Europe’s €750 billion (A$1.23 trillion) European Recovery Plan is in deep trouble. Member states have yet to find agreement on how the funds are distributed and on what criteria distribution should be based.

At a crucial European Union summit on Friday, the European Commission president obtained broad support for the organisation’s highest ever borrowing on the capital markets, but the leaders of the 27 member countries remained deeply divided as to how the money should be distributed.

Leaders will meet again in mid-July to try and resolve a conflict that some observers believe could threaten the future of the European Union itself. German Chancellor Angela Merkel said pointedly: “It is no exaggeration to say we are facing the biggest economic challenge in the history of the European Union.”

The appropriately named Frugal Four (the Netherlands, Sweden, Denmark and Austria) flatly refused to back the Commission’s proposal for a substantial chunk of the fund to be provided as grants to those countries hardest hit by the COVID-19 pandemic, most notably Italy and Spain.

The summit ended inconclusively after four and a half hours of well-ventilated disagreements, which took place via video link.  European Commission President Ursula Von der Leyen had proposed that two-thirds of the money raised (€500 billion) should be distributed as grants, with the remaining €250 billion as low-interest, EU-guaranteed repayable loans. There were differences of opinion on this split and on the size of the fund itself. The Frugal Four thought it was too high. There were disputes as to how and when the money would be paid back, if ever. The capital raising is likely to be through a bond fund with an initial life of 30 years.  The distribution of funds was also a source of dispute. How would the grants be parcelled out, on what criteria, and who would decide? Which hardest-hit enterprises or sectors would get the loans?

The Commission proposed to use three key national statistics as distribution criteria: population, GDP per capita, and the five-year average rate of unemployment between 2015 and 2019. Italy and Spain, the two nations hardest hit by COVID-19, stood to gain the most, along with some countries that managed the coronavirus relatively well.

The meeting ended with not a little grumbling, and a refrain from the most famous of the World War II songs of Vera Lynn (who had died the previous day), “We’ll Meet Again.” That could be as soon as early July, but whether it will be “some happy day” is anyone’s guess.

Meeting reporters in The Hague afterwards, Dutch Prime Minister Mark Rutte demanded an economic impact assessment and a change in criteria, arguing that long-term jobless figures are not relevant to measuring the impact of the pandemic. “I find it difficult that unemployment is being used. We should use statistics from this crisis, not the past,” he said. Other leaders expressed similar views. Ireland’s Leo Varadkar suggested that current economic damage and 2020 job losses caused by COVID-19 and Brexit should be the major criteria.

The German chancellor said that she wasn’t sure everyone understood the gravity of the situation, adding that Europe faces “very, very difficult times” and that “the bridges we have to build are big.” French President Emmanuel Macron struck a calmer note, saying failure to settle the issue would “send the wrong signals” and urging a rethink and compromise.

This prolonged rift within the world’s biggest economic bloc is a reminder yet again of the European Union’s biggest weaknesses. It is, in effect, a hybrid institution. It is neither the federation of states that would some would like it to be, nor a group of loosely connected countries like ASEAN. The EU controls some crucial policies like foreign affairs, trade, agriculture and food, and environmental standards, and has partial control of monetary policy for those members that are in the Eurozone. But, crucially, it has no control on fiscal policy, which leads to widely different policies on taxation, benefits, public spending, and much else.  The EU’s second biggest source of funds, the UK, is completing its transition out of the EU on December 31, bringing fear of further fragmentation.

Since the failure of the summit there has been intense activity among European capitals to try and find a way out of this rift, with the diplomatic activity led by Chancellor Merkel and the French president. Macron flew to The Hague for a one-to-one meeting with Rutte, only to find Dutch opinion hostile to treating Italy as a special case.

There are also some dark suggestions emanating from The Netherlands and neighbouring Belgium, the country hardest hit by the pandemic in statistical terms, that Eastern European nations, which did relatively well in combating COVID-19, are getting more money than they deserve because the Commission is trying to buy their votes. Ms von der Leyen rejects this and continues vigorously to defend the use of five-year unemployment data in the criteria.

Adding to the complications, the European Commission’s Johannes Hahn, who is in charge of the EU’s seven-year budget cycle, proposed on June 24 that the €166 billion allocated for 2021 should be supplemented with €344 billion from the Recovery Fund. This sum, 45 percent of the proposed capital raising, would leave much less for grants and loans, and the idea is likely to encounter stiff opposition.

In other developments, it emerged that there is considerable unease about an anticipated shortage of tax receipts, possibly leaving insufficient money in the Commission’s forward budget to fund climate change targets, to which the EU is committed.  There is also a view in some countries that the EU needs to devote more than 20 percent of its budget to climate change, as presently planned.

The hopes expressed by leaders for a unanimous agreement by mid-July look thin indeed, and arguments over both the Recovery Fund and the budget are likely to stretch out into September and beyond.

On a brighter note, UK Prime Minister Boris Johnson has signalled he is ready to compromise in order to revive moribund UK-EU trade talks, and Brussels has said it will be more flexible when negotiations restart next week.

Colin Chapman is a writer, broadcaster, and public speaker who specialises in geopolitics, international economics, and global media issues. He is a former president of AIIA NSW and was appointed a fellow of the AIIA in 2017.

This article is published under a Creative Commons License and may be republished with attribution.