BERLIN — Germany’s Lufthansa bailout is putting German Chancellor Angela Merkel and European Commission competition chief Margrethe Vestager on a collision course.

After weeks of back-and-forth over the terms of a €9 billion rescue for Lufthansa that includes a 20 percent ownership stake for the German government, the flag carrier said Wednesday it could not accept conditions imposed by the EU’s competition department.

The Continent’s second-largest airline felt Brussels’ demands “would lead to a weakening” of its core Frankfurt and Munich hubs by forcing it to relinquish prized landing slots, it said in a statement.

“We won’t allow that to happen,” Merkel is reported to have told her party colleagues earlier this week in response to suggestions the Commission would play tough.

Merkel is said to have pledged a “tough fight” should EU officials, principally Vestager, try to water down Lufthansa’s position in the European aviation market to get the deal through.

The new rules allow the European Commission to demand concessions “to preserve effective competition,” when the public money top-up is greater than €250 million.

Lufthansa’s decision to delay its approval of the rescue tees up a conflict between the two over how far Brussels should drag on German economic policy in what Merkel has called the worst crisis since the close of World War II.

Even before the pandemic, Vestager had dashed hopes for a mega rail merger between Germany’s Siemens and France’s Alstom, a pet project for Merkel’s ally Economy Minister Peter Altmaier. He also helped broker the Lufthansa deal, Europe’s biggest pandemic airline bailout.

France stumped up €7 billion to help Air France and Italy pitched in €3 billion to renationalize Alitalia. In Berlin, the fear is that the Commission wants to make an example of Lufthansa.

“The French and Italians put their money in the airlines that they want,” one senior German aviation executive complained, insisting that giving away slots would do nothing to boost competition. “Slots in the next two years are not our issue at all. Everyone is flying less.”

Buckle up

Brussels recently adopted temporary bailout rules that apply during the coronavirus crisis. They impose strict conditions on EU countries willing to support their champions in distress, aimed at preventing states from helping struggling companies to take over markets once the crisis ends.

The new rules allow the European Commission to demand concessions “to preserve effective competition,” when the public money top-up is greater than €250 million, a Commission spokesperson told POLITICO. France and Germany agreed to the rules, after forcing Brussels to back off some of its original demands.

In previous aviation competition cases, the European Commission asked airlines to divest slots at airports, but this is a no-go for Berlin.

The fear is that giving up slots at Frankfurt and Munich — where the company holds roughly two-thirds of take-off rights — endangers Germany’s links to destinations in Asia and North America. What’s more, workers argue that vacated slots would otherwise go to low-cost airlines with looser labor standards.

But those low-costs argue that such measures are the only way of paying fair. Ryanair threatened to appeal the German bailout, arguing the deal amounted to “illegal state aid.” It is also planning a bloc-wide legal attack against other rescues.

To save their national flag carriers, Paris provided a €7 billion loan package, while Italy is planning to take a stake in exchange for fresh money, the same idea proposed by Berlin.

The Commission doesn’t treat those types of rescues in the same way.

“There is a substantive difference in nature” between public loans that have to be repaid and injecting public money into a company, and in how it affects competition, according to the Commission official.

Injecting equity “does not increase the debt exposure of the company and ensures that the company is supported by a strong shareholder,” she added.

This explains why the Commission did not request that Air France divest slots at airports where it has a strong market position. But there is no doubt, according to two competition experts, that Brussels will ask Alitalia to make important concessions to preserve competition.

The Lufthansa Group, which also includes the Austrian, Brussels, Swiss and Eurowings brands, has been desperate to keep the state off its board, insisting Berlin only appoint “independent experts” rather than occupy the two supervisory board seats its 20 percent stake would warrant.

The problem for Lufthansa is that the airline which says it is losing €1 million an hour and is flying only 1 percent of its normal passenger load needs help. A German government bailout is the “only viable alternative for maintaining solvency,” it said in the statement, but said it would hold off on taking the deal to a shareholder vote “for the time being.”

“The resulting economic impact on the company and on the planned repayment of the stabilization measures, as well as possible alternative scenarios, must be analyzed intensively,” said Lufthansa.

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It’s Ursula von der Leyen’s €750 billion bet: that economic damage from the coronavirus crisis is so devastating, EU countries will take a huge leap of faith and effectively sign up for a joint credit card.

By proposing a €750 billion recovery fund, using borrowed money to be repaid over 30 years, the European Commission president is wagering that national capitals will put aside any misgivings, and not only agree to the novel financing mechanism to get EU economies back on their feet, but also cut a fast deal on a €1.1 trillion, seven-year budget that will secure resources for her priorities, including fighting climate change and promoting digital transformation.

Skeptics of her plan — especially the leaders of Austria, Denmark, the Netherlands and Sweden — argue von der Leyen is welcome to gamble her presidency as she likes, but not using their taxpayers’ money. Fierce negotiations now lie ahead.

Much of von der Leyen’s presentations on Wednesday, as well as briefings by commissioners and other officials, seemed tailored to convincing those skeptics, the so-called frugal four, that there is not as much to fear in her proposals as they anticipated.

