different levels: European Council, Council Secretariat, Commission and member states both during the negotiations and afterwards. We joined these insiders as they were trying to keep track and make sense of ongoing events and initiatives.
The central actors were already identified in the introduction. Effective reforms require political leadership, to provide impetus and overcome resistance to change, as well as technical or instrumental leadership, to design and broker reform proposals (see e.g., Tallberg, 2006, p. 37–39). On major EU crisis reforms, political leadership is primarily expected to come from the European Council (Van Middelaar, 2019). Instrumental leadership is generally attributed to institutional actors, the presidents and civil servants in the different EU institutions (see e.g., Becker et al., 2016). Through their ‘entrepreneurial’ activities, institutional actors try to shape and steer policy reform processes.
With regard to levels, we use the distinction between the control room and the machine room (Smeets et al., 2019, p. 677; Van Middelaar, 2019, pp. 197–199). The control room refers to the level that is formally/nominally in charge of the process, which in the case of major crisis reforms is typically the highest political decision-making level. It is the European Council that needs to acknowledge ownership of the problem and the need for an EU level policy response. Actual European Council involvement might be limited and erratic, as it lacks the institutional infrastructure to manage and oversee policy development and debate. The Heads therefore need to delegate policy design and process management tasks to the institutional machinery. Also, if policy reform primarily takes the shape of legislative change, which can be processed through the ordinary legislative procedures, the appropriate level of political authority (i.e., control room) can also be the respective ministers, united in the Council of Ministers. The machine room refers to the technical and preparatory levels of the negotiations, which prepare, pre-discuss and potentially reshape the reform proposals, but which lack the authority to provide the formal approval.
Third, with regard to the stages, we build on the distinction between agenda setting, negotiation, endgame stage, known from the policy studies and negotiation literature (see Pollack, 1997; Tallberg, 2006). The stages are used to structure the analysis, connecting the initial cause – a crisis with a recognized demand for collective action – to the final outcome, that is, major policy reform (see Figure 1).
Crises are defined as a situation in which: ‘a social system – a community or organization – experiences an urgent threat to its basic values, which appears to require a far-reaching response’ (Rosenthal et al., 1989, p. 10). As we mentioned in the Introduction, crises do not by themselves launch a reform process. Instead, the process is triggered by a shared understanding that the collective level has a responsibility to (‘should’) act. There does not necessarily have to be consensus about the need for collective action. In fact, a reform process can be proceeded by ‘framing contests’ about whether the collective level indeed has a responsibility to act (Boin et al., 2009). However, a reform process can only start when there is critical mass to support collective ownership of the problem.4
We define the outcome major reform as: ‘a policy innovation manifesting an unusually substantial redirection or reinforcement of previous public policy’ (Keeler, 1993, p. 434). Like Keeler, we assess the magnitude of a reform by the degree of change it encompasses, not its impact or success (i.e., whether the reform serves to solve the problem it was intended to solve).5 To be able to attribute causal leverage to institutional activities, this outcome should be more ambitious/go further than what governments left to themselves would have agreed on. This interpretation of causal influence fits with the classic understanding of ‘entrepreneurial’ or ‘transforming’ (supranational) leadership, which in the EU induces further steps in European integration that transcend LCD outcomes typically produced by intergovernmental decision making (Moravcsik, 1999, p. 271). In the empirical reconstruction we will show that other, less radical, reforms were available to governments, such as support through the European Stability Mechanism (ESM) or setting-up a targeted and limited intergovernmental fund.
Between cause and effect, we identify three stages. In the agenda-setting stage, the political (control room) level needs to move from acknowledging ownership to providing a mandate for action. Within the context of the EU, what is required is a decision by the European Council, and some form of delegation of responsibility to the machine room to develop solutions and deliver them to the Heads (Van Middelaar, 2019, p. 180). At the technical (machine room) level, institutional actors seek to identify how the EU as a policy instrument can be used to tackle the crisis. Agenda setting primarily revolves around the drafting of texts, some of which may never reach the negotiation tables. The ones that do, however, lay out the tracks for subsequent negotiations.
The negotiating stage starts after the control room level has given the go-ahead. This is the central stage of the reform process, in which institutional actors and member states representatives discuss and further develop the elements of solutions in the machine room. The main activity here is process management. Major crisis reforms require the involvement of multiple actors at multiple levels of decision making, from technical experts in national line ministries, to EU and national civil servants in working parties, to EU ambassadors (Coreper), to ministers, before going back to the Heads. Consequently, this is a process that cannot be managed by one single actor or institution (Smeets & Beach, 2020a). The European Council President can provide process management in the control room, but lacks the expertise to formulate solutions and has no presence in the machine room. The Commission is present in both the control and the machine rooms and might have the expertise, but is generally not trusted as the sole independent expert because it has its own substantive agenda. The Council Secretariat has the trust of the member states and the deep knowledge of the functioning of the EU system, but it lacks the capacity that the Commission has for developing substantive proposals. Moreover, while actors in the machine room can develop crisis reforms, they cannot provide the political endorsement. This can only come from the Heads. As said, even though the Heads’ involvement might be limited and superficial, providing their blessing to existing proposals and ongoing processes in the machine room is crucial. It is what keeps the normal bureaucratic actors and action channels – inside the Council and Commission – at bay.
