French president Emmanuel Macron and Angela Merkel, German chancellor, arrive for the final roundtable session of a marathon EU summit in Brussels © Mario Salerno/European Council/dpa

Be the first to know about every new Coronavirus story

When Finnish prime minister Sanna Marin confronted Spain’s Pedro Sánchez over a testy summit dinner on Sunday night in Brussels, EU leaders began to fear there was a real risk that their marathon negotiations on the bloc’s response to coronavirus would end in failure. 

Ms Marin, a 34-year-old social democrat and one of the bloc’s few female leaders, snapped at the Spanish premier’s demands that a “frugal” alliance of small, rich countries further raise their offer on the volume of grants that could be handed out by the EU’s planned pandemic emergency fund. “We have leaders around this table who moved from nothing to €350bn. What did you do? We have moved. Now it’s your turn,” said the Finnish prime minister. 

The exchange marked the moment when Finland joined the four frugal member states determined to scale back EU plans to bankroll Europe’s economic recovery by borrowing €750bn on the capital markets and distributing much of it in the form of grants rather than loans. Three days into the summit, with no agreement in sight, the situation looked bleak.

“It was all about to collapse over dinner,” said one senior diplomat. “The frugal four became the frugal five.”

Instead of letting the summit dissolve into reprisals and recriminations, however, Ms Marin and her counterparts from Austria, Sweden, Denmark and the Netherlands went into talks with Germany’s Angela Merkel and France’s Emmanuel Macron later that night. 

Out of that huddle arose a sense of what the landing zone could be on grants, with the wheels greased by an understanding that the core frugal four would get an increase in the budget rebates they craved.

Dutch prime minister Mark Rutte, left, and his Finnish counterpart, Sanna Marin, make their case to Charles Michel, European Council president © Francisco Seco/Pool/AP

It was a 4am trade-off that unlocked a grand bargain that was finalised in the early hours of Tuesday morning — bringing the second-longest summit in the EU’s history to a successful close. After four days of tense dinners, roundtable sessions and endless breakout meetings, leaders ultimately answered the call from EU chiefs, including Ms Merkel and Mr Macron, for a large-scale effort to fight the downturn.

The recovery fund they went on to unveil marks the most significant step in the pooling of fiscal firepower in the EU since the eurozone crisis and is the union’s first major endeavour of the post-Brexit age. Alongside the massive borrowing, leaders also managed to agree the terms of a €1.07tn common budget for the next seven years, securing the EU’s medium-term finances.

The €750bn pandemic response, which builds on a Franco-German proposal from May as well as detailed plans from the European Commission, will include €390bn in non-repayable grants as well as loans to help countries bounce back from the crisis. It comes just four months after Europe’s economies were forced into hibernation by Covid-19.

“If you had told me a year ago that the EU would be agreeing to massive common debt issuance and a budget like this I would have said you’re daydreaming,” said Maria Demertzis, deputy director of Bruegel, a think-tank. “Tuesday’s package may officially be a temporary crisis measure, but it could well end up becoming permanent by default — notwithstanding the scepticism of the frugal states.”

The question for the EU now is whether this emergency package proves a transient high-water mark for fiscal integration or the point of no return. Leaders’ public celebrations afterwards only highlighted the divisions over that question, as they presented starkly different visions of the philosophy and purpose underlying the recovery instrument they had just agreed to create. 

Mr Macron said on Tuesday morning that the €390bn of grants constituted substantial “transfers” within the union. “That changes everything because we’re creating a budget in the eurozone,” Mr Macron said. “These are legitimate transfers. So this is indeed a moment of great change for Europe and for the eurozone.”

Minutes later, however, when asked if the fund was made up of transfers, the Netherlands’ Mark Rutte replied in characteristically blunt terms: “No!”

He insisted that the temporary nature of the instrument meant that it could never morph into a permanent transfer mechanism. “This is a one-off,” said Mr Rutte, a key figure in the frugal alliance. 

The battle lines were drawn as leaders gathered for an ill-tempered dinner in Brussels’ Europa building on Friday night, which was also Ms Merkel’s 66th birthday. Anger boiled over at Mr Rutte’s insistence on retaining a veto over disbursements of money to stricken member states, a measure that Italy and other countries warned could scupper the entire package. 

While the Dutchman attracted opprobrium from all corners, diplomats involved in the negotiations said that the four frugal leaders, plus Ms Marin, became increasingly emboldened during the talks.

Denmark’s prime minister Mette Frederiksen, right, speaks with Sweden’s prime minister Stefan Lofven, left, and Austria’s chancellor Sebastian Kurz © John Thys/Pool/AP

Austria’s Sebastian Kurz emerged as a particular obstacle to Mr Macron’s push for €400bn of grants, demanding a substantial increase in his country’s budget rebate as the price of an agreement. He left the summit having secured a doubling in Vienna’s discount — a feat that past British prime ministers, including Margaret Thatcher who first won a rebate for the UK in 1984 — would have marvelled at. 

For some leaders, the comparisons with another former Conservative UK prime minister, David Cameron, who threatened to torpedo the EU’s budget in 2013, were hard to ignore — only now there were several leaders with the potential to hold the talks hostage. Mr Macron at one point railed against the frugals and compared their strategy to Mr Cameron’s demands for a smaller EU budget. 

After the summit, Ms Merkel, a veteran of EU budget negotiations, acknowledged that the departure of the UK had led to a “new dynamic” around the summit table. “Now Britain is no longer with us, that perhaps means that other member states will come to the fore,” she said.

Mr Macron said the negotiation had been “marked by difficulties, sometimes by clashes — different conceptions of Europe”. Giuseppe Conte, Italy’s prime minister, was less diplomatic, accusing the frugals of “blackmailing Europe”. 

To optimists, the deep rifts do not alter the political significance of the moment: the EU has set itself on a path to fiscal transfers and mutual debt issuance — something that had, until very recently, been a federalist pipe dream.

But the ideological splits that have defined the long road to financial integration have not disappeared. Agreement on the recovery fund may have papered over those divisions, but they have not been resolved. 

Letter in response to this article:

Covid-19 aid package leaves EU looking like Hotel California / From Timo Soini, Foreign Minister of Finland, 2015-2019, Espoo, Finland

Get alerts on EU common budget when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article