Frugal states push to cut size of EU recovery package

Europe’s “frugal” governments are pushing for cuts to Brussels’ planned €750bn coronavirus recovery package and the EU’s next-term budget, heralding tough discussions among the bloc’s leaders at a summit this week.

As governments engage in intense diplomacy before Friday’s meeting, the overall size of the EU’s Covid-19 response has emerged as a major battleground for member states who have been at loggerheads since the commission tabled the proposal in late May. 

Diplomats told the Financial Times that fiscally conservative capitals are demanding cuts to the European Commission’s €750bn fund called “Next Generation EU” and want to further reduce the bloc’s upcoming €1.07tn budget as their price for doing a deal at the summit. 

Charles Michel, who as president of the European Council will preside over the summit, is hoping to secure an agreement over the two pots of cash, which are intimately linked. In a compromise outlined on Friday, Mr Michel cut the proposed size of the budget from €1.1tn to €1.07tn, but kept the €750bn recovery instrument unchanged. 

“The approach may not be perfect but it has many advantages”, Mr Michel told a group of European newspapers on Friday. “It is important to be ambitious with a strong recovery fund which is one-off and exceptional.”

But EU officials involved in the negotiations said the €750bn package — which consists of several instruments, the biggest of which being a temporary €560bn pool of cash that will give grants and loans to crisis-hit economies — is unlikely to survive the summit unscathed.

Sanna Marin, Finland’s prime minister, on Friday said that her government wanted “a lower overall level” for the recovery package and “a better balance of grants and loans”. The demands are backed by Denmark, Sweden, Austria and The Netherlands — the so-called “Frugal Four” alliance. 

Diplomats said initiatives under risk include a €26bn “solvency support instrument” designed to recapitalise otherwise healthy companies that have suffered from months of lockdown caused by the pandemic. The commission’s €30bn “InvestEU” pool, designed to boost private investment thanks to EU guarantees, is also threatened to be discarded, said officials. Governments have complained that the two tools, which would both be managed by the European Investment Bank, have too much overlap in their aid to the private sector. 

The EIB has demanded that EU governments — who are all shareholders in the lender — raise their capital contributions to allow the bank to manage these new responsibilities. But a capital raising is being fiercely resisted by the EIB’s biggest shareholders who say the lender has not made a sufficiently convincing case for needing fresh money. The removal of the solvency instrument and InvestEU would also “remove the need for a capital raising”, said one diplomat.

European Investment Bank The EIB has demanded that EU governments raise their capital contributions to allow the bank to manage new responsibilities © Bloomberg

The way the money is policed has also emerged as one of the most debated issues. The frugal quartet wants member states to be involved in approving and disbursing the grants and loans distributed under the recovery fund.

Mr Michel has suggested member states approve the commission’s decisions to offer aid to any individual country requesting it through a weighted majority voting system. The Netherlands however has asked for unanimous approval, in effect giving a veto to any one country. 

Southern member states like Spain and Italy, which are due to be the biggest beneficiaries of the recovery fund, have resisted a “political” system of ratifying the funds, arguing it will lead to delays hampering their efforts to revive their economies. They have touted a system where commission decisions are automatically approved unless they are overturned by a qualified majority of countries. 

In an attempt to win over the frugals, Mr Michel has offered the four and Germany a “lump sum” rebate as part of the EU budget — a prized cashback system that richer countries have said is needed to prevent them paying disproportionately into the pot. 

“I think the rebate is an important signal in the direction of some member states,” said Mr Michel.