The endgame stage is focused primarily on the control room level, where the Heads deal with the final, unresolved, contentious issues (in EU terminology ‘the brackets’) through classic, intergovernmental bargaining. Institutional actors support the Heads in finding ways to deal with member-state specific concerns by suggesting legal or substantive solutions, drafting compromise proposals and chairing effective negotiations, either bilateral or multilateral. This final part is crucial for delivering the more ambitious outcome that has been developed in stages one and two.
In the next section, we use these distinctions between actors, levels and stages to reconstruct the process that resulted in the coming about of the Covid Recovery Fund.
Empirical analysis: The covid recovery fund
This section provides an empirical reconstruction of the coming about of the Covid Recovery Fund (RRF), on the basis of the analytical framework presented in the second section. Figure 2 provides an overview of the central actors that were involved in the RRF process. The network also shows the main formal and informal intra- and inter-institutional links that were responsible for producing the deal and shepherding it through the appropriate decision-making channels.6 In the analysis, we trace the activities of these actors at the different levels and stages of the decision making. A more detailed explanation of the evidence for each of these activities and their impact on the process and outcome is provided in the methodological appendix.
Before we start, we point out two case-specific particularities of the Covid crisis that are unrelated to the analytical framework. First was the lockdown. What usually happens in crisis situations is that the EU machinery goes into hyper drive. In contrast, in the weekend of 14 March 2020 Brussels came to an abrupt standstill, with much of EU politics transferred back to the capitals. There was the inability to organize physical meetings and informal get-togethers, which left Coreper as the only body standing. Additionally, both the European Council President and rotating Council Presidency were severely limited in their administrative and coordinating abilities. Both presidencies were highly dependent on input from specific member states and from the European Commission. The Commission, for its part, jumped into the void, coming up with a plethora of initiatives in the first weeks in March, and even setting up a parallel system of ministerial videoconference meetings from the Berlaymont (the Commission's main premises).
The second case-specific element concerns the role of the European Central Bank (ECB) and the German Constitutional Court (Bundesverfassungsgericht). In earlier crises, the Eurozone crisis in particular, when the Heads had failed to do what (according to some) was required, the ECB would step in to do ‘what-ever it takes’ to save the Eurozone (see e.g., Bastasin, 2012). Meanwhile, the Bundesverfassungsgericht would carefully monitor whether the ECB was not overstepping its mandate. In the early stages of the Covid crisis, the ECB intervened heavily, amongst others through its Pandemic Emergency Purchase Program (PEPP) and Pandemic Emergency Long Term Refinancing Operations (PELTRO). However, in a ruling of 5 May 2020, the Bundesverfassungsgericht stated that the 2015 ECB bond buying (Public Sector Purchase) Program would be illegal under German law unless the ECB provided adequate justification within 3 months (Bundesverfassungsgericht, 2020). This ruling raised alarm bells in Germany, and curtailed the role that the ECB itself could play in subsequent stages. One role that the new ECB President, Lagarde, would continue to play, though, was to spur on national leaders and finance ministers to consider radical solutions, such as Corona bonds (e.g., Reuters, 2020).
The cause: An(other) unprecedented crisis with an acknowledged demand for EU action
It took only a short period of time for the Covid crisis to become (acknowledged as) an EU crisis. Within the span of a few weeks from mid-February 2020, EU countries had gone from state of normal to lockdowns, border closures, and unprecedented national health crises. In the very early stages, it was still primarily considered as a health crisis, predominantly falling under national competences. Hence, calls for EU action were relatively limited and the focus was on increased coordination between member states. However, the focus would shift very quickly to the European level.
The early crisis was the worst in Northern Italy, where hospitals were overflowing and equipment shortages led the Italian government to issue a desperate cry for help, activating the EU's ‘civil protection mechanism’. The economic consequences of lockdowns were also immediate, forcing the Italians and other EU governments to adopt massive financial rescue packages that many of them could ill afford, as they were still recovering from the aftermath of the Eurozone crisis. In this situation, the Italians and other heavily impacted countries called out for solidarity from other EU governments, both in the immediate term with medical supplies, but also increasingly to help with funding the extraordinary lending required to tackle the short- and medium-term economic consequences of the rescue packages (Volkskrant, 2020b). Two hastily convened virtual European Council meetings were held on 10 and 17 March to discuss the unfolding crisis (European Council, 2020a).
