EU leaders brace for summit showdown over recovery fund

EU leaders are heading into a critical Brussels summit at loggerheads over the fundamentals of a €750bn recovery package aimed at revitalising the bloc’s economy after the pandemic.

Diplomats have spent the days leading up to the first in-person leaders’ summit in five months struggling to resolve issues including the volume of financial support, how it should be shared out and the rules for tapping the money.

Some warn that it will be a tall order for leaders to seal a deal this weekend, with some delegations preparing for a possible return to Brussels before the end of the month. “We are not there yet,” said an EU diplomat. “There are still bridges that need to be built”.

The meeting marks a major test for European Council president Charles Michel, who will chair the summit, and for German chancellor Angela Merkel, who holds the EU’s rotating presidency. 

Ms Merkel earlier this year abandoned previous German reservations about EU-issued debt, agreeing with French president Emmanuel Macron that the scale of the economic damage wrought by Covid-19 meant that Brussels should be able to go to the market to finance a €500bn fund; that plan forms the kernel of the more complex package that is now on the table.

The magnitude of the task facing leaders is far greater than the traditional horse-trading over EU budgets in the pre-Covid-19 age. Significant delays to the roll out of the recovery fund would deliver a further blow to the EU’s reputation after it struggled earlier this year to respond to the worst human and economic crisis in the postwar age.

To make matters even more complicated, the fund is intimately tied up with the EU’s next seven-year budget, worth some €1tn, which has to be ready for the start of next year.

Here are the four most divisive questions that will need to be solved after the discussions kick off at 10.00 Brussels time.

Control (aka the Dutch dilemma)
The Netherlands is insisting that the planned recovery fund can only dish out grants to crisis-hit economies with the unanimous approval of all governments — effectively handing a single member state the ability to veto handouts of cash.

Dutch prime minister and cycling fan, Mark Rutte © ANP/AFP via Getty Images

Mr Michel has proposed a less stringent system: nations’ spending plans would need approval by a qualified majority of capitals, and governments would also have some further oversight before each transfer of cash. But that’s not enough to win round the Dutch. Mark Rutte, prime minister, wants cast-iron guarantees that grants (which don’t need to be paid back) are not abused by recipient governments and that funding can be cut off in cases of non-compliance. Diplomats have spent the last week trying to come up with creative solutions that fall short of outright unanimity but that could still reassure Mr Rutte and his restive parliament.

Rule of Law (aka the Orban problem)
Hungary’s belligerent premier Viktor Orban heads into the summit vowing to block any deal that enshrines respect for the rule of law as a condition for accessing recovery money. Diplomats admit that this has emerged as a major complication, with Budapest digging in. Mr Orban’s compliant parliament backed his stance in a vote this week.

Hungary’s parliament passed a resolution against rule of law conditionality on recovery money © Reuters

As it stands, any freezing of money over rule-of-law concerns would have to first be recommended by the commission and then backed by a qualified majority of countries — something that is unlikely to happen given the opposition of Hungary, Poland and their Visegrad allies to the whole idea. On the other side of the debate are richer northern countries like the Nordics and the Dutch, who want a stringent system that makes respect for EU fundamental rights a prerequisite for getting money. One senior diplomat suggests Mr Orban could be bought off with extra recovery cash; but that’s unlikely to do anything to soften western capitals’ reservations.

Volume (aka the Frugal fight)
As the FT reported last week, the Frugal Four of Austria, the Netherlands, Sweden and Denmark want to chip away at the overall size of the recovery package and the EU budget. Diplomats expect the €1.07tn EU budget will shrink to around €1.05tn. As for the €750bn recovery package, up to €190bn looks vulnerable — as diplomats consider whether to junk EU commission wheezes such as a solvency support instrument to help struggling companies. The debate over the volumes of cash is also linked to the ratio of loans and grants handed out by the recovery fund. Here again the Frugals want to keep a tight limit on grants.