Appearing first in the European Parliament, where she arrived wearing a white face mask and spoke to a largely empty chamber with MEPs scattered for social distancing, then at the Commission where she fielded questions from reporters connected via an interactive videoconference platform, von der Leyen insisted that the drastic economic downturn required an extraordinary response. But she said it would not permanently change how the EU manages member countries’ money.

“This is a completely new concept and a new step forward … The crisis is so huge, we have to take unusual steps” — Ursula von der Leyen, European Commission president

The result, at times, was a series of seemingly contradictory statements.

She billed her plan, called Next Generation EU, as revolutionary, but insisted it was not a new normal.

The Commission proposed help for business and industries, such as the aviation sector, but also proposed levying a new tax on big companies.

Von der Leyen presented her proposal as the best possible package — €500 billion in grants; €250 billion in loans — but admitted those amounts, and even the overall size of the recovery fund, will be up for negotiation with the EU’s 27 heads of state and government. The entire EU would issue bonds, guaranteed by national commitments to the bloc’s budget, and would repay the debt jointly, but this should not be viewed as “debt mutualization.”

“This is a completely new concept and a new step forward,” von der Leyen said at one point, adding: “The crisis is so huge, we have to take unusual steps.”

But in response to questions, she also said: “This would allow EU member states to contribute to the next budget at the same level as they currently do.” And she said of the unprecedented borrowing program, “I want to be clear, this is one-off and this is an exception.”

At least some of her message appeared to be well-received in the capitals it was aimed at.

“What we find positive — not just myself, but the Netherlands, Sweden and Denmark — is that there is a time limit and that the fund will be a one-time emergency measure and not the first step toward a debt union,” Austrian Chancellor Sebastian Kurz said in an interview with POLITICO. “Considering that there are many in Europe who want such a debt union, it’s important to us that this be clarified in writing once and for all.”

Banking on Merkel and Macron

Von der Leyen and her team are clearly counting on supporters, especially German Chancellor Angela Merkel and French President Emmanuel Macron, to wield the political muscle needed to bring all 27 EU countries on board.

Merkel and Macron last week put forward their own joint proposal for the EU to borrow €500 billion and use it to distribute grants to member countries hit hardest by the pandemic. But while von der Leyen proposed that same amount in grants and another €250 billion in loans, she conceded the figure could very well change.

“I think especially in this exceptional situation where we really need a clear and strong and united answer to this crisis, this was and is a big step forward,” von der Leyen said, noting that the EU had long used the same approach in the past to borrow far more modest sums.

Enzo Amendola, Italy’s minister for European affairs, praised the proposal, calling it “a solid basis for a successful conclusion to the negotiations.”

And in a sign that efforts are underway to foster goodwill between north and south heading into the budget talks, Dutch Prime Minister Mark Rutte tweeted that he had spoken with his Italian counterpart, Giuseppe Conte, on Tuesday, and he praised Italy’s recovery efforts.

Von der Leyen said EU members were already in agreement on broad principles. But some of the items that are yet to be agreed are hardly trivial.

“To raise money on the capital market and to channel this through the European budget is accepted,” von der Leyen said. “The discussion is about the size, and the discussion is about grants and loans.”

She added, “What part is loans? What part is grants, or do we have only grants or only loans? That will have to be discussed, and I think it’s positive that we are now starting to work with the solution. It will change. In any negotiation, a concept is partly changed. But I am deeply convinced that is the sound answer we should give.”

Across the street from the Commission headquarters, Council President Charles Michel and his team immediately set to work, phoning capitals to gauge reactions to the proposal, and announcing that EU leaders would hold a summit on June 19, possibly their first in-person gathering since the pandemic forced countries into lockdown back in March.

“Everything should be done to reach an agreement before the summer break,” Michel said in a statement. “Our citizens and businesses have been heavily impacted by the pandemic. They need targeted relief without delay.”

Council officials said they are analyzing the Commission’s proposed recovery fund, as well as the revised €1.1 trillion core budget plan, in an effort to understand what they will mean for each of the 27 EU countries.

“We need to make sure the allocation is fair,” a senior Council official said, noting that while Italy and Spain suffered the most from the coronavirus, the economic hit was felt across the entire Continent.

“We can’t just say Italy and Spain and that’s it, full stop,” the official said. “It’s a psychological issue as well. We have all seen deaths. It’s emotion. You won’t be able to avoid that.”

According to figures provided by a Commission official, Italy and Spain would receive by far the most from the new fund. Rome would be in line for nearly €82 billion in grants and almost another €91 billion in loans. Madrid is forecast to receive more than €77 billion in grants and over €63 billion in loans.

For the Council, and the 27 member countries, numerous technical questions remain to be answered, including exactly how the Commission has calculated its allocations, and precisely what cuts have been made to various programs in order to accommodate some of the new spending.