In Brussels, the view quickly took hold that the EU member states were going to be unevenly affected financially by the crisis (Bruegel, 2020). Already by the middle of March, officials within the European Commission had started to propagate their fears for a great fragmentation between those with and those without financial buffers that could endanger the EU's internal market; a view that was shared with member states representatives from France and Germany (Author's interviews, 27 August 2020, 1 February 20217). Those who would argue against this view would be shamed into silence, most notably the Dutch Finance Minister Hoekstra, who openly wondered whether the Commission should investigate why Italy and Spain were in such a bad financial situation to begin with (Volkskrant, 2020a). However, to be able to trigger a reform process, this view from within the institutions required the formal acknowledgement of ownership by the political leaders.
Part 1: Agenda setting in the machine room
Ahead of any political mandate from the European Council, the institutional machinery of the EU institutions kicked into gear, especially within the Commission. The Commission is the steward of the EU budget, and it has a clear informational advantage in terms of the size of staff and domain-specific expertise in this area (Author's interview, 23 April 2021). Meanwhile, at the other side of the Rue de la Loi, the European Council President and his cabinet were still recovering from a disastrous – both in terms of process and outcome – European Council Summit in February on the MFF (Author's interviews, 4 June 2020, 23 June 2020; Ludlow, 2020a, pp. 23–29). The problem was not so much that the Summit itself had failed – hardly anyone expected a deal already in February – but rather that the institutions had been given very little to work with. President Michel even considered going for an intermediate ‘war-time’ budget for 1 or 2 years. This explains why the new MFF would not feature prominently in the early talks about financing the Covid recovery.
Within the Commission, on the other hand, a small informal team of advisers centred around Commission President von der Leyen had already started brainstorming the modalities of EU assistance (Politico, 2020f). Within DG Ecfin, Director General Maarten Verwey started drafting a highly confidential internal report, creatively entitled ‘back to the future’, that included a much broader MFF and a proposal for a massive Recovery Fund (Author's interview, 31 July 2020, 27 August 2020). Within DG Budget, Director General Gert Jan Koopman started writing a budgetary blueprint for a Recovery Fund, which included the highly controversial idea of Commission borrowing on the financial markets (Author's interview, 21 September 2020). There was precedence for using article 122 TFEU to allow the Commission to borrow funds on markets from the creation of the EFSM in 2010 – although the scale under consideration here was several factors of magnitude larger (Author's interview, 29 October 2020).
The Commission's core team further included cabinet officials Björn Seibert and Stephanie Riso, along with Secretary-General Ilze Juhansone and the head of the Commission's Legal Service, Jean-Paul Keppenne. Interestingly, the directly responsible Commissioners for these dossiers, Gentiloni (DG Ecfin) and Hahn (DG Budget), either had different priorities (Corona bonds) or were kept out of the loop (Author's interviews, 31 July 2020, 27 August 2020). At the same time, there were informal high-level contacts with selected capitals, who felt that the need for speedy measures ruled out any link to the new MFF (Author's interviews, 29 October 2020, 1 February 2021; Ludlow, 2020b, p. 6, 27). French officials, in particular, were not fully convinced by the Commission's reassurances that it could be done within the framework of the MFF and kept their intergovernmental alternative – a Special Purpose Vehicle (SPV) structure resembling the European Financial Stability Facility (EFSF) – in reserve (Author's interview, 11 December 2020).8
Part 2: Agenda setting in the control room
The political mandate for proceeding with the Commission's ideas would come at the European Council's third video-tele-conference (VTC) meeting of 26 March. At the second VTC meeting of 17 March, the idea of ‘Corona bonds’ had ‘spontaneously’ appeared on the agenda. The idea was in essence a rebranded Eurobond, which was a plan for issuing common EU debt in solidarity with hard-hit countries during the Eurozone crisis that had been vehemently opposed by Germany, Finland and the Netherlands. The idea was again raised at the third EUCO VTC on 26 March, on the basis of a letter of nine Heads to President Michel (Euractiv, 2020a). The idea, again, met with strong opposition from Germany, Austria and the Netherlands (European Council, 2020b; Politico, 2020a). In an attempt to avoid a complete collapse, President Michel suggested delegating the search for further solidarity measures to the Eurogroup, without specifying the direction in which these ‘proposals’ should go (Author's interviews, 29 March 2021, 23 April 2021).
The 26 March meeting was significant for a number of reasons. First, instead of going at it alone, like they had done during the early stages of the Eurozone crisis (e.g., the first Greek loan package, EFSF, and Euro Plus Pact), the Heads were now bringing in the machine room (Eurogroup, Commission) very early on in the crisis. Second, a remarkably broad mandate was given to the machine room (Eurogroup), tasking them to present proposals for a comprehensive recovery, with a strict deadline of 2 weeks (European Council, 2020b, p. 14; Ludlow, 2020b, p. 40). The Commission and European Council President were provided with a similarly broad mandate to deliver ‘a coordinated exit strategy, a comprehensive recovery plan and unprecedented investment’ (European Council, 2020b, p. 22). This mandate did not attract a lot of attention, neither by the press, nor by insiders for that matter (Author's interview, 4 June 2020). After all, the Eurozone and migration crisis had seen many roadmaps that never reached their destination (e.g., the Four and Five Presidents Reports from June 2012 and June 2015).
