Netherlands’ prime minister Mark Rutte, whose budget rebate under these plans would jump to €1.92bn from €1.57bn © REUTERS

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European Council president Charles Michel has proposed large increases to the rebates that so-called “frugal” EU countries receive on their contributions to the bloc’s budget, as part of a plan to break the deadlock on the multibillion coronavirus recovery plan.

The compromise, which Mr Michel sent to delegations meeting in Brussels on Monday evening, settles on a figure of €390bn in grants for stricken countries under the recovery programme.

The frugal member states that include the Netherlands, which had been holding out for a lower figure, would receive substantial increases in rebates they receive on their budget contributions as part of a possible deal.

For example, Austria’s annual reduction would be doubled to €565m a year compared with previous proposals, while the Netherlands’ would jump to €1.92bn from €1.57bn. Denmark and Sweden would also receive increases. Germany, which is not part of the frugal grouping but does receive a budget discount, would see its rebate remain unchanged.

The rebates — discounts applied to budget contributions — are a legacy of the UK’s membership of the EU after then prime minister Margaret Thatcher in 1984 won the prized payback mechanism. Countries led by France have pushed for the abolition of the rebates after Brexit, but they have re-emerged a key bargaining tool to win over frugal countries in the debate over Europe’s landmark response to the coronavirus.

One diplomat called the boost to rebates “unacceptable”.

The new proposals from Mr Michel are an attempt to push forward marathon talks over Europe’s financial response to the pandemic, which are now stretching into a fourth night.

The €390bn in grants he put forward was below the figure proposed before the summit began, but higher than earlier demands from the alliance of frugal nations. The total recovery fund will remain at €750bn, with the rest of the package comprised of loans.

Diplomats said the grants figure represented a breakthrough in the talks that have been beset by divisions. Sebastian Kurz, Austria’s chancellor, who was one of the advocates for a smaller fund, said he was “very happy” with the result after a day of “tough negotiations” on Monday morning.

But there were still complex discussions ahead on Monday evening, on topics including climate change targets and how to link payments to adherence to rule of law principles.

Mr Michel’s text kept unchanged previous language on both issues, which is being resisted by Hungary and Poland. Diplomats said the pair would fight for changes and anticipated a long night of talks that could spill into Tuesday.

The compromise proposal cuts the overall level of grants by drastically reducing a planned “Just Transition Mechanism” to help poor economies reduce their carbon emissions. This fund would drop from €30bn to €10bn, while a proposed top-up to the EU science research programme would be reduced to €5bn from an earlier €11.5bn.

Leaders have been locked in talks since Friday as they try to forge a common EU response to the worst economic crisis since the bloc’s inception.

Not only are they attempting to seal a deal authorising the European Commission to borrow unprecedented sums to seed the recovery fund, they are also attempting to settle the EU’s upcoming €1tn seven-year budget.

Emmanuel Macron, France’s president, said there was a “spirit of compromise” in the negotiations but warned that the agreement had not been settled. “I remain extremely cautious,” he told reporters, pointing out that important elements such as respect for climate targets and the rule of law were yet to be discussed. He added that a failure to agree would risk a revival of the arguments at “harder moments” and at a higher cost.

The main sticking point over the weekend had been the level of non-repayable grants that the recovery fund would be permitted to give hard-pressed member states. France, Germany, Spain and Italy had sought to keep the grants ringfenced at no less than €400bn — a figure that was itself shy of the €500bn originally advocated by Berlin and Paris in May.

Hungarian premier Viktor Orban has threatened to veto a compromise that tied distribution of money to respect to EU fundamental principles. The current deal says money can be withheld from member states that flout the rule of law as long as the move has the support of a qualified majority of governments.

One western diplomat said the frugal countries would remain firm in the face of threats from Mr Orban. “We will resist and let’s see if Orban really wants to block a deal,” said the diplomat.

Other outstanding issues to be resolved included a move to tie aid to respect for the EU’s goal of hitting climate neutrality by 2050. Poland has not formally signed up to the goal and does not want aid to be made conditional on the net-zero target.

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