Budget deal struck, with Hungary threat still hanging

The agreement is key to unlock the €1.8 trillion package aimed at alleviating the economic impact of the pandemic, and finance EU programs until 2027.

MEPs pushed for almost €40bn new money from member states for what they called "flagship programmes", such as the Erasmus student scheme and the Horizon research.

Any fresh money from member states would have meant re-opening the delicate agreement, only reached by EU leaders in July after five days of gruelling talks, which would have meant a "Pandora's box", as one EU source quipped.

In the end, MEPs managed to squeeze out an additional €15bn for the programmes - which will be financed with competition fines the EU Commission hands out in the next seven years, and reallocations within the budget.

A further €1bn will be used for increased flexibility in the budget to tackle unforeseen spending and crises.

MEPs also pushed for a legally-binding commitment from member states to introduce new EU levies to finance the recovery fund. The money for the fund is to be raised by the EU Commission on the financial markets.

Negotiators agreed on a roadmap for introducing new levies, but member states did not want to legally commit to them since the specific proposals are not even ready.

Already on Tuesday, it was clear MEPs and the presidency had different interpretations on how binding will be the roadmap that sets out a plastic tax from next year, a levy based on the Emissions Trading System from 2023, a digital levy from 2024, and an and a financial transaction tax from 2026.

Negotiators also agreed that at least 30 percent of the total budget and recovery spending will support climate objectives, and 7.5 percent of annual spending is dedicated to biodiversity objectives, from 2024, and 10 percent from 2026.

The European Parliament's plenary can now ratify the seven-year budget.

Veto threat

But the entire package could unravel if Hungary's prime minister Viktor Orban carries out his threat to block the budget and recovery package over the rule of law conditionality.

To be able to finance the recovery fund, national parliaments need to ratify the planned increase to the EU budget's "own resources". The Budapest government threatened to withhold approval if the method of linking EU funds to the respect of the rule of law is not to its liking.

Orban's government has been backed up, albeit less vocally, by Warsaw - the two governments currently under EU scrutiny for breaching rules on judicial independence.

Both argue the final rule of law agreement is not what was agreed by EU leaders in July.

After the German EU presidency clinched a deal on both the budget and the rule of law conditionality, member states will have to approve them formally too.

On the rule of law, a qualified majority of member states' backing is needed, and Hungary and Poland could be overridden.

Hungary has warned against this - with some comparing such a move to the 2015 majority vote on migration quotas which created a political rift and which later Budapest attacked in court, and lost.

But on the budget, unanimity is needed, and Hungary could block here as well, although the country is also in need of EU funds to protect its economy against the pandemic's devastating effects.

On Tuesday, Orban government spokesman Zoltan Kovacs said that the rule of law conditionality is "merely a new instrument in the hands of the EP's liberal, pro-migration majority to blackmail and pressure dissenting member states to fall in line", and claimed it was part of the plan by US billionaire George Soros, a political fixation of Orban.

A decision among member states is expected to come next week.

Negotiators do not expect the agreement on the rule of law to be opened despite Hungary's opposition.

"We urgently need the recovery fund up and running in order to cushion the dire economic consequences of the pandemic. I hope that everyone understands the urgency of the situation and will now help to clear the way for the swift implementation of the EU budget and recovery package, no one needs new hurdles and further delays," Michael Clauß, German ambassador to the EU, said in a statement.