EU rift deepens as Commission sticks to €1trn recovery

Dombrovskis added that the commission is working on a proposal which would include both loans to distribute the recovery funds, which member states would have to pay back, and grants, which are basically subsidies to EU countries.

The French and German governments' proposal on Monday, which supported the concept of the EU commission raising money on the capital markets, backed by the EU budget, is a turning point for Berlin - which has traditionally opposed any common debt.

German chancellor Angela Merkel, who is nearing the end of her 16-year-long term and was criticised a decade ago for not being flexible enough during the euro and debt crises, has managed to rally her political allies behind the move.

The group of four fiscally-conservative countries - the Netherlands, Austria, Sweden and Denmark - opposing commonly-issued debt and grants under the recovery effort, have pushed back. They said they would come forward with their own proposal soon.

It remains to be seen if the initiative from the EU's two largest economies, traditionally the political motor of the bloc, will create enough pressure to agree on a compromise.

"We still have to convince other member states, four in particular: Austria, Denmark, Sweden and the Netherlands," French finance minister Bruno Le Maire admitted on Tuesday. "And we mustn't hide the fact that it will be difficult," he added.

The borrowing costs for Italy, Spain and Portugal have all decreased since the French and German proposal.

A smaller scheme of common financing was approved on Tuesday by EU finance ministers, who greenlit a €100bn employment support scheme where the commission will raise money backed by €25bn of contributions from member states.

Not copy/paste

The commission, which will unveil its budget and recovery plans next Wednesday (27 May), welcomed Monday's French-German proposal - but rejected suggestions it would "copy-paste" it.

"Clearly there are many elements that will have to be taken into consideration, but we cannot say today that whether or not we will take up any member states' proposal 'lock, stock and barrel' in next week's proposal," commission spokesperson Eric Mamer said.

He added that commission president Ursula von der Leyen is "in contact with all member states, to get feedback, points of views, to listen to different proposals", and will try to balance the commission's position.

The commission claimed it was not caught by surprise by the German and French announcement, with Mamer saying: "We are not living in an ivory tower. We don't receive proposals out of the blue."

The commission is working on plans to create a larger so-called "headroom" in the seven-year EU budget, the space between the existing budget ceiling and the 'own resources' ceiling - which is fresh revenue from member states.

The commission is also planning to ask EU countries for new revenue streams, which could include, for example, a tax on plastics, a digital tax, and a carbon border tax.

Increasing own resources have been traditionally opposed by the fiscally conservative so-called 'Frugal Four' countries.

Fault line

Both the common financing and the increased own resources revenue would mean a major step towards closer EU integration.

It cuts to the core of the main fault line between those governments that support closer EU cooperation and those which argue that national sovereignty must remain the basis of the bloc.

The French-German proposal can not only expect opposition from the frugal countries but also from sceptics such as Poland and Hungary.

Once the commissions proposal is out, it will be EU Council president Charles Michel's task is to find compromise among the diverging EU governments.

"All member states eventually agree that we are facing a major crisis and we need to react in a spirit of European solidarity. I'm optimistic at the end of the road we will able to find acceptable compromise," Dombrovskis said.

The EU's long-term budget needs to get underway next year, but first requires the agreement of the European Parliament.

EU leaders might need to meet in person in June, if possible given the social distancing rules, to seal a deal.

MEP Johan Van Overtveldt, chair of the parliament's budget committee told a group of journalists on Tuesday that it is "time to take decisions".

"If we don't stop this recession as soon as possible, we might be confronted with what I define as a new financial hurricane," he said.