“The Stakes Couldn’t Be Higher” – European Recovery Plan Summit Begins With Leaders At An Impasse

German Chancellor and current EU President Angela Merkel has joined her 26 colleagues from the European Council, which is comprised of the leaders of the EU’s 27 member states, in Brussels Friday morning for the beginning of a two-day summit where Merkel and French President Emmanuel Macron will attempt to shove a controversial €750 billion recovery plan (which was hammered out by the European Parliament) down the throats of all of Europe.

However, resistance from a group of fiscal conservatives in the bloc has hurt European stocks and the euro on Friday, as investors fear that despite more than 2 months of negotiations, the European Council still won’t manage to walk out with a deal when the summit ends tomorrow.

Many investors expect the bloc will need to hold another summit later this month, though if they ever want to get something done, a compromise must be made. This week’s two day weekend summit will be chaired by European Council President Charles Michel.

But so far, the “Frugal Four”, a collection of four northern countries who oppose the plan, has shown no signs of capitulating, while the rest of the bloc has given no indication that they would be willing to incorporate the FF’s demands into the design of the joint EU recovery fund.

“Presumably, as is the way of Europe, they will agree to come back from more talks followed by a compromise and a watered down deal,” Societe Generale’s Kit Juckes said of the EU discussions. “The positive though is that we are getting a recovery fund.”

As the leaders entered the summit room, clad in masks and sharing salutatory elbow bumps, some joked that the negotiations have become “stuck in a Rutte” – a reference to Dutch Prime Minister Mark Rutte, one of the main opponents of the recovery fund deal struck by Merkel and Macron. Rutte, a leader of the “Frugal Four”, said he was “not optimistic” that an agreement would be reached on Friday as he arrived for the meeting.

The Netherlands, Sweden, Denmark and Austria have become known as “the frugal four” because of their resistance to the plan, which, as it stands, involves doling out grants to the worst-hit countries, with virtually no strings attached. Instead, Rutte and the frugal four are demanding that any money tapped from the fund must be repaid by the countries taking it, and that borrows must agree to certain financial reforms, a condition that progressives will decry as more forced austerity.

Rutte told the FT that he felt there was “less than a 50% chance” of striking a deal on Friday. The growing number of contentious issues led the FT to declare that the likelihood of a second Brussels summit later this month is extremely high.

According to the FT, one of the most controversial elements of the plan is the creation of a recovery instrument worth €560 billion that is designed to hand out grants and loans to crisis-hit economies. Rutte is demanding a veto over approving the disbursing of cash, a condition that Italy, Spain and other southern member states have fiercely resisted. That €560 billion is part of a total €750 billion stimulus package. The remaining ~€200 billion will be handed out in the form of loans.

But the FF isn’t the only bloc that Merkel & Co need to worry about. Though Hungarian PM Viktor Orban has said he would only do so as a last resort, Hungary’s parliament voted earlier this week to support a veto from Orban if the European Council tried to attach so-called “rule of law” conditions intended to block funds from going to Hungary and Poland, whose conservative governments have repudiated many of Brussels’ diktats.

All of these programs will be backed by joint debt backed by all 27 EU member states. This would be the first time that the bloc has moved to jointly take on debt, and that fact alone has rankled conservatives in the bloc who are staunchly opposed to the EU moving toward a fiscal union that would strip financial and economic power from local governments.

The Netherlands wants countries receiving EU support from the fund to agree to reforms in their labor markets and pension systems, among other more strict conditions.

European Solidarity was slow to arrive at the beginning of this crisis. EU leaders must now make amends.

The European Parliament took the initiative and proposed an ambitious recovery plan to reform our union.

Let’s take this chance to build back stronger! 🇪🇺#EUCO

— Guy Verhofstadt (@guyverhofstadt) July 17, 2020

Of course, failing to implement a deal could deliver another economic shock to Europe, something the continent’s shaken economy might not be able to easily withstand.  For this reason, some insist, the stakes “couldn’t be higher.”

“The stakes couldn’t be higher,” European Commission President Ursula von der Leyen said before the meeting began. “The whole world is watching us, (to see) whether Europe is able to stand up united and to overcome this corona-related crisis strongly.”

Since Brussels is basically a sieve for inside information, we suspect Friday morning’s session will be peppered by reports about the talks hitting an impasse. Expect more of that between now and the European market close.