Angela Merkel with France’s president Emmanuel Macron, centre, and Charles Michel, European Council president, at the start of the EU summit in Brussels on Friday
Angela Merkel with Emmanuel Macron, centre, and Charles Michel at the start of the EU summit in Brussels on Friday © Stephanie Lecocq/Pool/Reuters

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European leaders’ attempt to agree a €750bn economic recovery package to overcome the damage wrought by Covid-19 was in disarray in the early hours of Saturday morning after a summit in Brussels was suspended in acrimony.

Prime ministers and presidents ventured to their hotel rooms without comment following 13 hours of talks that laid bare splits over the rules for doling out hundreds of billions of euros that the EU would borrow on the capitals markets. Negotiations at the summit — leaders’ first physical meeting since February — are set to resume at 11am Brussels time on Saturday.

Diplomats said that 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.

Mark Rutte, Dutch prime minister, insists on a national veto © Getty Images

The row over how to govern the stimulus plan overshadowed progress in the complex issue of what criteria to use for deciding how much money each country gets, leaving Charles Michel, the European Council president, facing a daunting challenge to get discussions back on track on Saturday morning. Mr Michel told leaders he would be working through the night in bilateral meetings to try to salvage a deal, said officials

Diplomats said the mood was summed up by a heated exchange over dinner when Boyko Borisov, the Bulgarian leader, accused Mr 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.

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

The row reflects how deep-seated EU divisions over economic policy are hampering Brussels plans to move into uncharted territory by borrowing on a large scale on the capital markets. The European Commission published a blueprint for €750bn of borrowing in May, building on earlier Franco-German proposals. The debate is further complicated by being tied up with talks on the EU’s next long-term budget.

Mr Rutte has said that the moves to give countries unprecedented grants should come with a greater degree of surveillance than ordinary loans. But economies who have borne the brunt of the pandemic have bristled at the idea of being subject to “Troika-style” monitoring of the kind that was imposed on countries during the eurozone sovereign debt crisis.

As leaders convened for a dinner session late on Friday, Mr Michel aimed to break the deadlock with a compromise plan that offered an emergency brake on distributions of cash to help win over Mr Rutte. But the Dutch prime minister rejected the proposal with a rival plan that still contained a national veto.

Some diplomats later criticised Mr Michel for focusing on detailed governance arrangements in the opening hours of the summit, rather on the overall size of the proposed package, which remains unresolved. Given the lack of progress they questioned how soon the European Council president will be able to table a revised compromise plan, which will be an essential part of pushing talks forward.

A sticking point is the Netherlands’ desire to keep a tight leash on potential grants out of concern that the money might be misused by recipient countries. Mr Rutte’s parliament has also backed his tough stance.

Mr Michel’s proposal late on Friday, seen by the Financial Times, suggested that the payment of funds would be halted if member states failed to reach consensus on national recovery plans already endorsed by the European Commission. The matter would then have to be taken up by EU leaders, with no payments being disbursed before then.

Mr Michel’s text left unspecified the number of countries needed to trigger the brake. A rival Dutch plan, also circulated on Friday, insisted that a single country should be able delay the process — giving one country a de facto veto. That has been fiercely opposed by other capitals that argue it would delay the distribution of funds needed to revive their economies after months of hibernation.

But diplomats said that parallel efforts by Mr Michel to settle how grants should be shared out among countries were gaining traction. Mr Michel proposed in advance of the summit that 30 per cent of the payments would be held back until after 2021, when the pandemic’s impact on gross domestic product could be factored into allocation decisions.

Under a tweaked plan, also seen by the Financial Times, the 30 per cent share would be split into two components. Half would be linked to countries’ GDP performance in 2020 alone, and half to movements in output over both 2020 and 2021. It is designed to address concerns among some countries that they would end up losing out if they had robust recoveries in 2021.

An outstanding question remains the size of the recovery package and allied seven-year budget. Austria’s chancellor said his government “clearly rejected” a proposed €500bn plan to hand out grants. Other “frugal” governments such as Denmark, Sweden and the Netherlands have also demanded cuts to the overall size of the package.

Diplomats said most countries would be anxious to protect the core €310bn of grants proposed by the commission. That meant that the axe would most likely fall in other areas, including EU investment support and a proposed tool to help recapitalise struggling companies. “The magical number for cuts has always been €100bn for the frugals,” said one diplomat.

Leaders will also need to resolve a dispute over how to tie recovery money to respect for the rule of law. Hungary’s illiberal premier, Viktor Orban, has threatened to veto a deal that makes respect for fundamental values a precondition of the recovery fund — a position supported by Poland’s prime minister, Mateusz Morawiecki, during the summit.

Western European capitals are demanding tougher cash sanctions for member states such as Poland and Hungary that are accused of undermining the independent judiciary and the press.

A failure to find a breakthrough this weekend would raise the prospect of another summit in Brussels before the end of the month.

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