EU wrangles over how best to splash cash on recovery

EU leaders convene on Friday for a virtual summit focused on the bloc’s budget for the next seven years, coupled with a proposed 750 billion euro ($842 billion) fund to support economic recovery from the Covid-19 pandemic.

With British relations and sanctions on Russia also set to feature at the meeting from 11 a.m. (Greek time), here are details on the main issues:

BREXIT

European Commission President Ursula von der Leyen will brief leaders on her talks with British Prime Minister Boris Johnson on Monday. Both sides agreed that talks on their future relationship need to step up to clinch a deal, although major differences remain.

RUSSIA

EU leaders are expected to extend the bloc’s main economic sanctions against Russia over its annexation of Crimea by a further six months until the end of January 2021.

EU BUDGET/RECOVERY FUND

Talks on the next EU budget for the 2021-2027 period, referred to as the Multiannual Financial Framework (MFF), stalled in February. Faced with a gaping Brexit hole, the “Frugal Four” of Austria, Denmark, Sweden and the Netherlands demanded that the budget be capped at 1% of the bloc’s economic output, while poorer countries demanded more aid.

Then the Covid-19 pandemic struck.

Recognizing the EU needed to pump money into the economy to support a recovery from what is set to be a record contraction of almost 9% this year, the European Commission proposed in May a 1.1 trillion euro seven-year budget for the bloc along with a 750 billion euro Recovery Fund – 500 billion euros of that in grants and the rest as loans.

The Commission wants to start doling out money from September, with changes to the current EU budget, and step up stimulus spending for four years from 2021. New money would come from unprecedented mass borrowing by the Commission.

Many EU governments want an agreement on the budget and recovery fund by the end of July, just six weeks away. Few expect major progress on Friday, with leaders giving their first views on the new expanded 1.85 trillion euro package.

“This will not be a negotiation, but just an exchange of views,” said one EU diplomat.

The “Frugal Four” have said they favor loans over grants.

The “Club Med” group of southern EU members and other countries say grants are needed because Italy, Spain, Greece, France and Portugal already have high debt and rely heavily on tourism, a sector hit hardest by the pandemic. Travel slowly restarted only from mid-June.

Most EU governments believe an in-person summit in July will be required to break the deadlock. Some think it will take two summits.

There are big differences of opinion over the size of the recovery fund and budget, the proportion of grants vs loans, the size of budget rebates which the “Frugal Four” receive and the way funds would be allocated. There is also the question of whether budget funding should be made conditional on upholding EU values or the rule of law, which Poland and Hungary have been accused of flouting.

[Reuters]