EU recovery fund faces prodigious hurdles to reach consensus

Brussels faces a critical few weeks for corralling member states to fall in behind an unprecedented boost to EU spending, betting that its proposal for €750bn of borrowing will unblock talks on the bloc’s next budget.

France’s Emmanuel Macron was among the leaders who quickly welcomed European Commission president Ursula von der Leyen’s pitch for the EU recovery fund, part of a broader €1.85tn package aimed at helping the bloc emerge from its coronavirus-driven economic downturn. 

But while a number of capitals indicated that they saw the commission proposal as a workable basis for negotiations, there is a widespread recognition that prodigious hurdles remain in the way of a consensus. 

Ms von der Leyen’s plan fuses the recovery fund with the EU’s next seven-year budget, which she has said should total €1.1tn. National leaders have been trying and failing to agree on the spending pot for two years, but Brussels has argued that it is the only sound and available way to pump money into crisis-hit regions. The budget, or multiannual financial framework (MFF), needs to be ready for the end of this year, when the EU’s existing spending plans expire.

Among the traps lying in wait for governments as they resume negotiations are the size of the recovery fund, the share of money set to be distributed in the form of grants as opposed to loans, the conditions attached to handouts for member states, the formulas governing how the money is allocated between countries, and the vexed question of how the EU will repay its debts.

Angela Merkel, the German chancellor, gave Ms von der Leyen’s ideas an even-handed reception on Wednesday. She pledged to examine the blueprint carefully but added that “it’s clear that there will now be difficult negotiations. They will not be finished at the next European Council.” 

Charles Michel, the EU Council president, has confirmed that summit meeting will happen on June 19, but officials are already bracing themselves for a second meeting of EU leaders in early July. Paris and others hope that gathering will be decisive.

Diplomats noted that Ms von der Leyen achieved her primary goal of making a proposal that was not rejected out of hand by governments, despite deep political divisions over the bloc’s crisis response.

Brussels is hoping that the act of putting more money on the table through the recovery fund will ease some of the tensions that have dogged MFF discussions.

Southern European countries joined with Mr Macron in welcoming Ms von der Leyen’s proposals on Wednesday. Giuseppe Conte, the Italian prime minister, argued that Brussels was following ideas that Rome has been putting forward since the start of the crisis. “It goes right in the direction — indicated by Italy,” he said. António Costa, Portugal’s premier, said the plan “rises to the challenge that Europe is facing”.

Poland’s prime minister, Mateusz Morawiecki, also praised the blueprint, calling it a “very good starting point” that showed Warsaw’s ideas and demands had been “taken into account elsewhere in Europe”. 

Mr Michel is preparing for sensitive political consultations as he judges the mood in the run-up to the June summit. He will need to find ways of winning over “frugal” northern European states that are suspicious of the idea of the commission borrowing to hand out grants. They want to keep a lid on the size of the overall budget. 

These countries — Austria, Denmark, the Netherlands and Sweden — are under intense pressure to soften their opposition to the use of borrowed money for grants, following Germany’s decision this month to ally itself with France behind a €500bn fund. 

EU diplomats speculated on Wednesday whether they could be won round with other concessions. All four “frugals” currently benefit from budget rebates, for example, that they are determined to retain.

Nevertheless, Stefan Löfven, the Swedish prime minister, said it was “remarkable” that the commission had proposed €500bn of the recovery fund money be distributed as grants with no repayment requirements.

“There is a risk of this resulting in a significant increase in Sweden’s contribution to the EU,” he said. “Sweden has consistently called for the fund to instead focus on issuing loans, which provides stronger incentives to use the money efficiently.”

Jeppe Kofod, the Danish foreign minister, said Copenhagen wanted to show solidarity with the hardest-hit countries but that a “slim and modern budget” was needed and that the current proposal was too high.

EU officials acknowledge that satisfying all sides will be a formidable task.

Even if they do compromise on some mixture of grants and loans, northern states will want to see tougher reform conditions imposed on states that receive EU funding than those proposed by the commission. Countries that do not receive a budget rebate will fight richer countries’ attempts to preserve the refunds. 

Should a deal be reached in July, the European parliament would then need to vote in favour of the EU budget, while national parliaments would need to ratify moves to increase Brussels’ borrowing power. 

“I want us to take a new bold step together,” Ms von der Leyen said yesterday. She is about to discover just how bold EU leaders are prepared to be.

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