EU Scrutinizes an Enormous Virus Plan That Has Critics Squawking

(Bloomberg) --

When it comes to freeing up record amounts of money to overcome the pandemic, the big hitters in the European Union need to make more concessions than they had bargained for to get everyone over the line.

The 27-nation bloc has kicked off an intense week of negotiations over its economic response to the coronavirus with a fresh proposal offering sweeteners to critics while sticking to the overall size of the package.

The problem is that EU leaders need to agree unanimously, but they are at odds over the balance between grants and loans, as well as the size of the stimulus. The heavyweights are trying to pull rank.

Germany’s Angela Merkel, whose economy will bankroll a lot of this, is pleading for a deal before summer’s end. Charles Michel, as president of the European Council, needs to help grease the wheels and has proposed a draft designed to appeal to all sides.

The pressure is on, but the opposition too is strong.

The bloc still plans to distribute to governments 500 billion euros ($560 billion) in grants and 250 billion euros in loans. That shows Michel is sticking to the framework that most countries agree with. But as a concession to the fiscally shy countries in an attempt to get a deal over the line, he proposed earlier repayments and the continuation of the bloc’s system of budget rebates.

The EU is facing the biggest recession in its history, and the response has exposed deep divisions between its members.

“In the next weeks and months we will face more unemployment in many member states and we will face and observe, unfortunately, bankruptcies with social consequences -- it’ll be more and more visible,” Michel told small group of reporters in Brussels. “So that’s why it’s important not to wait, important to make a decision to send a strong signal, and that’s why I support a quick decision.”

The majority of grants will be committed in 2021 and 2022 while only 30% will be committed in 2023, to address calls for the funds to be disbursed faster to deal with the impact of the coronavirus crisis. Meanwhile, the funds allocated for 2023 will be distributed taking into account slightly different criteria that focus more on the direct impact of the pandemic on economic growth -- a change also aimed at addressing concerns by the northern bloc.

A key concession to sweeten the deal for the net payer states is the proposal to keep correction payment in the EU’s long term budget, a key request by countries like Denmark. Many EU diplomats have seen the so-called rebates as a key piece in the negotiations.

Michel’s draft, along with a revised version of the bloc’s 1.074 trillion-euro budget plan for the next seven years, will feed into negotiations between leaders when they meet in Brussels on July 17-18. It’s their first in-person summit since February, when they failed to reach agreement on their original spending plan.

Last week, an EU official with knowledge of the negotiations, said it wasn’t a given that a deal would be reached this month. It’s unclear whether the latest concessions go far enough to placate the governments that have been opposing the proposal.

The Dutch Prime Minister Mark Rutte signaled an accord could be in reach when he told reporters that “the current proposal is better than the one in February” and “the rebate is an entry ticket for discussions.”

But Hungary’s ruling party showed how difficult the way forward will be, when it said that it would try to enable its government to approve the spending plan -- only if the EU ends a probe into the country’s alleged breaches of the rule of law.

Control of the Money

The spending plan is controversial because it would represent a massive shift away from national governments having control over their finances. The European Commission, the bloc’s central executive, would issue debt on behalf of all 27 members. At present, the EU’s budget is only used for tightly controlled and specific reasons, such as agricultural subsidies and infrastructure projects in the bloc’s poorest regions.

The previously proposed principle that the recovery funds will be available only for projects that are in sync with the EU climate objectives still stands.

Michel wants to make the recovery program and the next budget greener, introducing a goal of earmarking 30% of funds -- a total of 547 billion euros -- for projects that fight climate change. That would help Europe reach its 2050 climate-neutrality target and also could convince the frugal nations, which support stepping up efforts to reduce greenhouse gases, to endorse the deal.

Climate policies are also set to play an important role in financing the budget and the recovery fund, with the EU betting on revenues from a planned levy on imports of emissions-intensive products and an extension of the bloc’s carbon market to shipping and aviation.

As talks intensify, leaders have engaged in shuttle diplomacy to help smooth a path to a deal before their summit. Merkel, who has lined up alongside French President Emmanuel Macron in pleading for an agreement this summer, is scheduled to meet Italian Prime Minister Giuseppe Conte next Monday and his Spanish counterpart Pedro Sanchez on Tuesday.

On Thursday evening, Merkel met Rutte for a work dinner in Berlin and made clear before the meeting that she shares his belief that financial aid should be combined with reforms. A German government spokeswoman declined to comment on the outcome of the meeting.

Rutte is playing host to a string of leaders, too. Conte was due to hold talks in the Hague on Friday, with Portugal’s Antonio Costa and Sanchez -- among those that would benefit most from the recovery plan -- scheduled for meetings on Monday.

©2020 Bloomberg L.P.