EU leaders struggle into third day of budget and recovery talks

European Council President Charles Michel’s so-called “super emergency brake” was designed to yield a breakthrough. But as of late Saturday night, EU leaders’ negotiations over a landmark €1.82 trillion budget and recovery package were still stalled.

One of the main points of dispute was a governance mechanism to ensure that countries meet the requirements for receiving money from a coronavirus recovery fund.

The fight over governance was among the most intractable of a long list of outstanding disagreements among EU heads of state and government after their second day of brokering over the proposed new long-term budget and economic recovery initiative.

Some officials and diplomats said the atmosphere on Saturday was better than Friday and that leaders were inching ever so slowly toward a deal. Michel adjourned the session after dinner, and called for a third day of talks to begin at noon on Sunday.

“The deliberations are at an important stage,” an official in the German delegation said. “It cannot yet be said whether there will be a solution tomorrow. But it is worth continuing the work, because there is a broad readiness among the member states to find a solution.”

The deadlock on governance seemed even tougher than the fight over the size of the budget and recovery fund.

Clearly, it will not be easy.

Late Saturday, a post-dinner meeting between German Chancellor Angela Merkel, French President Emmanuel Macron and leaders of the so-called Frugal Four — Austria, Denmark, the Netherlands and Sweden — as well as their ally Finland, ended in some acrimony over demands by those countries for further cuts to the signature recovery initiative: a grants program financed by joint EU borrowing.

Momentum

Michel created some momentum Saturday morning by nodding to the frugals’ demands and reducing the grants portion of the proposed recovery fund as part of a broader, 65-page revised proposal designed to break the deadlock.

According to Michel’s revised plan, the core seven-year EU budget remained at the proposed level of €1.074 trillion. The size of the recovery fund would remain at €750 billion, but the level of grant funding was reduced to €450 billion from €500 billion.

That, however, was apparently not enough for the frugal countries.

“There has been movement in the right direction but there is still a long way to go tomorrow,” Austrian Chancellor Sebastian Kurz tweeted at 1:41 a.m.

Macron, in turn, was firmly resisting demands from the frugals to reduce the grants portion of the package below €400 billion, officials said.

A French diplomatic official said that Macron, Merkel and Italian Prime Minister Giuseppe Conte would meet Michel at 9:30 a.m. Sunday before all the leaders reconvene.

The official held open the possibility that the trio might not go on to the session with all the leaders if they felt a deal could not be done due to frugal opposition. But German officials had previously made clear the chancellor would be there.

The deadlock on governance seemed even tougher than the fight over the size of the budget and recovery fund.

Dutch Prime Minister Mark Rutte has demanded that the disbursement of recovery money be approved unanimously by all 27 EU countries — a position that the Commission and Council say is legally not feasible, and that some countries including Italy and Spain strongly opposed.

Michel, in a bid to fashion a compromise on Saturday, proposed the “super emergency brake,” by which any country could slow the disbursement of recovery funds by bringing any objection to the heads of state and government on the European Council, or to EU finance ministers.

Dutch officials said Michel’s plan was a step in the right direction. But Prime Minister Mark Rutte signaled it was not enough.

Conte, in particular, pushed back hard on Rutte.

“I have a good personal relationship with Rutte,” Conte told reporters outside his hotel late Saturday night. “Then the fight is very hard. We are colliding these days in a very hard, very tight way.”

Conte said that Italy still preferred the Commission’s original proposal on governance, which is more lax than Michel’s compromise plan.

Conte said Rutte’s unanimity requirement would be a violation of the EU treaties. “The problem is that when we then go to operate this system of checks and controls, it must first be a system compatible with the treaties,” Conte said, adding: ”On this, I am absolutely uncompromising.”

A senior EU diplomat monitoring the leaders’ negotiations said overall the atmosphere on Saturday was positive, but that there were clear obstacles. “Mood was better tonight than yesterday,” the senior diplomat said. “Not much progress. Still stuck on governance.”

One diplomat from a frugal country echoed the sense that there was some progress. “I think we are getting closer,” the diplomat said, “but some heads of state are not happy.”

A senior official from a southern European country said that not all leaders appeared to be bargaining in good faith. “Some are here to present their show with no will to compromise,” the official said, while others “really want to finalize this deal.”

Coronavirus impact

To that end, Michel was expected to put forward yet another revised overall package on Sunday. That package would add other further refinements to changes he proposed Saturday, which included the cut in grants.

To lower the amount of grant funding, Michel is proposing reductions to several budget programs from his previous blueprint. Among those affected would be the Horizon Europe research program (a cut of €2 billion), the health program (a cut of €2.7 billion) and rural development funding (a cut of €5 billion). A planned €26 billion pot to support the solvency of companies would be eliminated.

Michel also added other sweeteners intended to assuage the frugals, including increases in rebates that have been used as a way to cap the overall contributions of countries that pay the most into the EU’s common budget.

Michel proposed an increase of €50 million in Austria’s annual budget rebate, as well as an extra €25 million in rebates per year for Denmark and Sweden.

He also suggested raising the amount of EU customs revenues that countries can keep — from 15 percent proposed earlier this month to 20 percent. That’s a major win, and a major windfall, for the Netherlands, which operates some of Europe’s busiest ports.

Following intense opposition from some countries to how recovery funds would be allocated, Michel proposed that a new formula be used for the €325 billion of grants to be given to countries under the Recovery and Resilience Facility.

That change was designed to respond to concerns that previous proposed formulas gave too much to some countries and not enough to others — and also were not closely enough linked to the impact of the coronavirus crisis.

“I think that a deal is possible tomorrow, but there are still big questions remaining” — Dutch Prime Minister Mark Rutte

Allocations of these grants in 2021-2022 would be made using the original formula, which is based on unemployment data for 2015 to 2019. But in 2023 the historical unemployment figures would no longer matter, and money would be distributed based on the loss of GDP in 2020 and 2021, according to the new text.

Some top policy priorities were carefully preserved in Michel’s new proposal, including the EU’s focus on fighting climate change, with 30 percent of the EU’s long-term budget and recovery fund earmarked for climate action.

But in a sign of the numerous outstanding issues, a dinner discussion on a proposed mechanism to link payouts of EU funds to respect for the rule of law was inconclusive, and it was unclear how Michel would navigate continuing disagreement on that and other topics on Sunday.

Rutte, speaking to reporters after 2 a.m., said leaders were struggling to find a landing zone but expressed cautious hope. “I think that a deal is possible tomorrow, but there are still big questions remaining,” Rutte said, adding, “The fact that we continue to talk shows that we have optimism.”

Florian Eder and Paola Tamma contributed reporting.

This article is part of POLITICO’s coverage of the EU budget, tracking the development of the seven-year Multiannual Financial Framework. For a complimentary trial, email pro@politico.eu mentioning Budget.