Merkel Sees a July Deal on the EU’s Massive Recovery Fund

(Bloomberg) -- German Chancellor Angela Merkel expects the European Union to agree on a recovery plan in July, a sign of the long and fraught negotiations the bloc’s leaders are facing the coming weeks as they seek to agree on a radical proposal to deal with the virus-induced recession.

Merkel, who was speaking on Tuesday to conservative lawmakers in a closed-door meeting, also said that Germany should be able to receive funds from the plan, according to an official who asked not to be named discussing private remarks.

The money in question is part of a radical 750 billion-euro ($844 billion) EU proposal to finance the bloc’s economic recovery and help tackle divergences in the region’s internal market that have widened as a result of the outbreak and the different national responses. The program, which needs to win the backing of every capital, would be funded by joint debt issuance in a significant step toward closer economic integration.

The EU’s 27 leaders will hold a video conference on June 19 to debate the proposal, put forward by the European Commission, for the first time. The plan would make as much as 500 billion euros in grants and 250 billion euros in concessional loans available to the member states most affected by the pandemic.

Such aid -- especially in the form of grants -- would offer much-needed support to the region’s hardest hit economies like those of Spain, Italy and Greece, which are projected to shrink by almost 10% this year. These countries have also been constrained by much less fiscal leeway than their peers in the north who have used national buffers to help companies and cushion the economic blow, as well as dangerously high debt levels.

Yet even as EU nations all concur that the economic damage they’ll face this year is unprecedented and that they need to help those who’ve taken the biggest hit, disagreements persist over how best to do so.

“There is still quite some way to go towards an agreement, so we will need to work hard in the coming days and weeks,” EU Council President Charles Michel said in a letter to EU leaders ahead of the summit.

Key Divisions

The divisions were laid bare at a meeting of ministers Tuesday, where envoys from Europe’s north, south and east voiced their contrasting views on key aspects of the proposal including on the total size of the available funds, the balance between grants and loans and the criteria for allocating money.

The debate is further complicated by the fact that the proposed recovery fund will have to be agreed alongside the EU’s next long-term budget, which is set to kick in next year. Negotiations over the seven-year spending plan were already testy before the pandemic complicated matters, and EU diplomats expect it will be weeks if not months before a deal can be struck.

Governments from budgetary hardliners, including Austria, Denmark, the Netherlands and Sweden, are keen to ensure their taxpayers aren’t on the hook for future repayments, and are expected to put up a fight on various aspects of the package including its total size and duration.

The group, which are net payers to the EU budget, are also keen to ensure that money from the emergency pot will not be used to address other issues such as chronic lags in investment in certain countries, and would prefer the money was given through loans rather than grants.

“We are all affected by this crisis, and it puts all national budgets under severe strain. So we must all have a realistic level of spending,” the leaders of the four countries wrote in the Financial Times. “Most importantly, money should be used carefully and only where we know it will make a real difference.”

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