"Europe Is Being Blackmailed": Scandal Erupts As EU Remains Deadlocked Over Critical Recovery Fund

It was supposed to be a "simple" European affair, where leading politicians sat down and agreed to spend all those hundreds of billions in debt that the ECB had agreed to monetize, thus providing a boost to their crashing economies. Alas, there is no such thing as "simple" in Europe, and after a third day of "marathon summit talks" - as the FT put it and for good reason as it is already the longest EU meeting since December 2000 - over Europe’s proposed €750BN response to the coronavirus pandemic on Sunday, the European Union once again failed to overcome gulfs that have split north and south, and east and west, and may send the Euro - which has soared in recent weeks - tumbling lower as without a finalized recovery fund Europe's economy is set to disintegrate (even more).

The protracted summit in Brussels, which began on Friday morning, has laid bare deep differences over the size, design and conditions attached to a planned multibillion-euro package of loans and grants designed to revive Europe’s economy after months of hibernation.

Yet even the biggest skeptics expected that it would be concluded by Sunday night, alas as Bloomberg reports European Union efforts to agree on the stimulus package faltered late Sunday "as leaders were unable to reconcile differences over how much of the recovery fund should be distributed through grants versus low-interest loans."

Sunday's chaos was to be expected after the summit in Brussels was "suspended in acrimony" in the early hours of Saturday morning, after it became obvious just how stern resistance to handing out billions in grants would be.

One direct consequence of the impasse is that the total €750BN facility has already been cut to at most €650BN as European Council President Charles Michel floated a new proposal that would reduce the size of handouts to 400 billion euros, down from an original 500 billion euros, according to a Bloomberg source. meanwhile, Dutch Prime Minister Mark Rutte, joined by his Austrian, Danish and Swedish counterparts - known as the Frugal Four - rejected the new offer, and stood by a pledge to limit grants to 350 billion euros.

"Frugal Four": Sebastian Kurz, chancellor of Austria, Mette Frederiksen, prime minister of Denmark, Mark Rutte, prime minister of the Netherlands and Stefan Lofven, prime minister of Sweden

The impasse is hardly a surprise, as the Covid pandemic has pitted a group of richer “frugal” member states — Austria, Sweden, Denmark and the Netherlands — against the likely biggest recipients of EU pandemic emergency funds. But leaders also clashed over how to police countries’ respect for the rule of law, with Hungary’s Viktor Orban facing off against western leaders over proposals to hardwire respect for fundamental rights into the recovery plan.

Meanwhile, the recently anti-frugal Germany, together with France, who have the backing of most of the bloc, are insistent that at least €400 billion of the package must be handouts in order to shield the fragile economies of southern Europe from the worst effects of the coronavirus pandemic.

And just as Germany was bashed by Europe's Mediterranean states, now it is the Netherlands' turn to become the most hated nation in Europe.  As the FT reported on Saturday quoting diplomats, "much of the ire at the summit table was directed at Mark Rutte. The Dutch prime minister’s insistence on a national veto over the spending of recovery money led to tensions with other capitals that boiled over during an ill-tempered late-evening dinner."

The mood was summed up by a heated exchange over dinner when Boyko Borisov, the Bulgarian leader, accused Rutte of wanting to be “the police of Europe” by handing himself the right to decide if countries’ national reform plans were ambitious enough to justify EU financial support.

Rutte told journalists after the dinner that his demands left fellow leaders “more irritated” but insisted that all countries were “fighting for their view”.

Needless to say, the mood wasn't any better by Sunday, when Italian Prime Minister Giuseppe Conte said that "Europe is being blackmailed," as frustration with the Dutch-led group boiled over.

Still, despite the inability to find a consensus over the size of the stimulus package, there is still hope and talks continued into the evening.

Europe has long had a habit of getting "deals" done just milliseconds before the final deadline and this time is expected to follow along, especially since investors have already priced in a deal after a series of bold announcements in recent weeks, leaving leaders under intense pressure to bridge their differences before financial markets open on Monday. Yet as Bloomberg notes, "they’ve largely been going around in circles since talks began on Friday morning as they struggle to bridge the familiar fault lines between the richer North and the southern countries worst affected by the pandemic."

“Ideally the agreement should be ambitious in terms of size and composition of the package, broadly along the lines of what has been proposed by the commission,” European Central Bank President Christine Lagarde said in response to a question from Reuters. “It is better to agree on an ambitious facility even if it takes a bit more time.”

That said, one can't really blame Rutte for refusing to drown future generations of Europeans in massive debt. In fact, one can argue that the "Frugal four" is the last bastion of fiscal conservatism anywhere in the world.

Rutte and his allies have been trying to water down the handouts that the highly indebted South sees as critical for shoring up its finances. While Saturday proved less bad-tempered and more constructive than Friday’s gathering, it was still difficult to discern much progress.

“Until now what we have seen is the commission, the president of the council and the majority of member states making an effort to come closer to four countries,” Portugal’s Antonio Costa said. “They also have to make some effort.”

The 27 leaders are 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 the buffers. Now, facing a devastated economy, "investors are looking to the group to muster a display of unity to maintain the rally in stocks" as Bloomberg puts it because just imagine an insane world where stocks ... gasp... drop!

“The will to find a compromise should not make us renounce the legitimate ambitions which we must have,” Macron said Sunday. “In the coming hours we will see if the two are compatible.”

“Things are moving in a fairer direction,” Austrian Chancellor Sebastian Kurz said. “I personally would find it a real shame if it was abandoned.”

Meanwhile, in keeping with the European tradition of herding cats, the deliberations have proven to be a baptism of fire for Michel, the 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 stinging criticism from governments over their handling of the pandemic response.

Merkel and Macron have been pressing for an agreement before the summer but haven’t yet been able to bring their weight to bear to force a result. The bloc’s two largest economies are seen as crucial power brokers and they were photographed sitting on a sunny terrace as they searched for a breakthrough.

“We’re entering the third day of talks and it certainly is the decisive one,” Merkel said on Sunday morning. “It’s possible there will be no agreement today.” And with just a few minutes left until Sunday becomes Monday, Merkel will likely be right.

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Finally, here are some less then upbeat thoughts from Saxo's Head of Macro Analysis, Christopher Dembik, who is right in concluding that this will represent another "missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and constitutes a strategic move towards completing the monetary union. It also shows how deep is the EU fragmentation."

I have been following the EUCO meeting since it has started on Friday. Clearly, this is not Europe’s Hamilton moment, but this is a great telenovela !

PM X. Bettel has just announced he is leaving EUCO for Luxembourg to lead a government council on COVID-19. He is planning to come back to Brussels later tonight…

In other words, don’t expect any agreement to be reached in the coming hours.

The best case scenario is a foul compromise in the night…It is already the longest EUCO meeting since Nice in December 2000…

I see at least three main points of disagreements:

  • Over the rule of law (rift between East and West)
  • Over volumes of the EU recovery plan and governance (rift between North and South)
  • Over EU leadership (this meeting is also about the future balance of power in post-Brexit EU)

I acknowledge it is probably too early to jump to conclusions but I think it is safe to say that if we get a deal in the night or later on in July, the original proposal is likely to be watered down – which means that this is again a missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and constitutes a strategic move towards completing the monetary union. It also shows how deep is the EU fragmentation…

This is not what we have been dreaming of…