EU corona recovery talks could drag into summer

Deep disagreements among governments have caused talks to drag on over long-term recovery plans to kickstart the bloc's economy, which is estimated to contract by 10 percent this year.

Leaders, are expected to agree on a package worth €500bn to take effect in June, including safety nets for workers and firms, and a lifeline for governments from the EU's rescue fund.

Heads of governments will now mainly focus on a larger pool of money, which could be potentially be financed through the EU's seven-year budget, which needs to be in place by the end of the year.

Leaders are expected to flesh out the broad sketches of such a recovery fund and task the European Commission to hammer out the details, possibly already by next week.

Governments disagree on the size of the recovery, how should it work and what its relation to the EU budget should be, while the commission has been pushing for borrowing using the budget as collateral.

One senior official said a deal on the recovery fund and on the long-term budget were interlinked and will likely have to be decided in a package.

EU governments have, for years, been unable to progress significantly on the budget plans over deep divisions on the overall size of it, and the financing of the gap left by the UK's departure.

"At the end, maybe a physical meeting [of leaders] will be needed, which presupposes the [lockdown] exit strategy works well by the summer. If we have bad surprises, everything will take even longer," said the official.

The official added that a physical meeting of leaders can happen "perhaps already in June or perhaps later", adding that a decision on the budget needs to be taken as soon as possible.

Sticking points

Compromises will have to be found on Thursday, but the videoconferencing format makes the usual leaders' haggling more difficult.

EU council president Charles Michel does not plan to publish a joint statement on Thursday, but will instead issue a statement of his own on the progress made, in order to avoid disputes over the precise wording of an EU-level text.

"There is a bit of distrust, there are some countries that think they will have to pay the debt of others, and others think some will take the competitive edge and take more business than others," said the EU official.

Richer northern EU members have so far been resisting pressure for new financing structures to help jumpstart the economy in the south, which has large public debt from before the corona outbreak.

Several ideas have been floating in Brussels on how to finance the recovery.

These include using the the long-term budget to borrow money, giving countries grants rather than repayable loans to avoid piling onto their public debt, long-term perpetual debt, and the mutualisation of debt in the euro area.

All of these issues create fault lines among member states: some insist on grant-based support and long-term debt, others want to stick to loans and avoid any long-term debt taken on by the commission.

While France, Spain, and Italy have called for the EU to jointly issue debt, governments such as Germany and the Netherlands have rejected the so-called coronabonds or eurobonds, concerned that they will have to foot the bill eventually.

The EU executive has floated the idea, seen by Bloomberg, of a €2 trillion recovery plan with a temporary €300bn recovery fund in the bloc's long-term budget.

German chancellor Angela Merkel on Monday said she is open to a bigger budget, currently negotiated on the basis of little more than 1 percent of EU gross national income, and joint debt via the commission.

Dutch sceptics

Some governments, however, such as the one in The Hague, have sounded sceptical about the idea of allowing the commission to borrow money if it does not use it to lend it on the member states.

"We don't see the moment to change the fundamentals of the EU, to extend completely new powers [to the commission]," said one senior EU diplomat.

"There is fiscal space in almost all member states to borrow money," added the diplomat.

Germany's deficit will estimated to grow to more than 7 percent of the GDP this year with extra government spending to help the economy, while debt will climb to 75 percent.

Italy's deficit could be more than 10 percent of the GDP, and push its debt to 150 percent, according to Bloomberg.