EU Leaders Clash Over Stimulus Package With Markets on Edge
A European Union flag hangs near company trading price movements on a digital screen inside the Euronext NV Paris stock exchange in the La Defense business district of Paris, France. (Photographer: Cyril Marcilhacy/Bloomberg)

EU Leaders Clash Over Stimulus Package With Markets on Edge

The European Union’s push to agree on a 750 billion-euro ($860 billion) stimulus package before the close of the weekend hung in the balance after an acrimonious dinner on Friday of the bloc’s 27 leaders.

Sitting together in Brussels for the first time since Europe’s economy started going into lockdown in March, the group spent most of the day rehearsing their starting positions and the mood soured when Charles Michel, who leads the meetings, proposed a mechanism that would allow member states to hold up the disbursal of funds, according to officials briefed on the talks.

EU Leaders Clash Over Stimulus Package With Markets on Edge

Michel was trying to win round 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.

The compromise proposal failed to convince Rutte and succeeded in annoying many of the other leaders, the officials said. 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.

“The atmosphere this evening was more cranky than this afternoon,” Rutte told reporters afterward. “The notion that reforms are needed is shared more broadly, the group gets a bit smaller when you talk about strictly nailing down reforms.”

Traders had been on edge since German Chancellor Angela Merkel predicted “very, very difficult” negotiations on her arrival at the summit venue on Friday morning. The Stoxx Europe 600 benchmark index swung between gains and losses through the day, finally closing up 0.2% as the market awaited the results of talks while German bonds edged lower.

“There’s no need to rush,” Polish Prime Minister Mateusz Morawiecki told reporters past midnight after the talks broke up for the day. “It’s highly probable that neither tomorrow nor on Sunday will there be a final decision. We’re telling each other that maybe we will meet again in July.”

Touching elbows for the cameras instead of shaking hands gave the gathering a frisson of novelty during the opening exchanges, with leaders bringing presents for Merkel’s 66th birthday. Macron gave her several bottles of a white Bourgogne wine she is fond of, a French official said.

But the mood became more sober as the wrestling began over the package and the scale of disagreement in Europe looks just like the bad old days. Under EU law nothing can happen unless leaders agree unanimously.

Rutte has called for the fund to be smaller and argued that any disbursement should require the backing of all member states, meaning his government would have a veto over any decisions, two other diplomats said. French President Emmanuel Macron told him that any reduction in the 500 billion euros of grants that many governments see as the bedrock of the plan would mean a reduction to the budget rebate that Rutte is demanding for the Netherlands, the diplomats added.

While Rutte’s position has had support from Austria, Denmark and Sweden since the plan was proposed, the Dutch leader was starting to look somewhat isolated on Friday, according to several officials.

Legal Lesson

Italian Prime Minister Giuseppe Conte, who was a law professor before he entered politics, told Rutte that his proposal for controlling the money would be incompatible with EU treaties and impractical politically, according to another official briefed on the talks.

Rutte, for his part, indicated that the European Commission can’t be trusted to make sure beneficiaries of the fund follow the rules and so the leaders should have oversight powers, one official said. To back up his point, he recalled a suggestion from the former commission chief Jean-Claude Juncker that France was too big to be bound by EU budget rules and said this caused him trouble with Dutch voters.

Rutte’s coalition has just 75 deputies in his country’s 150-seat parliament so he’ll need opposition support to ratify any deal he strikes with the bloc. The Dutch have history when it comes to EU integration -- in a 2005 referendum they rejected the EU constitution, contributing to the collapse of that initiative.

EU Leaders Clash Over Stimulus Package With Markets on Edge

According to the initial proposal by the commission, Italy will be the biggest beneficiary from the fund, with 82 billion euros in grants, while Spain will get some 77 billion euros. Diplomats said that the likeliest scenario now is that 70% of these funds will be distributed on the basis of the commission’s proposal, with the remaining 30% to come in 2023, depending on the depth of recession in each country over the next two years.

Rutte wants watertight guarantees to ensure the money is spent only on commonly agreed projects in line with the fund’s objective of fortifying the bloc’s fragile economies. Other countries, and the commission, which traditionally polices national spending plans, maintain that would make it unworkable.

“If they want loans and even grants then it’s only logical that I can explain to the people in the Netherlands and other countries that, in return, those reforms have taken place,” Rutte told Bloomberg TV before the start of the meeting.

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