Third, the von der Leyen Commission played a notably different role. Where her predecessor, Juncker had envisioned an autonomous, political role for the Commission, von der Leyen appeared willing to work within the confines defined by and under the aegis of the European Council. This is why, at the political level, the Commission operated very prudently in the agenda-setting stage (Author's interviews, 27 August 2020, 29 October 2020). In the three virtual summits of the Heads in March, Commission President von der Leyen had mainly spoken in terms of flexibility, in effect getting Europe out of the way of national attempts to manage the crisis (e.g., relating to border closures, state aid). The President did not talk about massive additional funding, and even refused to talk about the (new) MFF (Ludlow, 2020b, p. 36). Instead of jumping on the occasion, von der Leyen was quick to dismiss the idea of Corona bonds (Politico, 2020b).
Part 3: Negotiations in the machine room
After the control room level had given the go-ahead, the negotiation stage could start. At the beginning of April, the core network within the Commission was developing the modalities for a Recovery Fund linked to the EU budget, to be financed by Commission borrowing and to be paid back by the member states from 2028 onwards. The substantive elements were ready by Easter (Author's interviews, 21 September 2020, 20 January 2021; Euractiv, 2020b). The main concern was the legal base: specifically, whether Article 122 provided a sufficient legal basis to allow for ‘borrowing for spending’. Early consultations with Berlin had revealed that Germany was hesitant about using Article 122, which based the Recovery Fund on a Council decision and was subject to QMV. Germany wanted a stronger legal base to ensure that the fund could not be changed or extended by means of a Council decision, but would require unanimity and ratification (Author's interviews, 20 January 2021, 29 March 2021). To ensure a soft landing of their proposals, the Commission officials started collaborating with their counterparts in the Council Legal Service (CLS). Again, only a very small number of people were involved in these consultations, also from the side of the Council: the cabinet of the European Council President, the Secretary General and a few selected members of the CLS (Author's interview 29 October 2020, 20 January 2021). The process was shielded even from the units that were dealing with the new MFF (Author's interview, 19 March 2021).
Meanwhile, political discussions still focused on other solutions: Corona bonds, SPV (i.e., a new, intergovernmental fund), but mostly support through the existing ESM (Author's interviews, 27 October 2020, 21 January 2021, 25 February 2021). The 9 April Eurogroup was tasked to deliver a 500 billion package of ‘safety nets’, consisting of ESM pandemic crisis support, a European unemployment reinsurance mechanism (SURE), and EIB guarantees to small and medium size enterprises (Eurogroup, 2020, pp. 15–17). However, in spite of very long and harsh negotiations, the ESM was a non-starter. Southern member states, Italy in particular, had no intention to apply for it because of the stigma and the conditionalities (both real and imagined) that were attached to using it (Author's interview, 21 January 2021).
At the preceding Eurogroup Working Group (EWG+) meetings, Commission representatives had also been able to pull the plug on the other radical solution: Corona bonds. Technical talks had been particularly unfruitful due to the unwillingness of both proponents and opponents to clearly define what they had in mind with these bonds and which purpose they should serve (Author's interviews, 31 July 2020, 27 August 2020, 27 October 2020). From an institutional perspective, however, there was an upside. The sheer endless and ultimately futile hassling about ESM and Corona bonds helped pave the way to using and extending Community-based instruments, first and foremost within the new MFF.
“Innovative financial instruments was understood as common debt issuance. However, debt issuance at a grand scale was not considered compatible with EU Treaties, which is why the second part is in there.” (Author's interview, 25 February 2021)
Anticipating stalemate at the ministers level, the drafters cleverly suggested that ‘discussions on legal and practical aspects of such a fund, including its relation to the EU budget, its sources of financing’ were ‘subject to guidance from Leaders’ (Eurogroup, 2020, p. 19; Ludlow, 2020d, p. 6). Opponents to the fund had fought hard to keep the reference out completely, arguing that the Eurogroup does not deal with MFF matters. However, proponents argued that they had been provided with a mandate from the Heads to explore all potential solutions. The sentence survived.
Unclear to both sides at the time was that the Commission's and Council's legal services had found a way to make the two elements compatible (Author's interviews, 29 October 2020, 1 February 2021). On 15 April, President von der Leyen declared at a press conference that, ‘the principle-leveraging money that is guaranteed by the member states – the Commission has done before.…never, ever before at that size, but it has the mechanism…a trusted one and a proven one’ (Politico, 2020c). At a Coreper meeting on 20 April, Commission Secretary General, Ilze Juhansone, informed the ambassadors that an alternative legal base – which was Article 310 and 311 (dealing with the Community's own resources) – was available (Ludlow, 2020b, p. 58). What was still missing was the political buy-in from the Heads, and in particular from Germany.
Part 4: Negotiations in the control room
The necessary endorsement by the Heads would come in two steps, in the days between 20 and 23 April and on 18 May. We should not overemphasize the role that institutional actors can play at this level. Their role was ‘to point out the possible’, which in this case paved the way for a German ‘U-turn’ on debt mutualization (Author's interviews, 1 February 2021).
