EU recovery summit could end with no deal, says Germany's Merkel

German Chancellor Angela Merkel (left) gestures as she speaks to France's President Emmanuel Macron (second left), Finland's Prime Minister Sanna Marin (third left) and Sweden's Prime Minister Stefan Lofven in Brussels on July 18, 2020. PHOTO: EPA-EFE

BRUSSELS/WARSAW (AFP, BLOOMBERG, REUTERS) - Germany's Chancellor Angela Merkel warned that EU leaders may fail to reach an agreement on Sunday (July 19) on a huge post-virus recovery plan for the shattered European economy.

Arriving for the third and what she said was probably the "decisive" day of an extraordinary European summit, Dr Merkel said the 27 leaders had "many positions" on the size of the fund, on rules for accessing it and on tying it to respect for the rule of law.

"I still can't say whether a solution will be found," she said. "There is a lot of goodwill... but it may also be that no result will be achieved today."

Dr Merkel was due to join French President Emmanuel Macron and the president of the European Council, summit host Charles Michel, to prepare a new offer to break the logjam after Dutch Prime Minister Mark Rutte and his "Frugal Five" allies blocked a deal.

Mr Michel had proposed a 750 billion euro (S$1.2 trillion) package of EU loans and grants to help member states recover from an historic coronavirus recession, but Austria sees the package as too big and the Netherlands wants member states to be able to veto national spending plans.

The rest of the 27 EU leaders were due to meet again in the full summit format from noon (1000 GMT) and talks could yet go late into the night.

Talks on the stimulus fund failed on Saturday after two days of fraught negotiations, but the leaders had extended their summit for another day to try and iron out their differences.

Leaders continued with informal talks after negotiations broke up at at 11pm on Saturday as they tried to find common ground on the composition of the fund and the conditions attached to it.

A crucial late-night meeting including Mr Rutte, Dr Merkel and Mr Macron ended abruptly in a dispute over how much of the package should be disbursed as grants and how much as loans.

Germany and France are insisting that at least 400 billion euros (S$635.1 billion) should be handouts but Mr Rutte and his allies from Austria, Denmark, Sweden and Finland want to water down the handouts that the highly indebted South sees as critical for shoring up its finances.

These wealthy but so-called fiscally frugal countries favour repayable loans rather than free grants for the hard-hit indebted economies mostly on the Mediterranean rim, and they want control over how the funds are spent.

After several attempts at finding a compromise, Dr Merkel and Mr Macron left the meeting and returned to their hotel together for further discussions, the diplomat said.

"They are walking away grumpy," Mr Rutte told reporters afterward. "A compromise is possible tomorrow but there remain big issues."

With investors already pricing in a deal after a series of bold announcement in recent weeks, leaders are under intense pressure to bridge their differences before financial markets open on Monday.

Yet the battle has exposed the fault lines at the heart of the EU.

Fiscally frugal countries from northern Europe are showing their resentment at paying for the pandemic while the southern countries worst affected are struggling to contain their outrage at the lack of solidarity.

"We will keep going because we have to resolve it," Italian Prime Minister Giuseppe Conte told reporters. "Delaying this does no good to anyone."

The 27 leaders were meeting in person for the first time since February, when initial talks over the EU's seven-year, 1 trillion-euro budget also ran into a wall.

Saturday started with a fresh compromise proposal drafted by Mr Michel but as time wore on, frustration grew.

While Mr Rutte, the hardliners' ringleader, welcomed a proposal to reduce the amount of grants to 450 billion euros from 500 billion euros, his allies from Austria and Finland pushed for the total to go lower still, setting up a clash with Dr Merkel and Mr Macron.

In an attempt to bend to another of Mr Rutte's demands, the new plan had also included a mechanism that would give any country the right to put the brakes on disbursement if it didn't think the money was being spent correctly.

The Dutch saw it as a step in the right direction, but the southerners fretted that it could slow up the cash they need to get their economies going.

Leaders must agree unanimously if there's to be a deal.

POWER BROKERS

The deliberations are proving to be a baptism of fire for Mr Michel, a former Belgian Prime Minister, and European Commission President Ursula von der Leyen, who drew up the original plan.

They only took up their jobs in December and have faced criticism from governments over their handling of the pandemic response.

Dr Merkel and Mr Macron have been pressing for an agreement before the summer, but haven't yet been able to bring to their weight to bear to force a result.

The bloc's two largest economies but are seen as crucial power brokers and they were photographed sitting on a sunny terrace as they searched for a breakthrough.

Adding to the complications is the number of side issues that are being tied to the fund.

Many leaders want to see access to financing linked to member states' compliance with democratic standards and that's something that Poland and Hungary strongly oppose, since both are subject to EU legal proceedings over rule-of-law backsliding.

Leaders spent the last part of the Saturday discussing the latest proposal, seen by Bloomberg, which stipulates that rule-of-law "conditionality under the regime will be genuine" and that when transgressions are identified, the European Commission will propose "appropriate and proportionate" measures.

Those measures will be approved by a qualified majority rather than unanimously, meaning that the Poles and the Hungarians won't have vetoes to bail each other out as they do in other areas.

Adding another layer of complexity, Hungary's Parliament passed a declaration this month that called on Prime Minister Viktor Orban to reject any stimulus package until the EU investigation into its democratic standards was withdrawn.

At Saturday's meeting, the budget commissioner of the bloc's executive reminded the leaders - who wore masks and kept their distance from each other - that Covid-19 was still among them and they needed to act.

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"Just a solemn reminder: the Corona crisis is not over: infections on the rise in many countries," Johannes Hahn tweeted. "High time to reach an agreement which allows us to provide the urgently needed support for our citizens+economies!"

By the end of the day, Italian Prime Minister Giuseppe Conte made it clear that the chances of unlocking an agreement were bleak.

"We are in an impasse now. It is more complex than what was expected," Conte said in a video on Facebook.

"There are many issues that remain unresolved."

The EU is already grappling with the protracted saga of Britain's exit from the bloc and has been bruised by past crises, from the financial meltdown of 2008 to feuds over migration.

Another economic shock could expose it to more eurosceptic, nationalist and protectionist forces, and weaken its standing against China, the United States or Russia.

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