German chancellor Angela Merkel helped orchestrate the deal © Alexandros Michailidis/European Council/dpa

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EU leaders have struck a deal on a landmark coronavirus recovery package that will involve the European Commission undertaking massive borrowing on the capital markets for the first time.

After days of sometimes bitter debate, the bloc’s heads of government agreed on a €750bn package aimed at funding post-pandemic relief efforts across the EU. The deal was announced in a tweet from Charles Michel, the European Council president, at 05.31am (CET) on Tuesday and was hailed by Emmanuel Macron, the French president, as a “historic day for Europe”.

The recovery fund centres on a €390bn programme of grants to economically weakened member states — a significantly smaller sum than the €500bn package originally proposed by Berlin and Paris in May. Leaders also signed off on the EU’s next seven-year budget, which will be worth €1.074tn.

The deal, orchestrated by Angela Merkel, the German chancellor, and Mr Michel, is the fruit of marathon negotiations which began in Brussels on Friday morning. The summit was the second longest in the bloc's history, falling just shy of the record set at a meeting in Nice in 2000.

Ms Merkel hailed the agreement as setting “the financial foundations for the EU for the next seven years”. The chancellor added: “Europe has shown that it is able to break new ground in a very special situation such as this one.”

Leaders had struggled to settle an agreement in part because “frugal” states — Austria, Denmark, the Netherlands and Sweden — were opposed to the idea of permitting the EU to borrow money and hand it out as budgetary expenditure for member states.

Even after the summit began, they continued to insist on paring back the amount of grants that the commission would be permitted to hand out, before finally settling on the €390bn figure. 

The price for this was a boost to the budget rebates that those frugal nations receive as a legacy of the UK’s membership of the EU.

Margaret Thatcher, the former British prime minister, won the prized payback mechanism in 1984, but recently countries led by France have pushed for the abolition of the rebates after Brexit. 

Instead they re-emerged during the discussions as an important bargaining tool to win over frugal countries in the debate over Europe’s unprecedented response to coronavirus. Austria’s annual reduction will be doubled to €565m a year compared with previous proposals, while the Netherlands’ rebate will jump from €1.57bn to €1.92bn.

Denmark and Sweden will also receive increases in comparison with earlier plans on the table. Germany’s discount will be unchanged. Ms Merkel said the decision to raise the rebates was “painful” but necessary.

Mr Macron said retaining the rebates was the price of securing a deal. “This long negotiation was marked by difficulties. Sometimes by disagreements — different conceptions of Europe,” he said.

To reach a deal, leaders signed up to cuts in top-up funding for EU programmes compared with earlier proposals, a decision that Ursula von der Leyen, the commission president, described as “regrettable”.

A mooted solvency instrument that would have helped recapitalise struggling companies worth €26bn was scrapped. Proposed top-up spending intended to be added to the EU’s Horizon science programme was radically reduced compared with earlier proposals, and a “Just Transition Fund” to help poorer countries reduce their carbon emissions was cut from a mooted €30bn to €10bn.

The protracted negotiations laid bare deep divisions over governments’ willingness to pool their financial firepower. Splits had to be overcome through a complex patchwork of compromises. 

Mark Rutte, the Dutch prime minister, secured an emergency brake that would allow any country to raise concerns that another was not honouring promises to reform its economy, and temporarily halt transfers of EU recovery money by Brussels.

But, to accommodate the sensitivities of other governments, the mechanism is time limited. The final text said EU leaders should “as a rule” take no more than three months to address any complaint. The final decision is formally left in the hands of the commission.

Another flashpoint during the talks was how to link the money to respect for the rule of law. Critics have claimed there have been violations of judicial independence in Poland, and have alleged that democratic norms have been undermined in Hungary. But a push for tough conditions led to threats from Hungarian prime minister Viktor Orban to block the entire recovery package.

On this issue, a group of leaders led by Ms Merkel and Krisjanis Karins, the Latvian prime minister, worked on a compromise plan that would allow a weighted majority of EU governments to block payments to a country over rule-of-law violations.

After the summit, Ms Merkel said the rule of law mechanism would not “single out one or two countries” — a reference to objections from Poland and Hungary that the plan was designed to sanction their governments.

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