EU Weighs $57 Billion Cut in Stimulus Cash to Win Over the Dutch

European Union leaders were presented with a new compromise proposal for a radical 750 billion-euro ($860 billion) economic recovery fund as they entered a second day of talks in Brussels with deep divisions over key aspects of the plan.

The new proposal, seen by Bloomberg, would keep the size of the fund intact, but reduce the amount given out as grants by 50 billion euros. Under this plan, 450 billion euros would be given out as grants and 300 billion euros as loans in an effort to appease the concerns of fiscally hawkish states like the Netherlands.

The new push comes after the first day of negotiations ended in acrimony, leaving the bloc’s plan to help its economies heal from the coronavirus hanging in the balance. At stake is not just the amount of funds that will be given to countries, but the ability of the EU as a whole to offer meaningful solidarity to its 27 members and push through unprecedented financial integration.

Most leaders are seeking a decisive response from the bloc with more than 100,000 Europeans dead from Covid-19 and their economies battered by the lockdown. Yet sitting together in Brussels for the first time in five months, they spent much of the first day rehearsing their starting positions and bickering over a Dutch request for a mechanism that would allow member states to hold up the disbursal of funds .

The mood soured when Charles Michel, who leads the meetings, tried to win over Dutch Prime Minister Mark Rutte, who has insisted he won’t allow handouts to the southern members hardest hit by the virus without cast-iron guarantees the money will go, as intended, to projects that will upgrade their economies. Other countries, and the commission, which traditionally polices national spending plans, maintain that would make it unworkable.

The latest compromise proposal presented to leaders ahead of their second day of talks seeks to balance the demands of the Dutch and their opponents. According to the new proposed plan, a “super emergency brake” would allow a single member state to hold up a disbursement if it had questions about whether the funds would be used appropriately.

Governments would have three days from when the commission approves a payment to raise their objections and then the matter would have to be addressed by either EU leaders or finance ministers.

The mechanism individual countries more say over how the money is spent, but it would also require any issues to be dealt with quickly. Finance ministers could also handle disputes, addressing concerns by several governments that escalating the issue to leaders would overly-politicize the process and lead to delays.

New Revenues, Rebates

Other features of the compromise that seek to make it more palatable to net contributor countries such as the Netherlands, Austria, Denmark and Swede includes increased annual corrective payments for these countries, a key demand from them throughout budget talks. These payments are part of the EU’s longterm budget, negotiations on which are intertwined with those on the recovery fund.

Under the latest compromise proposal, the overall package discussed by EU leaders is worth about 1.8 trillion euros, of which 1.07 trillion euros will be distributed in the form of grants from the bloc’s regular budget, and 750 billion euros under the emergency stimulus package. Germany contributes the lion’s share to the bloc’s budget.

Almost a third of this total amount will have to be committed to projects transforming the EU into a low-carbon economy. Expenditure not-consistent with the Paris Agreement on climate change won’t be approved, thus making the potential deal the biggest green stimulus the world has ever seen

The Netherlands and its allies have also been calling for the fund to be smaller and for more of the money to be disbursed as loans. So the new proposal represents an incremental concession to their point of view.

The proposal would also introduce new ways for the EU to generate revenue, including a tax on non-recycled plastic waste that would be implemented by January 2021. The EU would also put forward proposals in the next year on a carbon border adjustment mechanism and a digital tax, which would take effect by January 1, 2023, at the latest.

The new proposal says that rule-of-law “conditionality under the regime will be genuine,” and that when transgressions are identified, the European Commission will propose “appropriate and proportionate” measures that will be approved by qualified majority.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.