EU leaders haggled over how far to cut the size of a recovery fund worth hundreds of billions of euros over a fraught dinner on the third day of a marathon summit, after an offer of grants from richer northern capitals was immediately rebuffed by southern countries.

A “frugal” alliance of Austria, Denmark, the Netherlands and Sweden told other EU states they wanted to scale back proposed grants from €450bn to €350bn, coupled with another €350bn of loans, in a recovery package worth €700bn to help fight the coronavirus.

The offer, which came conditional on rebates to their EU budget contributions, was backed by Finland but received a cool response from nations that have been hardest hit by the pandemic. During the summit dinner, Italian prime minister Giuseppe Conte said failure to strike a deal would lead to the “destruction of Europe’s single market”, according to diplomats.

The offer from frugal leaders such as Austrian chancellor Sebastian Kurz and Dutch prime minister Mark Rutte represents a jump from their previous position that no grants could be distributed under the recovery fund. But it is still a massive cut from draft proposals going into the summit. France, Germany, Spain and Italy are among the countries determined to keep the grants ringfenced at no less than €400bn.

In May, Paris and Berlin called on the European Commission to borrow €500bn and hand the proceeds out in non-refundable grants to assist stricken member states. Commission president Ursula von der Leyen later echoed that proposal but added an extra €250bn of loans in her own blueprint for a total package worth €750bn.

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The plans on the summit table are the product of months of work by Brussels to craft an effective response to Europe’s worst economic downturn in the postwar era. They will also take the EU into uncharted territory by allowing the union to borrow massively on the financial markets.

Dutch prime minister Mark Rutte, left, and Austrian chanellor Sebastian Kurz softened their position slightly but it was not enough to swing a deal © Arno Melicharek/BKA/dpa

Despite the gap between the two camps being only €50bn in grants, diplomats warned that leaders were struggling to find a way through after long talks beset by acrimony. One diplomat said negotiations were “stuck at an impasse” that would require “movement form both sides” or risk ending in failure.

Making matters more complicated, the recovery fund proposals sit alongside the debate on the bloc’s next €1tn long-term budget, forcing leaders to confront longstanding divisions over issues including budget rebates received by the four frugal states as well as Germany.

The intermingling of the debate on the budget with the recovery fund proved particularly contentious on Sunday evening. “Leaders are working very hard to bridge the differences, which are still there,” said one diplomat. “It might take a while.”

On Saturday night, Ms Merkel and Mr Macron had been left visibly frustrated by the demands for lower grants and they curtailed a meeting with frugal leaders. “They were not happy with the frugals’ demands on the size of cuts,” said one diplomat. 

In parallel, Mr Rutte’s insistence on having the right to veto grant payments to stricken countries unilaterally if they do not meet reform demands continued to spark resistance from Italy. Both sides remained locked in compromise talks on Sunday.

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Both Madrid and Rome have said they cannot accept plans on the table — crafted by Brussels to assuage Mr Rutte — that would give finance ministers the final say on whether a nation deserved to keep receiving its tranches of recovery aid.

Mr Orban also emerged as a roadblock to a deal when he threatened to veto a compromise that tied distribution of aid to respect for the rule of law. 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.

Speaking to journalists on Sunday, Mr Orban accused Mr Rutte of hating him and Hungary, and seeking to financially punish the country for failing to respect the rule of law, adding this was “not acceptable”.

Mr Orban’s stance on the rule of law mechanism was backed by Poland, which joined Hungary in rejecting 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 that 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.

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”, French president Emmanuel Macron said on Sunday. “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.”

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Mr Macron’s stance was echoed by other leaders including Greek prime minister Kyriakos Mitsotakis, who said: “We simply cannot afford to either appear divided or weak.”

Via Financial Times