The start of the German U-turn can be traced back to a mini-summit on 20 April, convened by European Council President Michel, but in which the focus was very much on German Chancellor Merkel (Author's interview, 23 April 2021). Up to this point, the Dutch and Austrians had been labouring under the impression that debt mutualization was off-limits. As long as the Italian and Spanish prime ministers, Conte and Sanchez, kept picking fights over Corona bonds, they could safely rely on Germany to fight their battles for them. However, at this mini-summit Merkel was heavily on the defensive (Author's interviews, 2 November 2020, 23 April 2021). In the end, she got Sanchez and Conte to definitely drop Corona bonds. In return, Merkel suggested a second major support package, over and on top of the ESM pandemic crisis support which Italy still refused to apply for, and in line with the proposals developed by the Commission (Ludlow, 2020b, pp. 58—62). The Chancellor also openly acknowledged, in the press conference afterwards, the need for a new and very different MFF.
The European Council President and Commission President then wasted no time. The course that had been charted out by the German Chancellor at the political level, and by the Commission at the technical level, was to be endorsed by the European Council at their fourth VTC meeting on 23 April (Ludlow, 2020b; Politico, 2020f). To avoid the kind of bad press that had surrounded the meeting of 26 March, where clashes between the Heads had been publicly exposed, President Michel decided that there would not be any European Council conclusions this time (Author's interview, 23 April 2021). In fact, there would not be much of a debate, because the VTC format did not allow for it. The conclusions would be the Conclusions of the President of the European Council. Not surprisingly, these neatly followed the line of the Commission notes, by agreeing ‘to work towards establishing a recovery fund…of a sufficient magnitude, targeted towards the sectors and geographical parts of Europe most affected’. They invited the Commission ‘to urgently come up with a proposal’ that inter alia ‘should clarify the link with the MFF, which in any event will need to be adjusted to deal with the current crisis and its aftermath’ (European Council, 2020d).
Initially, von der Leyen suggested that a full proposal could be readied in a week or two. The speed with which the institutional machinery was moving prompted even the German Chancellor to intervene and remind the Commission President, ‘do not forget to talk to us’ (Author's interview, 23 June 2021; Volkskrant, 2020b). A clear reminder that the matter was still Chefsache.
The second step of control room endorsement came in the shape of the ‘Franco-German initiative for the European Recovery from the Coronavirus Crisis’ of 18 May 2020. The plan called for a 500 billion Recovery Fund. ‘France and Germany propose[d] to allow the European Commission to finance such recovery support by borrowing on markets on behalf of the EU under the provision of a legal basis in full respect of the EU Treaty’ (Bundesregiering, 2020; italics added). This legal base had been the game changer for Germany. The money was to be disbursed as ‘budgetary expenditures [i.e., grants, not loans], in line with European priorities, to enhance resilience, convergence and competitiveness of the European economies’ (Bundesregierung, 2020).
The Franco-German paper reflects a degree of political leadership that only France and Germany can provide. However, by mid-May the substance and legal framework for the deal had already been firmly laid out within the institutional circles (Author's interview, 29 October 2020; Ludlow, 2020d, pp. 6–7; Politico, 2020f). It would be more appropriate to say that the French President managed to acquire the German Chancellor's blessings for plans that had been developed within the institutional network. There had been consultations with the French Elysée and German Chancellery, but primarily at the higher (Sherpa) level, which had discussed it in terms of political feasibility rather than technical design (Author's interviews, 29 May 2020, 4 June 2020, 25 June 2020). It is thus not surprising that, apart from the overall size, the Franco-German plan fits together seamlessly with the subsequent Commission texts from 27 May.
Part 5: Endgame in the control room
On 27 May the Commission put forward its own set of proposals, under the heading of NGEU. Everything that happened afterwards can be considered as a prelude to the final European Council Summit of 17–21 July. The Commission package included a €750 billion Recovery Fund along with a new €1,100 billion MFF. The Recovery and Resilience Facility (RRF), would take up 560 of the 750 billion reserved for recovery, 310 billion in the shape of a grant facility and 250 in loans (Commission, 2020b). While the proposals were extensively discussed at the Coreper level, it was clear to all involved that this was Chefsache. Most of the time was spend asking the Commission and the CLS for further clarifications about the set-up and the legal base (Author's interviews, 21 September 2020, 29 October 2020, 1 February 2021; Ludlow, 2020d, p. 10–11).
On 26 June, the CLS presented its ‘Opinion on the Commission NGEU package’, to reassure member states (and national parliaments) of the legality of the proposals (Council, 2020). Seeing that the budget itself had to be in balance, the main issue that had to be addressed in this 68-page analyses of legal niceties was whether the €750 billion could be placed outside the annual budget as ‘external assigned revenue’ (EAR). Could such an enormous EAR still be considered as ‘additional means’, which according to the Treaty (Article 311 TFEU), the Union is ‘allowed to provide itself with to attain its objectives and carry through its policies’? The CLS justified it by pointing to the exceptional, targeted and limited (in time) nature of these expenses. Also, it specified why technically speaking this was not a Eurobond, since real debt mutualization would require ‘joint and several liability’. The CLS thereby helped to pave an arguably narrow, legal pathway towards a final deal (Author's interviews, 1 February 2021, 26 February 2021).
