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EU leaders deadlocked on recovery fund in marathon summit

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Divided EU leaders headed for their third day locked in talks over Europe’s proposed €750bn response to the coronavirus pandemic, as they battled to overcome differences that have split north and south, and east and west.
After two days of marathon summit negotiations in Brussels, European leaders on Saturday evening failed to bridge deep differences over the size, design, and conditions attached to a planned multibillion-euro package of loans and grants designed to revive Europe’s economy after months of hibernation.

The summit has laid bare divisions pitting a group of richer “frugal” member states — Austria, Sweden, Denmark, and the Netherlands — against the biggest recipients of EU pandemic emergency funds. Frugal capitals are demanding drastic cuts to a €750bn package as their price for signing up to a final compromise, while Spain, Italy, and others have pushed back against substantial cuts, forcing talks to spill into Sunday.

At the start of Sunday’s talks, Germany’s Angela Merkel told reporters she was uncertain “whether a solution will be found”.

“There is a lot of goodwill but there are also a lot of different positions,” she said. “I will do my part in this. But it is also possible that there will be no result today. Non-frugal leaders emphasised their desire to reach a deal, but warned that it could not come at the expense of whittling down Europe’s economic response to Covid-19.
A deal “will not be built on sacrificing Europe’s ambition,” France’s Emmanuel Macron said. “Not out of principle, but because we are facing an unprecedented health, economic, and social crisis, because our countries need it, and because the unity of Europe needs it. His stance was echoed by other leaders including Greek prime minister Kyriakos Mitsotakis, who said: “We simply cannot afford to either appear divided or weak.”

Sunday’s talks are set up to be a crunch moment for the EU’s ability to respond to the worst economic crisis to hit Europe in the postwar era.

The proposals on the summit table are the fruit of months of work by Brussels to craft an effective response, but they take the EU into the uncharted territory of allowing the union to borrow massively on the financial markets. The talks are also tied up with negotiations on the bloc’s next long-term budget, forcing leaders to confront longstanding divisions over EU economic policy.

Diplomats said Charles Michel, European Council president, would need to table a fresh compromise addressing the outstanding issues on Sunday, or risk failure in the first face-to-face summit of EU leaders in five months. The splits cover everything from the volume of recovery aid to how to police countries’ respect for the rule of law, to how to make sure capitals honour commitments to economic reform.

A diplomat from Germany, which holds the rotating presidency of the EU, said the meeting entered a crucial phase overnight as leaders from France, Germany, the Netherlands, Italy, and others held bilateral talks late into the morning.

Hungary’s illiberal premier Viktor Orban also emerged as a roadblock to a deal after he entered the summit threatening to veto a compromise that tied distribution of aid to respect for the rule of law. During Saturday’s sessions, Budapest demanded that any potential sanctions to suspend cash payments could only be done with the unanimous support of all governments — in effect handing one country a veto.

Mr Orban’s stance was backed by Poland and Slovenia. All three rejected a draft plan that would require a qualified majority of member states to back potential cash sanctions. Western governments, including the frugals and France, have called for a stringent system under which money would be withheld for governments who breach the EU’s fundamental rights. One diplomat said Hungary and Poland’s stance was designed to extract more money as part of a final compromise.

Progress on multiple fronts stalled on Saturday despite Mr Michel tabling a compromise in the morning that trimmed €50bn off the total amount of grants to be doled out under the recovery plan.

By late afternoon, leaders from the frugals and Finland were pushing for substantial cuts to the level of grants in the €750bn package, creating a new deadlock in the talks. Southern countries with the backing of France and Germany have insisted the grants element should be ringfenced at €400bn from a current €450bn, diplomats said. A Franco-German proposal from May called for at least €500bn in grants.

In a tense meeting with frugal leaders after the summit, Ms Merkel and Mr Macron were visibly frustrated by the demands for lower grants and prematurely left the talks. “They were not happy with the frugals’ demands on the size of cuts,” said one diplomat.

A demand from Mark Rutte, Dutch prime minister, to unilaterally veto grant payments to stricken countries if they do not meet reform demands also continued to spark resistance from Italy.

Italy’s prime minister Giuseppe Conte said his country was “sharply confronting” frugal capitals in order to rescue a sizeable recovery package. “[Our] tools must be proportionate to the crisis and effective. Our answer must be prompt, solid, robust,” Mr Conte said during a break in the summit.

But diplomats said these governance rules remained a major sticking point going into Sunday. Both Madrid and Rome have said they cannot accept a system where finance ministers would need to unanimously back a decision on whether to resume cash payments or not.

Mr Michel’s compromise plan kept the overall size of the EU’s borrowing plan at €750bn, but shifted the balance between loans and grants. Cuts to the overall volume of grants were done by scrapping a proposed recapitalisation tool for struggling companies worth €26bn and trimming an initiative to stimulate private investment from €30bn to €11bn.

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