EU leaders agree corona recovery after epic summit

The deal was met with applause by the leaders at their first physical meeting since the pandemic, according to sources familiar with the talks.

It is a win for France and Germany, which proposed the core of the recovery package in May, and means that German chancellor Angela Merkel has successfully pushed through the agreement right at the start of Germany's EU presidency.

"The deal is a very good message, [it] means that this very special construct of 27 member states of very different backgrounds can work together," Merkel said after the meeting, adding that "Europe has shown it is able to break new ground".

After gruelling talks, the leaders agreed to give €390bn in grants and €360bn in low-interest loans to the hardest-hit countries, after much opposition from the 'frugal' countries, led by the Netherlands, which wanted to see a lower share of grants, and smaller package.

Leaders, however, agreed on strict conditions for countries submitting reform plans to access the recovery fund - with the possibility of any one member state sounding the alarm if it has doubts over the plans' implementation.

Almost a third of the funds are earmarked for fighting climate change and the budget will mean the largest green stimulus package in the EU's history.

The fiscally-conservative 'Frugal Four' of Austria, Denmark, the Netherlands and Sweden were able to retain their rebates - compensation for their overall net-contribution to the EU budget, in order to secure their consent to the deal. Germany also retained its rebate, although agreed to a smaller level.

Leaders also agreed on a timeline on introducing new 'own resources', that is, new EU levies to finance the repayment of the joint debt.

They also agreed to cuts in research, health, migration, and external action in the budget.

Dutch 'the new British'

French president Emmanuel Macron on Tuesday morning described the deal as "historic". Keeping in line with his 'frugal' style, Dutch prime minister Mark Rutte told reporters after the summit that was not a word he would use.

Asked on the assertive position of Rutte during talks, Merkel said that, after the departure of the UK, "we have to learn how to work in this new dynamism".

Talks came close to breaking point several times over the summit due to conflicting national interests, and emotions ran high by Sunday evening.

However, there was huge pressure on EU leaders to come to an agreement, after the coronavirus left more than 100,000 Europeans dead, and is pushing Europe into its deepest recession since the Second World War.

The final compromise proposal was put forward on Monday evening by European Council president Charles Michel, after a breakthrough came Sunday night with the 'frugals' agreeing on the level of grants.

"I believe this agreement will be seen as a pivotal moment in Europe's journey," Michel said after the summit.

The European Parliament now also needs to agree the deal, and Merkel expected "difficult" discussions.

Rule-of-law link limited

Leaders at the summit also agreed for the first time to link EU funding to the respect of the rule of law - but watered down an earlier proposal in order to secure the larger deal.

In the compromise, the scope of the planned mechanism is limited to the protection of the EU's financial interests. Earlier proposals linked measures to "generalised deficiencies" in good governance by member states' authorities or respect for the rule of law.

Nevertheless, the commission can propose measures in case of such breaches, and a qualified majority of countries can decide on sanctioning countries at fault.

The compromise does refer to the EU values laid out in the EU treaty, which includes the rule of law, but is less explicit in linking breaking it to possible sanctions.

That compromise is a win for Hungary's prime minister Viktor Orban, who rejected the new mechanism linking rule of law to the EU budget. He was backed up by Polish premier Mateusz Morawiecki, and other leaders who viewed the original proposal as too broad.

Orban also asked Merkel to close the "humiliating" Article 7 sanctions procedure against Hungary for possibly breaking EU rules and values.

Merkel said at her press conference that Hungary needs to take "crucial steps" in order to move the process forward, without going into further detail.