By the time the Heads got involved, the negotiations were no longer about general principles, but about limiting specific implications and placating member states’ concerns (Tweede Kamer, 2020). In terms of process management, one open question was when to bring in the Heads (Author's interview, 23 June 2020; Ludlow, 2020d, pp. 25–28). President Michel was set to avoid the mistakes of February, by making sure that he would not bring in the European Council too early. Instead of wanting to do everything himself (as in February), Michel now decided to go for a division of labour. For instance, the German Chancellor and Latvian Prime Minister primarily engaged with the Visegrad countries on the issue of rule of law conditionality. The Commission and CLS dealt with the Dutch and Italians who held opposite views on the inclusion of an ‘emergency brake procedure’ that would allow individual member states to bring unwarranted disbursements from the fund to the attention of the European Council (European Council, 2020e, p. 19; Author's interviews, 26 February 2021, 29 March 2021).
In terms of substance, the President's draft proposal of 10 July 2020, which in MFF terminology is referred to as the ‘Nego box’, provided the creative solutions on key contentious issues: the division between loans and grants, (A14), the degree to which these grants would be pre-allocated (A15), the size of the rebates (‘lump sum corrections’ 152) and the VAT retention rate (143) (European Council 2020e; Author's interviews, 19 March 2021, 29 March 2021). The Commission had overplayed its hand by trying to transfer funds that it had failed to acquire in the MFF (e.g., InvestEU, external expenditures) into the new Recovery Fund, but where the link with the Covid-19 crises was unclear. President Michel's Nego Box, instead, went back to the February text on the MFF, while adding the RRF under a separate Chapeau.
Many things still needed to be hammered out at the Summit itself, for instance whether the next European Council should ‘exhaustively’ or ‘decisively’ discuss unwarranted disbursements (Author's interviews, 1 February 2021, 26 June 2021; Ludlow, 2020d, p. 37). It was only on the rule of law conditionality that the Heads agreed to kick the can down the road. As it turned out, this particular ‘can’ would only get bigger, eventually resulting in a veto threat by Poland and Hungary on the Own Resources Decision in November 2020.
The final outcome: A more ambitious deal
The final, but crucial, element of our analysis is to demonstrate that the process actually mattered in producing a deal that went beyond what national governments would have been able to produce by themselves. To be sure, there had been even more ambitious national proposals (Corona bonds, perpetual debt), but it is highly unlikely that any of them would have seen the light. The proof lies in showing that the Recovery Fund that we did get transcends the LCD outcome, and that the institutional actors paved the way towards reaching it.
With regard to the first element, there is sufficient reason to state that the Covid Recovery Fund transcends the LCD in terms of size, scope and legal shape.9 Instead of setting up another, limited SPV structure along French lines, or channelling support through existing intergovernmental instruments (the ESM) like the Dutch had preferred, the Heads agreed to the creation of a large, albeit formally temporary, fund within the Community framework, in line with the preferences of the Commission. The overall sum is notably bigger (750 billion) than the 500 billion that Merkel and Macron had suggested. The financing through the issuing of debt by the Commission and the principle of loans for grants were both maintained. Last but not least, instead of creating a targeted fund to deal with the immediate consequences of the Covid-19 crisis, the fund is set to address economic divergence in general, as well as financing twin transitions: Green (37%) and Digital (20%) (European Council, 2020e). What participants find most remarkable is that the Covid Recovery Fund that they ended up with had less to do with addressing the immediate consequences of the Covid crisis, and instead reflected Commission priorities and programs about the post-crisis (‘Next Generation’) EU.
With regard to the second element, the causal impact of the institutions, it is clear that this solution was not developed in Berlin or Paris, but rather in and around the Berlaymont. With regard to spending, the Commission might have drawn inspiration from the Eurozone specific negotiations about a ‘Budgetary Instrument for Competitiveness and Convergence’ (BICC), in which France had played a prominent driving role (Author's interviews 27 October 2020, 25 November 2020). The funding part, which participants from all sides agree is the truly revolutionary element, was fabricated in a small intra-institutional network around von der Leyen, which became a bit more inter-institutional with the involvement of the CLS. It was cleverly anchored into the language of the Eurogroup statement of 9 April, taken over by the European Council of 23 April, politically endorsed by the German Chancellor on 18 May and brought home at the July Summit.
