EU leaders no closer to agreeing on recovery fund as summit kicks off

Pressure is mounting on the European Union's 27 leaders to reach consensus in their heated discussions surrounding a proposed 750-billion-euro (855-billion-dollar) economic recovery plan and the EU's seven-year-budget.

The countries have a lot to lose during the first in-person summit in months: The bloc faces its deepest recession since its inception, and countries need money fast to get out of the economic crisis caused by the Covid-19 pandemic.

While several leaders expressed hope and called for compromise on their way into the summit, the very real possibility of not reaching an agreement on Friday or Saturday seems to have sunk in for Germany.

On Friday - her 66th birthday - Chancellor Angela Merkel sounded less than confident that the summit will deliver a breakthrough on the multibillion-euro coronavirus recovery package.

"I have to say that the differences still are very very great. And therefore I cannot say whether we will come to a result this time," Merkel told reporters in Brussels. "You have to face up to reality."

French President Emmanuel Macron said he was "confident but cautious" that a deal could be made. "It's a moment of truth and ambition for Europe."

Merkel and Macron both held a marathon of bilateral meetings over the past weeks and have taken a leading role in repeatedly appealing for premiers to compromise.

Grants and loans

The basis for discussions is a proposal by European Council President Charles Michel that foresees a 500-billion-euro share of grants and a 250-billion-euro share of loans, building on a previous suggestion by the European Commission.

Amid concerns over the sheer size of the budget, Michel slightly downsized the 2021-2027 spending plan from 1.1 trillion to 1.074 trillion euros.

The senior EU official said a deal is possible if the leaders could find the "political courage."

The clefts are deep on a host of issues: up for debate are the overall size of the recovery fund and the long-term EU budget to which this is attached, and the criteria used to distribute the funds.

The strongest criticism comes from the so-called Frugal Four - the Netherlands, Sweden, Denmark, and Austria. They want as little money as possible to be paid out in grants.

Finland and Hungary have also expressed concerns about Michel's proposal.

On Friday morning, countries seemed to not have come any closer to overcoming the divides - even after last-minute bilateral meetings.

French President Emmanuel Macron met with the Dutch prime minister, fiscal conservative Mark Rutte, for around 30 minutes on Friday, according to French sources, followed by a meeting with Merkel.

The French premier, who along with the German chancellor is an ardent supporter of a large recovery fund, met with like-minded Italian Prime Minister Giuseppe Conte and Portuguese leader Antonio Costa on Thursday night.

'Frugal Four' coordinated approach

Austrian Chancellor Sebastian Kurz, meanwhile, also held last-minute consultations with his fellow frugal group members to "coordinate our approach" before the start of the summit.

"We will not agree to any measures leading to a permanent #TransferUnion," he tweeted, referring the reallocation of resources within the bloc.

Rutte - the most outspoken critic of the current proposal for a recovery package - also remained firm on his position.

Rutte insisted that money should not be paid out as grants, and that any funds given to EU countries should be tied to reforms taking place in the country.

The Hague has also been adamant on getting strong oversight on spending from the fund, calling for a right to veto. But this is a step too far for some member states.

Tying funds to conditions is considered controversial across the board. Another bone of contention is the idea of building a mechanism to withhold funds from the EU budget in case of rule-of-law infringements, designed to target democratic backsliding in Hungary and Poland.

Polish Prime Minister Mateusz Morawiecki objected to this idea on Friday. "We do not agree on such an arbitrary take on the matter of rule of law," he said.

European Council officials may even go back to the drawing board during the summit and come up with a new proposal for EU leaders to consider, according to a senior EU source.

The 27 capitals may well need to hold another summit before the end of July, when the EU institutions wind down for their summer break.