(Bloomberg) — German Chancellor Angela Merkel raised doubts that European Union leaders, meeting in person for the first time in five months, would be able to agree this week on a landmark 750 billion-euro ($855 billion) recovery fund to help their economies heal from the pandemic.
“We’re entering these discussions with plenty of vigor, but I have to say that the differences remain very, very great, so I can’t predict whether we’ll reach an agreement here,” Merkel said in Brussels before the start of the summit. “I expect very, very difficult negotiations.”
Their meeting comes after weeks of intense negotiations between diplomats and governments, seeking to bridge differences over the total size of the package, how money would be distributed and the proportion of loans versus grants. Officials have warned that another summit later this month could be needed to clinch a deal.
Stocks in Europe slipped as investors weighed the prospects for a deal on the proposal. The Stoxx Europe 600 Index fluctuated before turning lower after Merkel’s comments, with banks leading the declines.
Historic Integration
Dutch Prime Minister Mark Rutte seemed even more pessimistic on reaching a deal at this gathering, and has said that any disbursements from the recovery fund need to be contingent on reforms from each country, which would be subject to unanimous approval by each member state. This would ensure that funds would only go toward projects to help laggard economies catch up and would give each nation an effective veto.
“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 instead of only assurances,” Rutte told Bloomberg TV before the start of the meeting. He added that the likelihood of a deal was “less than 50%.”
Rutte held a short one-on-one with French President Emmanuel Macron before heading into the main session. Macron left that conversation feeling trusting but cautious, according to a French official.
As talks got under way, the president of the EU leaders’ council, Charles Michel, asked leaders to focus on three key points, budget rebates for richer nations, the size of the fund and its governance, according to a senior EU official. The goal on Friday is to find common ground on these points and build from there, the official added, asking not to be named discussing private negotiations.
Under the compromise being discussed, the recovery package would be financed by joint EU debt issuance, marking a major step toward further economic integration in the 27-nation bloc. And 500 billion euros of those proceeds would be given out in grants, a type of transfer that would have been unthinkable just a few months ago.
Danish Wedding
The emergency nature of the summit was highlighted by the fact that it forced Danish Prime Minister Mette Frederiksen to reschedule her wedding, which had been planned for this weekend. Instead, she got married at a small ceremony on Wednesday, and on her Facebook page referred to the meeting with her counterparts as her “honeymoon”.
The first day of the summit also coincided with Merkel’s 66th birthday — Macron gave her a few bottles of a white Bourgogne wine, according to a French official.
But the festive mood may not last long, given the sheer scope of the negotiations planned. The volume of money under the plan and the various burden-sharing taboos it would break have rendered a compromise elusive, especially when it comes to countries that would be net contributors.
The debate is complicated by the fact that the 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 struck.
But the complication also offers an opportunity for tradeoffs. Budget hardliners are all net payers to the EU budget and want to receive corrective payments that will reduce their net contributions, a key bargaining chip in the negotiations. The four countries — Austria, Denmark, Sweden and the Netherlands — were planning to meet before the meeting started to coordinate their position on key issues.
“Differences in positions are still relatively large, and that means of course that negotiations will stretch for a while,” Austrian Chancellor Sebastian Kurz said before the meeting. “It isn’t entirely clear if we will be successful in achieving a breakthrough this summit or if it will hopefully be the case during a coming one.”
(Updates with market move in the fourth paragraph)
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