The framing of these measures as ‘targeted’, ‘exceptional’ and ‘one-off’ cannot hide the fact that the member states had for the first time endorsed the principle of a common debt instrument. There is no telling whether the instrument will indeed be one-off and temporary. ECB President Lagarde wasted no time in pushing for it to become permanent (Bloomberg, 2020). It is highly likely that, during the next crisis, the EU will do what it always does, which is to look at what instruments it already has. As one close insider to all these crises put it: ‘Basically our first move always involves drawing up a list of all things we came up with in the past, ranking them from less to more ambitious. This also has a pedagogical function, to make the political level aware of what the EU already has in store, before they start looking for something completely new’ (Author's interview, 27 August 2020). Negotiations start from there.
Conclusion and discussion
In this section we use our findings from the RRF case to (re)engage with the literature on crisis management and major policy change, within and beyond the EU. Our goal is to provide more clarity on the causal pathway that links crises to reforms. As said, most of the individual conditions for effective reform have been identified elsewhere and by others. We seek to identify how they are connected at the process level (when, by whom and at what level) to be able to produce reform. For this, we will also build on comparisons to previous cases of major crisis reforms within the EU.
First, reforms require leadership, political as well as technical/instrumental. In times of crisis, the general focus – of the media but also academia – tends to be on political leaders (Cross, 2017; Kreuder-Sonnen, 2018; Lipscy, 2020). However, the same literature has also shown that these political leaders are limited in their ability to link crises to reforms (Boin et al., 2017; Keeler, 1993). Our findings echo and extend this line of reasoning. The RRF case revealed some of the difficulties that the Heads faced when trying to provide collective leadership, albeit in a very unusual environment, in which physical meetings were impossible until the very end. The crisis management literature would then expect that the initiative would lie with individual leaders who have the political clout to take charge of crisis management and are able to bring together key actors. This is indeed part of the story behind the RRF, where political level agreement was reached in no small part through bilateral or multilateral meetings between leaders like Merkel, Macron, Sanchez, Conte and Rutte. However, what was lacking at this level was the ability to engineer policy solutions that could provide the basis for leaders’ discussions. Without viable solutions, political level discussions can quickly turn into a shouting matches, as we saw in the early stages of the Covid crisis, where alarmism and insults echoed through the VTC channels. In an attempt to show domestic audiences that they took charge, leaders championed radical ideas (Corona bonds, perpetual debt, Treaty reform) and opted for ‘heroism’ at a time when they needed allies more than ever (see also Goldfinch & ‘t Hart, 2003, p. 240).
To be sure, political leadership is required, but this energy needs to be channelled through appropriate policy ‘streams’ or channels (Kingdon, 1984). Such channels are not created by the leaders themselves, nor by their domestic policy-making machinery. The Spanish, Italian, French, Dutch and Franco-German proposals for dealing with the financial implications of the Covid crisis were political-level ideas only, and were not anchored to the policy-making machinery. A second type of (instrumental) leadership is required to provide the linkage between political (control room) and technical (machine room) proceedings. Successful crisis reforms depend therefore on the effective interplay between these levels. From our reconstruction of the RRF case, we extrapolate what this interplay could look like more generally. Figure 3 serves as a heuristic tool that can be used to understand such processes. It does not intend to serve as an exact replica for every reform process, but instead seeks to capture the core dynamics. The remainder of this section discusses the main elements in this model, in the context of the broader literature.
Agenda setting is a key condition for major policy change (Jones & Baumgartner, 2005; Pollack, 1997; Princen, 2011). Yet, in the literature, agenda setting is generally portrayed as rather long-term and gradual, leading to slow, but significant, reorientations of a policy course. Agenda-setting activities tend to take place away from the spotlights, at the lower, technical levels of the decision making. However, agenda setting in a crisis is a much more dynamic and interactive process, and, moreover, in a crisis, political authorities need be actively involved in this. The leaders need to be ‘fed’ with ideas that they can subsequently sell as their own. Within and beyond the EU, there is the persistent misconception that major policy reforms need to be carried by strong, ‘entrepreneurial’, institutional leaders, who present and defend their own reform agenda's to their political counterparts. The image of former Commission President, Jacques Delors, hangs heavily over EU decision making as well as its theorizing (see e.g., Grant, 1994; Ross, 1995).
The problem with this line of reasoning is that these institutional entrepreneurs, the presidents of the European Commission and European Council, face the same, if not more, limitations as national political leaders when they try to take the reins in crisis reforms. Some recent Commission Presidents, for example, Barroso during the Eurozone crisis and Juncker during the migration crisis, sought to leave their mark on the European project through a fundamental overhaul of the existing EMU and asylum regimes. But their attempt to ‘do a Delors’ quickly ran into member states’ opposition. Agenda setting in a crisis environment is more effective if it does not take the shape of bold initiatives, but instead involves what we term ‘laying out of the tracks’ that national, political leaders are then willing to endorse. Agenda setting also requires that these leaders provide a mandate to further develop some of these tracks.
The sequence and interplay between these agenda setting activities at the two levels can of course vary. It can be that the internal machinery will start to lay out the tracks – that is, diagnose the problem and formulate solutions, fitting within the legal and operational framework of that institution – ahead of any political mandate, like we saw in the RRF case. In other major EU crisis reforms, like the banking union, the control room provided the first spark, after which the machinery sprang into action (see e.g., Nielsen & Smeets 2018). The key point is that agenda setting on major crisis reforms is a shared competence, in which the political level decides the broader direction and the technical level is able to develop and deliver on these ideas.
