Dutch demands for a veto on how Europe distributes its proposed recovery funding emerged as a key stumbling block as leaders held crunch talks in their first face-to-face summit for five months on Friday.

Meeting with fellow leaders in Brussels, Mark Rutte, the Dutch prime minister, reiterated his insistence that grants handed out under a planned Recovery and Resilience Facility needed unanimous approval from all 27 EU governments. This de facto veto for one country has been fiercely opposed by other capitals and met with little support in the summit room, said diplomats.

EU leaders will face an uphill task bridging deep divisions over Europe’s €750bn pandemic recovery response this weekend, given the wide array of open issues going into the discussions. Speaking as she entered the summit, German chancellor Angela Merkel, who holds the rotating presidency of the EU, said: “The differences are still very large and so I can’t predict that we will achieve a result this time. It would be desirable, but we also have to be realistic.” 

The talks are also beset by differences over the size of the recovery fund, the conditions attached to the payouts, and the formulas determining how the money is allocated between member states. Among the questions ahead is the extent of potential cuts to grants being proposed under the recovery package.

Diplomats said tens of billions of euros in spending could face the chop if demands from the Netherlands and other “frugal” states gained traction as their price for doing a deal on the region’s pandemic rebuilding plans and associated seven-year budget. One diplomat said “several options” for reductions in the volume of the spending plans had been tabled during the early summit skirmishes on Friday.

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A key question is whether to take an axe to spending outside the core €310bn of grants within the Recovery and Resilience Facility that has been proposed by the European Commission. This would hit areas of spending including EU investment support and a proposed tool to help recapitalise struggling companies. “The magical number for cuts has always been €100bn for the frugals,” said one diplomat.

Speaking ahead of the summit, Mr Rutte said there was a “less than 50 per cent chance” of an agreement this weekend. The Netherlands wants to keep a tight leash on potential grants over concerns that the money may be misused by recipient countries, with the veto also giving countries the power to halt disbursements in cases of non-compliance.

Countries including Spain, Greece and Italy have pushed back at the idea of a system of unanimity, fearing that an overly politicised process will delay the approval of vital funds needed to help rebuild their economies after months of lockdown.

Leaders also clashed over how to tie recovery money to respect for the rule of law. Hungary’s illiberal premier Viktor Orban has threatened to veto a deal that makes respect for fundamental values a precondition of the recovery fund — a position supported by Poland’s prime minister Mateusz Morawiecki during the summit.

Western European capitals are demanding tougher cash sanctions for member states such as Poland and Hungary that are accused of undermining the independent judiciary and freedom of the press.

Other outstanding issues included the methodology used to allocate money to countries hit by the pandemic, and the question of whether member states will need to sign up to the EU’s ambitious climate goals to receive the aid. Poland, which is one of the biggest recipients of the recovery package, is the only country not to formally back Europe’s 2050 climate neutrality target.

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Ms Merkel, along with France’s president Emmanuel Macron, has backed EU plans to borrow hundreds of billions of euros to fund Europe’s recovery from Covid-19. In the meetings Mr Macron reiterated France’s opposition to controversial budget rebates being demanded by frugal states alongside Germany, but these are widely seen as likely to survive in the final compromise.

In their first physical meeting since February, EU leaders wore masks as they entered the summit, greeted each other with “elbow bumps”, and travelled with a restricted number of aides in order to abide by social-distancing measures.

A failure to find a breakthrough this weekend would raise the prospect of another summit in Brussels before the end of the month.

Giuseppe Conte, Italy’s prime minister, said that the negotiation was about more than “financial flows”.

“We are elaborating a response, an economic and social response, to all our European citizens in the common interest of the values that we share,” he added.

Additional reporting by Guy Chazan in Berlin

Via Financial Times