Quick analysis suggests that some programs von der Leyen identified as sacred priorities would in fact end up with budgetary allocations smaller than those originally proposed, including the Erasmus student exchange program, and many security and defense initiatives.

Cohesion programs, for example, which are meant to foster regional development, would be allocated €323 billion from the EU budget over seven years — less than the €330 billion proposed in 2018 — but would get a top-up of €50 billion from borrowed funding. Similarly, the Commission is proposing to reduce the EU budget allocation for the research and innovation program Horizon Europe, but add €13.5 billion of borrowed money.

Taxing questions

The Commission stressed that all the borrowing it has envisioned for the recovery fund could theoretically be repaid by creating new revenue streams that would flow directly into EU coffers. National capitals have long resisted allowing the Commission to create such new “own resources” but von der Leyen suggested they are more palatable than the alternatives — future spending cuts or higher national contributions to the EU budget.

Among the ideas floated were a digital tax, as well as a carbon border tax, or expanding the EU’s Emissions Trading System to increase fees on the aviation and maritime sectors. The Commission also raised a new idea of a tax on operations of “large enterprises” but did not provide details of how it might work.

One key change in the Commission’s proposal is its approach to rebates — reductions to the amount of money some relatively wealthy member countries, such as the Netherlands, contribute to the bloc’s budget. The Commission has backed down on plans to phase them out in the near term — a clear part of its effort to win over the frugal four.

A Dutch diplomat said it is too soon to fully evaluate the Commission’s complex proposal. The Netherlands is still firmly opposed to sharing debt with other EU nations but wants to find other ways to help with the recovery effort, the diplomat said.

“Our position is well known: The starting point is that the Netherlands is willing to help and wants to cooperate on a European level to fight the crisis,” said the diplomat. “We want to do this in a way that strengthens member states and the EU as a whole.” But the diplomat pointed to a joint paper issued by the four frugal countries calling for “loans for loans, no mutualization of debt, reforms.”

Commission officials insisted that the scale and scope of the economic damage from the pandemic — financial contraction at levels unseen since the Great Depression — called for extraordinary measures. And they said that a key advantage of von der Leyen’s proposal is that the money borrowed by the EU and distributed as grants would not add to the national debt load of countries struggling to recover.

Von der Leyen herself urged everyone to recognize the historic need for solidarity. “The current crisis,” she said, “is the greatest collective challenge we have faced since the beginning of the EU.”

Matthew Karnitschnig, Jacopo Barigazzi and Maïa de La Baume contributed reporting.

The EU’s diplomatic service has launched an investigation into the leaking of an internal email criticizing how a report on Chinese disinformation was edited.

The investigation follows criticism by the EU’s foreign policy chief Josep Borrell, who appeared to blame a member of his own staff for leaking the sensitive email, which was at the heart of a scandal about the EU allegedly bowing to Chinese pressure.

The European External Action Service (EEAS) last month published a report on “narratives and disinformation” around the coronavirus pandemic that was notably softer than a previous, leaked version reported by POLITICO. Most strikingly, references to China running a “global disinformation” campaign and Chinese criticism of France’s reaction to the pandemic were absent from the later version — prompting accusations that Brussels watered down its criticism in response to Chinese diplomatic pressure.

The EEAS denied that it had given in to Chinese pressure and said it had always intended to produce two versions of the report, one for internal use and one for the public.

But accusations of bowing to pressure were fed by an email from an EEAS staffer, leaked to the New York Times, which warned that the softening of the report would “set a terrible precedent and encourage similar coercion in the future.” The staffer also said that EU diplomats were “self-censoring to appease the Chinese Communist Party.”

EEAS spokesperson Peter Stano said Wednesday that the institution was now investigating who was responsible for leaking the delicate email.

“The EEAS is in the process of an internal follow up to the leaks,” Stano told POLITICO. He declined to say how many staffers are being investigated, when the investigation is supposed to be finalized or whether the EEAS was considering disciplinary measures. “Such internal processes are handled in a strictly internal way, hence we do not comment on them publicly,” he said.

Stano also declined to say whether the EEAS was investigating who leaked the first, internal version of the disinformation report to media.

During a European Parliament debate at the end of last month, Borrell expressed frustration over the leaked email, saying that it undermined the credibility of the EEAS. Borrell also appeared to lash out at his own staff, saying that “the personal belief” of a staffer — “maybe being written to be leaked” — had caused “damage to the credibility of the institution.”

During another Parliament hearing on Tuesday, Czech MEP Markéta Gregorová asked Borrell to provide evidence for his allegations or apologize to the staffer. Gregorová did not get an answer as the video connection of Borrell, who was taking part in the hearing remotely, was interrupted.

Gregorová told POLITICO she will now send her questions in writing to the foreign policy chief, and said Borrell’s reaction to the scandal should have been to stand behind his staff and not spread accusations unless he had clear evidence for them.

“The presumption of innocence has to apply,” she said, calling on Borrell to “be the vanguard for all people working in the EEAS … He must protect them against any undue interference and from self-censorship.”

Jacopo Barigazzi contributed reporting.