EU leaders fail to reconcile differences over recovery fund as talks continue

The leaders have been struggling to bridge the familiar fault lines between the richer North and the southern countries worst affected by the pandemic

German Chancellor Angela Merkel (R) and France's President Emmanuel Macron (L) at the start of the second day of an EU summit in Brussels, Belgium. EPA

European Union efforts to agree on a €750 billion ($856bn/Dh3.1 trillion) stimulus package ran into trouble late Sunday as leaders were unable to reconcile differences over how much of the recovery fund should be distributed through grants versus low-interest loans.

European Council president Charles Michel floated a new proposal that would reduce the size of handouts to €400bn, down from an original €500bn, according to officials familiar with the discussions. Dutch Prime Minister Mark Rutte and his Austrian counterpart Sebastian Kurz rejected the new offer, and stood by a pledge to limit grants to €350bn.

Denmark, Sweden and Finland, which initially had been aligned with the Dutch and Austrians, weren’t as opposed to the amount of grants in Mr Michel’s latest proposal, said the officials, who asked not to be identified because the talks are ongoing.

Germany and France, with the backing of most of the bloc, are insistent that at least €400bn of the package must be handouts in order to shield the fragile economies of southern Europe from the worst effects of the coronavirus pandemic.

“Europe is being blackmailed,” Italian Prime Minister Giuseppe Conte said Sunday as frustration with the Dutch-led group began to mount.

Despite the inability to find a consensus over the size of the stimulus package, talks continued into the evening.

With investors already pricing in a deal after a series of bold announcements in recent weeks, leaders are under intense pressure to bridge their differences before financial markets open on Monday. Yet they’ve largely been going around in circles since talks began on Friday morning as they struggle to bridge the familiar fault lines between the richer North and the southern countries worst affected by the pandemic.

“Ideally the agreement should be ambitious in terms of size and composition of the package, broadly along the lines of what has been proposed by the commission,” European Central Bank president Christine Lagarde said in response to a question from Reuters. “It is better to agree on an ambitious facility even if it takes a bit more time.”

Mr Rutte and his allies are trying to water down the handouts that the highly indebted South sees as critical for shoring up its finances. While Saturday proved less bad-tempered and more constructive than Friday’s gathering, it was still difficult to discern much progress.

“Until now what we have seen is the commission, the president of the council and the majority of member states making an effort to come closer to four countries,” Portugal’s Antonio Costa said. “They also have to make some effort.”

The 27 leaders are meeting in person for the first time since February, when initial talks over the EU’s seven-year, €1tn budget also ran into the buffers. Now, with more than 100,000 Europeans dead from the virus and an economy to rebuild, investors are looking to the group to muster a display of unity to maintain the rally in stocks.

“The will to find a compromise should not make us renounce the legitimate ambitions which we must have,” Mr Macron said on Sunday. “In the coming hours we will see if the two are compatible.”

“Things are moving in a fairer direction,” Austrian Chancellor Sebastian Kurz said. “I personally would find it a real shame if it was abandoned.”

The deliberations are proving to be a baptism of fire for Mr Michel, a former Belgian Prime Minister, and European Commission president Ursula von der Leyen, who drew up the original plan. They only took up their jobs in December and have faced criticism from governments over their handling of the pandemic response.

Ms Merkel and Mr Macron have been pressing for an agreement before the summer but haven’t yet been able to bring their weight to bear to force a result. The bloc’s two largest economies are seen as crucial power brokers and they were photographed sitting on a sunny terrace as they searched for a breakthrough.

“We’re entering the third day of talks and it certainly is the decisive one,” Ms Merkel said on Sunday morning. “It’s possible there will be no agreement today.”