Franco-German recovery deal meets resistance

Not everyone is climbing aboard the Franco-German love train.

A day after Paris and Berlin bridged their differences to propose a €500 billion coronavirus recovery fund, the EU’s so-called “frugal four” members signaled their resistance to the plan — particularly the idea of common EU borrowing to fund grants to countries, regions and sectors hit hardest by the coronavirus crisis.

The foursome of Austria, Denmark, the Netherlands and Sweden — who advocate lower EU spending and tight fiscal discipline — will present their own counter-proposal, Austrian Chancellor Sebastian Kurz declared Tuesday.

Some Central and Eastern European countries, who have traditionally been big net recipients of EU funds, also voiced reservations.

However, the plan was warmly welcomed by southern European leaders, whose economies have been battered most by the pandemic, and by the European Commission, which will publish its official blueprint next week.

The big question is whether the frugal faction would ultimately torpedo a plan that has broad support — with all the political and economic damage that would entail.

The holdouts still have considerable clout, as any recovery fund would need the approval of all EU countries if it is to be linked to the bloc’s long-term budget, as Paris, Berlin and others propose. But the big question is whether the frugal faction would ultimately torpedo a plan that has broad support — with all the political and economic damage that would entail — or could be mollified with concessions.

Vienna led the public charge against the Franco-German plan, declaring that the EU should offer loans rather than grants to counter the economic fallout from the virus.

“We stand ready to provide the EU with further guarantees so it can provide more repayable loans to member states and businesses,” Austrian Finance Minister Gernot Blümel wrote in an email to POLITICO on Tuesday. “What we cannot support — but what DE and FR [Germany and France] propose — is that the EU borrows on the markets to finance non-repayable grants.”

Austria, Denmark and the Netherlands all pushed back against the Franco-German pitch in a videoconference of EU finance ministers on Tuesday, three treasury officials attending the virtual meeting said.

Swedish Finance Minister Magdalena Andersson, usually an outspoken critic of a grant-based fund, said she would await the European Commission’s proposal on May 27 before commenting further.

The frugals argue not just that any money borrowed from the markets should be paid back by the countries who receive the cash. If the EU as a whole has to pay back the loans, it would likely be the bloc’s richer countries on the hook for the lion’s share, they say. They also argue recipients of loans should have to carry out structural reforms to make their economies more resilient.

Southern European countries argue that they should not be penalized for a crisis that was not their fault and that saddling them with more debt will make it difficult for the whole EU economy to recover.

In a sign that a compromise could ultimately be in the pipeline, criticism of the Franco-German plan was markedly less combative than in previous debates over north-south fiscal solidarity.

Dutch Prime Minister Mark Rutte, an outspoken opponent of previous proposals for common EU debt and cash transfers to the south, was noticeably quiet in the 24 hours after France and Germany announced their plan.

An official from Rutte’s People’s Party for Freedom and Democracy (VVD) said the Franco-German proposal has a “sense of realism, it’s not over the top for us.” The official also said Rutte was “aware” of the joint initiative ahead of its unveiling and has been in contact with both French President Emmanuel Macron and German Chancellor Angela Merkel.

But, the official said, the challenge for The Hague is that the blueprint “means that net contributors will pay off these loans. We would like to see loans for loans, not loans for grants.”

In a possible hint at concessions that could placate the Dutch, the official said two key points for the Netherlands are “rule of law and structural reform of economies” — in other words, linking the disbursement of EU funds to those two issues.

Some eastern member countries, meanwhile, fear getting cut out of new monies or losing out on future funding streams as the bloc begins repaying borrowed recovery cash.

“We believe that loans, rather than grants should be applicable,” the Hungarian government wrote in a discussion paper seen by POLITICO.

Other eastern countries expressed support for grants, but made clear they wanted to see the fine print on how the money would be distributed before signing up to any plan.

“The ambition of Merkel and Macron is exactly what we need now: mix of solidarity and responsibility” — Belgian Finance Minister Alexander De Croo

“The [Franco-German] non-paper says nothing on the implementation rules of measures financed from the Recovery Fund, which is an extremely important element,” Polish Minister for European Affairs Konrad Szymański wrote in an email on Tuesday. “The final position of Poland and other Member States from the CEE [Central and Eastern Europe] on the anti-crisis measures will be dependent on the exact formulation of those rules.”

Some eastern states are calling for a balance between loans and grants but share the frugal four’s interest in linking funding to economic reforms.

There should be “a clear incentive in that Recovery Instrument for structural reforms,” Slovak Foreign Minister Ivan Korčok told POLITICO last week, calling for the plan to be “fiscally responsible” and for “all countries” to have access to the new funding.

But following on from warm words from southern Europe on Monday evening, the Franco-German plan won new fans on Tuesday.

“The ambition of Merkel and Macron is exactly what we need now: mix of solidarity and responsibility,” Belgium’s Finance Minister Alexander De Croo tweeted.

Diplomats said Paris and Berlin had produced a balanced proposal that will serve as a good starting point for talks — but that didn’t mean it was a done deal.

The principles outlined in the initiative are “aligned with what many countries are saying,” said one diplomat, but the negotiation is “not going to be easy” and “there will be a lot of bickering.”

Others pointed out that the proposal’s vagueness gives negotiators room for maneuver. “It’s a nice framework, but could be read, whoever you are, the way you prefer,” said a second diplomat. “There’s still a lot of work to be done.”

David M. Herszenhorn and Hans von der Burchard contributed reporting.