Merkel Urges ‘Massive’ EU Recovery Effort Amid Deep Divisions

(Bloomberg) -- German Chancellor Angela Merkel implored European Union governments to quickly come together to authorize a “massive” economic response to the global pandemic, even as an official warned that member states remain deeply divided on the existing stimulus proposal.

“Europe is in the most difficult situation of its history,” Merkel said on Thursday during a virtual press conference with European Commission President Ursula von der Leyen. “There has to be an agreement during the summer -- I can’t imagine another outcome.”

Her comments come as the leaders of the 27 EU nations prepare to gather in Brussels on July 17-18 to hash out the details of a recovery package that would see the bloc issue 750 billion euros ($843 billion) of bonds to help the countries most affected by the coronavirus. European Council president Charles Michel will unveil a compromise proposal next week in an effort to bridge divisions, according to an official.

The current plan, which needs the unanimous approval of all EU members, would distribute 500 billion euros in grants and 250 billion euros in loans. The final compromise will need to address both the economic impact of the pandemic and the distortions it has caused in the EU’s single market, while maintaining a vital flow of funds to the bloc’s poorest regions.

New Proposal

Michel, who chairs the summits of EU leaders, will propose keeping the overall size the same, but the official declined to say if the current balance of grants to loans would change.

The countries remain deeply divided and the prospects for a deal at July’s summit are uncertain, said the official, who asked not to be named, in line with policy.

A bloc of richer member states, led by the Netherlands, wants to substantially reduce or eliminate the amount distributed in the form of grants that will be collectively repaid as of 2027 from the joint EU budget. Michel will propose offering the wealthier nations rebates that would limit the amount they contribute to the EU budget in an effort to win over their approval for the deal.

The proposed package, backed by Germany and France, could mark a giant leap in the European unification process, as it would see the EU’s executive arm issue billions of euros in debt on behalf of the entire bloc. While European markets have rallied on the expectation that the plan will eventually be approved, the proposal is mired in controversy, with nations at loggerheads over the size, the allocation and the conditions attached to the disbursement of funds.

Under the original proposal by the European Commission, Italy would get almost 82 billion euros in grants, making it the single largest beneficiary of the package, followed by Spain with 77.3 billion euros. In contrast, Northern countries, which are also projected to suffer from a record recession, would get a much smaller share of the pot, with the proposed allocation for Belgium set at 5.5 billion euros.

Following the pushback, Michel will instead propose next week that 70% of the total package is distributed in line with the commission’s proposal, while 30% will be distributed from 2023, depending on the depth of the recession in each country over the next 2 years. Overall, Michel will propose that countries have a total of 3 years to commit the funds to projects and another 3 years to spend it, according to the official.

The conditions attached to the disbursement of the money will be strengthened, so as to make sure it’s used to help Europe’s climate and digital transition, the official said. There will also be safeguards against sliding democratic standards in member states such as Poland and Hungary, though the official declined to elaborate on the specifics of the mechanism that will be proposed for discontinuing disbursements in such cases.

In another concession to Europe’s rich North, Michel will propose modest cuts to the regular EU budget which runs at over 1 trillion euros over the next 7 years. The proposal is likely to trigger a pushback from Eastern EU members, which benefit the most in agricultural subsidies from the budget.

The official didn’t exclude that another summit may be needed this month to bridge divisions, though he insisted that no such meeting is planned at this stage.

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