Allocation (aka everyone’s problem)
The methodology used to hand out money has been one of the biggest tensions among capitals since the recovery fund blueprint was published by the European Commission in May. The Frugals have complained that the likes of Poland are getting too much, while Hungary argues that it is losing out as compared with neighbours. A fresh complication has also emerged after Mr Michel proposed that 30 per cent of the aid be only handed out after 2021, when the GDP impact of the pandemic can be factored in. Big beneficiaries like Italy and Greece have warned this introduces a huge new element of uncertainty as they will not have a clear idea of how much money they are eligible to get until after next year. Some diplomats expect this component to be whittled down to as little as 10 per cent of the total aid.

mehreen.khan@ft.com; @mehreenkhn
sam.fleming@ft.com; @Sam1Fleming

Chart du jour: Brexit bruises

Chart showing most local economies have already suffered from the fallout of Brexit, with some falling 50 per cent behind their previous trajectory

Parts of the UK that voted to leave the EU have suffered the biggest economic hit since the 2016 referendum, according to new research that suggests Brexit is likely to further complicate efforts to level up underperforming regions. (chart via FT)

Planet Europe

Academic researchers and pharma companies have been targeted by Russian-backed hackers © AP

Coronavirus hack
Russian intelligence services are suspected to be behind attempts to hack pharma companies developing Covid-19 vaccines, the UK, US and Canada have warned. The FT reports that the attackers are likely to be the same group that was behind the theft of emails from the Democratic National Committee ahead of the 2016 US election:

Intelligence officials said the group used a variety of tools and techniques. However, they would not confirm whether any attempts to steal intellectual property from vaccine researchers had been successful.

Dmitry Peskov, president Vladimir Putin’s spokesman, told the FT: “We do not have information on who could have hacked pharmaceutical companies and research centers in the UK. ‘We can say one thing: Russia has nothing to do with these attempts. We do not accept such accusations.’”

Data strikedown
EU judges have delivered a second major blow to Brussels in as many days, this time striking down a data-transfer agreement with the US over fears about spying on European citizens. The European Court of Justice on Thursday said the so-called “Privacy Shield” agreement that allows US companies to transfer the private information of EU citizens across the Atlantic is illegal due to insufficient data protection rights in the US. The ruling is another major victory for Austrian privacy activist Max Schrems. Javier Espinoza reports.

Former prime minister Zoran Zaev, leader of the social democrats in North Macedonia © Reuters

Tight margins
North Macedonia’s pro-European social democrats have declared a narrow victory in the country’s first election since a landmark name change, raising hopes of accelerating the country’s EU accession process. (The Guardian)

The wounds of Srebrenica
Twenty-five years on from Europe’s worst genocide since the Holocaust, Valerie Hopkins reports on why the reckoning over the crimes against Bosnia’s Muslims in Srebrenica remain unresolved. (FT)

Let’s go round again
Poland’s main opposition party, the centre-right Civic Coalition, has lodged an official complaint against last Sunday’s presidential election, with its leader claiming that the contest did “not meet democratic standards”. (FT)

Merkel’s last rodeo
The New York Times takes a look at how the pandemic is coming to shape the legacy of the German chancellor and her 15 years leading Europe’s biggest economy:

“Expectations for Ms Merkel’s leadership are high. But while this may be her last rodeo, many expect the same cautious pragmatism and reluctance to take bold, transformative steps that have characterised her time in office and her response to past European crises.

As a politician, Ms Merkel, soon to be 66, remains, as ever, deliberately opaque, allowing many to imagine her support for their own preferred outcomes. But as much as she is committed to the European Union, she has consistently sought that sweet spot where German and European interests align, guided by German public opinion and her own careful personality.”

Europe’s smallest superpower
The Economist’s Charlemagne tracks how Ireland has managed to punch far above its weight as the EU’s smallest diplomatic powerhouse.

© AP

Spain remembers
Spain’s leaders came together on Thursday for a ceremony in Madrid to mourn the country’s victims of the pandemic. More than 28,000 people have died in the country from Covid-19. King Felipe VI led the tributes, saying that the Spanish people had shown “courage, morality and determination in the face of adversity”. (El País)

Keep covered
France will require masks to be worn in indoor public spaces from next week, accelerating previous plans to introduce the measure from next month. (Le Monde)

Coming up on Friday
The European Council summit begins with leaders’ doorsteps from 9.00 (CET). They’re expected to carry on negotiating until at least late Saturday evening.

mehreen.khan@ft.com; @mehreenkhn
sam.fleming@ft.com; @Sam1Fleming

*Holiday notice: the Brussels Briefing is heading off for its summer break. We’ll be back with you in September.