(Bloomberg) — European Union leaders are readying a back-up option that can cut budget holdouts Hungary and Poland out of a multi-billion dollar stimulus fund and still hold them to rule-of-law conditions they adamantly oppose.
The eastern European nations’ leadership dug in on Wednesday against their 25 EU peers at a meeting of government envoys in Brussels. They continued to wield their veto over the aid package aimed at fueling a post-pandemic recovery as the clock ticks down to the end of the year, when a no-deal will trigger an emergency budget for the entire bloc.
With Warsaw and Budapest saying they can do without the money and the latter ready to allow EU states to skirt the need for unanimous approval via inter-governmental agreements, officials in the bloc are now focusing on what they’re calling “Plan B.”
It would be to cut Hungary and Poland out of the 750 billion-euro ($908 billion) coronavirus-rescue fund, effectively stripping them of the power to veto the deal. Passing the EU’s $2.2 trillion spending plan that way, including the 2021-2027 budget, would offer a way to channel funds to hard-hit regions without delay.
“If they don’t respect the rules in our game on the European level then we do it without them,” Manfred Weber, the head of the European People’s Party caucus in the European Parliament, told Bloomberg TV Thursday. “So they must be aware that this can be a big problem for their own countries.”
Read more: Poland, Hungary Risk $220 Billion by Digging In on Stimulus
EU leaders will hold a summit on Dec. 10, which is now the most likely venue where they’ll try to resolve the standoff that also affects the next seven-year budget.
With Poland and Hungary both under rule-of-law probes in the EU, they’re potentially exposed if no deal is struck. They could face a lose-lose situation in which they’d forfeit a combined 180 billion euro ($218 billion) from the multi-year budget and the relief fund while still being subject to rule-of-law oversight.
Still, they remained defiant. Polish Prime Minister Mateusz Morawiecki said his country could cope with a potential exclusion from the virus relief fund because it can raise debt on financial markets cheaply.
“The reconstruction fund is essentially constructed from credit,” Morawiecki said answering online questions late on Wednesday. “Yes, it’s a low-interest loan, but today we can also place a very low-interest loan on the market — by issuing bonds.”
Poland’s borrowing costs have dropped after the country’s central bank slashed interest rates to nearly zero and launched a bond-buying program in the spring to help mitigate the impact of the pandemic lockdown.
The yield on the benchmark 10-year zloty bond now stands at 1.27%. That compares with negative borrowing costs for loans that would be extended from the EU’s recovery fund based on current yield levels.
Still, if the EU shuts off the taps, it would require the government in Warsaw to borrow “tens of billions of euros” in the next six years, said Mateusz Milewski, a debt trader at MBank SA in Warsaw. And while neither Poland nor Hungary are in immediate financial danger, the lack of an EU backstop could hit the zloty and forint and drive borrowing costs higher.
“If Poland were to cover the lack of EU funds with its own issuance, we would have to deal with considerable leap in yields,” Milewski said.
Hungary has also financially positioned itself for the standoff. The government sold 2.5 billion euros worth of Eurobonds last month, taking its annual foreign currency issuance to 6.5 billion euros, the highest since at least 1999.
Hungary is ready for further talks, while reserving its right to veto the financing agreements over conditions it continues to regard as unacceptable, Cabinet Minister Gergely Gulyas said.
Prime Minister Viktor Orban’s government remains ready to accept the EU rescue fund being implemented in the form of an intergovernmental agreement, out of “solidarity” with southern states, though again only if no objectionable conditionality is attached, Gulyas said.
The Plan B option is a “fall-back” if Hungary and Poland don’t relent over their opposition, Weber said.
Poland and Hungary “are walking on a very tight rope,” Spanish Foreign Affairs Minister Arancha Gonzalez Laya said in an interview with Bloomberg TV. “It’s a question of responsibility, and that is why what we are asking for is responsible behavior on the side of Poland and on the side of Hungary.”
One solution may be to could be to try to find a compromise with another dispute brewing before the Dec. 10 summit: the EU’s climate goal. Fault lines between member states are resurfacing over the costs of an ambitious economic clean-up that coal-dependent Poland, Hungary and other eastern countries say will burden them more than their peers.
“More legal bricks on the table allows for more flexibility in creating these agreements,” Rafal Trzaskowski, the mayor of Warsaw and a leading opposition member and critic of the Polish government, said Thursday. “It will help to create an agreement which will be very complicated but will allow everyone to come home and claim some victory.”
(Updates with potential solution in second to last paragraph.)
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