Process-management of negotiations is another key condition for major policy change, as is recognized in the policy and negotiation literature (Keeler, 1993, p. 440; Lipscy, 2020, p. 116). We sought to identify how these activities are related at the process level in producing successful reforms. We know from the literature that crisis is an enabling, rather than active, cause. Crises discredit prevalent policies and ideas, expand executive discretion and loosen the political, legal and bureaucratic constraints that hinder policy change in normal times.
However, this loosening of constraints does not happen automatically. Reform processes need to be actively shielded from national and bureaucratic policy actors. In a crisis situation, everybody typically wants to be part of the process, with the result that many reforms processes run aground (Boin et al., 2017, p. 133). In order to be successful, networks need to be small, lines need to be kept short and key actors need to be able to find each other across formal institutional divides. This also means that the process needs to be kept rather informal, arguably even ‘unrepresentative’ or ‘undemocratic’. Away from the spotlights, leaders need to know whom to call, or whom to invite to be part of their search for solutions.
Institutional actors are, of course, not the only ones that can come up with solutions and ‘feed’ them to the leaders. In other major crisis reforms, such as the EFSF and the EU Turkey deal, national civil servants played a key, engineering role (Smeets et al., 2019; Smeets & Beach, 2020b). However, institutional actors do have a competitive advantage in coming up with legally and operational sound solutions at the collective (EU) level and shepherding these to the policy making machinery. However, as we know from the literature, the effective management of major crisis reforms is not the prerogative of a single actor or institution (Boin et al., 2017). Instead, it requires collaboration across and a division of labour between various actors and institutions.
In earlier crises (Eurozone and migration crisis), there was mistrust of an overly ambitious Commission that tried to take charge of reform negotiations both at the control and machine room level. This resulted in political leaders hammering out solutions amongst themselves, outside of the Community framework, like the EFSF and EU Turkey deal. In June 2018, the Heads again tried, but failed, to reshape EU migration policy, drafting proposals and forging compromises, resulting in a plethora of measures, ranging from controlled centres to disembarkation platforms (Smeets & Beach, 2021). In the RRF case, the opposite happened. The Community framework made a comeback. The Covid Recovery Fund was, in fact, a Community product dressed up as an intergovernmental Franco-German initiative. But this approach is not new. Also, during the Eurozone crisis, we saw this interplay between Franco-German letters and institutional (Commission) proposals, specifically in the setting up of the ESM and the Fiscal Compact. At the time, the ideas were perceived to be in competition, but in reality they served to propel developments at different levels. Generally speaking, the Franco-German letters would serve to provide the political backing at the control room level that would allow the institutions to move forward at the machine room level.
In the RRF case, the Commission provided forceful leadership in the machine room, but it did not feature prominently in the political negotiations around the EUCO summits or bilateral or multilateral meetings between leaders. Rather than opting for political activism, President von der Leyen showed strong management of ‘the house’, getting her Commissioners to fall in line, enabling the internal machinery to deliver on an ambitious package (Kassim et al 2017). While her management style was perceived as ‘slightly Olympian’, von der Leyen managed to keep many bureaucratic actors within and beyond the Commission at bay. For this approach to work, inter-institutional cooperation was key. In the RRF case, the Council side – the European Council President, the Council Secretariat and its legal service – came in rather late in the process. However, it played a crucial role in getting the initial endorsement in the days between 20 and 23 April and shepherding the RRF through the final Summit in July. In the endgame process the Commission only played a marginal role. Creative solutions had to be found, primarily by the Council Legal Services and Council Secretariat in direct relations with national representatives, ahead of and at the July Summit.
We end with two broader observations. First, our process-level analysis offers a more optimistic perspective on how to get from crisis to reforms. If we look beyond the media alarmism and political grandstanding – which seems to become more dramatic with each crisis – we note that the EU policy-making system is remarkably resilient, and able to deliver in spite of, in fact even helped by, political clashes at the level of the leaders or ministers. Second, but related, we believe that there is reason to qualify the amount of political leadership that is required to get from crisis to reforms (cf. Ludlow, 2020b, p. 77; Van Middelaar 2019, p. 1010). We contend that political leaders need to be brought into a position in which they can exercise guidance and control. High level interventions need to be anchored in the policy-making machinery to be able to have an impact. If that happens, community-based solutions can appear remarkably attractive, and agreeing on them remarkably easy, when compared to the vicious intergovernmental bargaining on ESM involvement or Corona bonds. In the Covid case, it resulted in a massive Recovery Fund, which introduced a form of debt mutualization that had been unthinkable as late as early April.
Acknowledgements
We would like to thank the interview correspondents for their help and contribution to this project. We thank the reviewers for their very detailed and constructive comments. We thank the editors for their help and support.
