Monday

8th Aug 2022

EU leaders face off over corona bailout summit

  • European Council president Charles Michel welcomes German chancellor Angela Merkel earlier in July at the start of the German EU presidency (Photo: 16/07/2020)

EU leaders will face difficult and fundamental issues on Friday-Saturday (17-18 July), when they attempt to agree on the planned seven-year €1.07 trillion budget and €750bn recovery package.

Pressure has been mounting to come to an agreement to tackle the economic fallout of the pandemic, calm financial markets and invest in European economies facing the biggest recession in the bloc's history.

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But deep divisions persist, as EU leaders meet for the first time in person since the outbreak.

"We are not there yet," said one senior EU official.

Wealthy net contributors Austria, Germany, Sweden, Denmark and the Netherlands are arguing for a smaller budget and recovery fund available only as loans, plus strict economic conditions and monitoring, and economic reform in recipient countries.

Those, mainly southern, countries - unnerved by what they perceive as intrusive monitoring attached to bailouts during the debt crisis and eager to avoid more debt - argue for grants and looser conditions.

The monitoring and disbursing of EU aid - the governance in EU jargon - has emerged as one of the key hurdles in talks.

Based on the latest proposal by European Council president Charles Michel the bulk of the recovery fund will be available to countries as non-repayable grants, based on economic conditions before the pandemic.

Another almost €100bn would be made available in 2023, based on the drop in gross national production since the pandemic.

Reform plans and disbursement would be eventually approved by a majority of fellow governments, with a possibility to review if any government has concerns.

Net contributors that had received correction payments previously would be able to keep EU budget "rebates", to win them over to the stimulus package.

In a major leap forward for EU integration, the EU Commission will be allowed temporarily to borrow large sums on the capital markets to finance the recovery - but governments disagree when those repayments should start.

New EU levies on non-recycled single-use plastics, on digital transactions, on the carbon footprint of imports, fresh Emissions Trading Scheme revenues, and on digital companies are also on the table.

There are also big disagreements whether funding should be conditional on the respect of the rule of law - with Hungary arguing that such a link would be an overreach, and its parliament insisting that a deal cannot be accepted unless it is scrapped from the agreement.

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Leading the opposition of the so-called 'frugal' countries to the budget and recovery package is the Netherlands.

"It will be a Rutte-show," predicted one diplomat, referring to the Dutch premier Mark Rutte.

To some diplomats it feels like the Dutch premier comes with more and more demands. But they admit it is difficult not to agree with The Hague's position of wanting better control of where the money flows and for what.

Many governments that experienced difficult domestic economic reforms agree that other countries which have shied away from such reforms, and stayed more exposed to economic shocks, should only receive aid under strict conditions.

"Solidarity is important, but at the end fairness still matters," said the first diplomat.

Calls for a swift agreement to help countries hit hard by the pandemic and start reviving the European economy have so far not led to major breakthroughs on the key questions.

"I'm afraid corona hasn't changed Europe so much that leaders forget about their national interests," said another EU diplomat.

German chancellor Angela Merkel will want to push for a deal this weekend, as the budget issues might otherwise overshadow the entire next six months of the German EU presidency.

Merkel's change of heart and joining with France's Emmanuel Macron in proposing a €500bn rescue package in May, which was the seed of the recovery fund, meant a major shift in German policy and in the dynamics of the negotiations.

"Before that it was South, led by France, versus North, led by Germany. Now Germany and France are on the same page, pushing for a deal," a diplomat described the last few months - in admittedly simplified terms.

Some diplomats expect the summit to last until Merkel, famous for her stamina during marathon talks, sees a chance for compromise.

Covid distancing

Meanwhile, leaders will meet under new safety measures to manage the threat of Covid-19 infections.

Their usual 19-member staff, who provide critical expertise during the negotiations, is reduced to six people.

They will meet in a larger room, capable of holding 330 people, which will host 31 leaders and top EU officials during the meeting.

They will be asked to wear masks before the meeting, and when social distancing is not possible. There will be also be a doctor on site.

Journalists will not be allowed to follow the event from the building.

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