EU adopts groundbreaking stimulus to fight coronavirus recession

After nearly five days of intense haggling, European Union leaders early on Tuesday stepped up to confront one of the gravest challenges in the bloc’s history, agreeing to a landmark spending package to rescue their economies from the ravages of the pandemic.

The 750 billion euro ($857 billion) stimulus agreement, spearheaded by Chancellor Angela Merkel of Germany and President Emmanuel Macron of France, sent a strong signal of solidarity even as it exposed deep new fault lines in a bloc reshaped by Britain’s exit.

The deal was notable for its firsts: European countries will raise large sums by selling bonds collectively, rather than individually; and much of that money will be handed out to member nations hit hardest by the pandemic as grants that do not have to be repaid, and not as loans that would swell their national debts.

Those extraordinary steps reflected a difficult consensus among members: that the scale of the crisis facing them required groundbreaking measures to ensure the bloc’s legitimacy, stability and prosperity.

“Europe has shown it is able to break new ground in a special situation. Exceptional situations require exceptional measures,” Merkel said in a news conference at dawn. ”A very special construct of 27 countries of different backgrounds is actually able to act together, and it has proven it.”

But the lengthy negotiations in Brussels were notable, too, for their exceptional rancour — and it was clear that the pooling of resources and sovereignty had come at a cost.

A strange kind of political theatre, never visited upon EU summits before, marked the meeting — with leaders donning masks and bumping elbows to greet. They were safely spaced in a vast hall, their entourages trimmed to only the most essential members.

When they convened on Friday, it was their first in-person summit in the five months since the coronavirus took hold in Europe. The meeting was officially scheduled to last until Saturday. By Monday morning, exhausted and angry after bargaining all night, they were still tussling over the details. The start of Monday’s session was twice delayed, and then it spilled into Tuesday morning.

As negotiations broke down over the weekend, so did many precautions the leaders and their teams had taken to protect themselves from the virus, which in most of Europe has been brought down to manageable levels, in any case. As the hours wore on and the talks grew heated, the diplomatic gloves came off, and so did the masks. Breakout groups met in rooms far smaller and less ventilated than the 300-seat auditorium where the general meeting was convened.

While there is no underestimating the importance of the agreement — the generosity of its size and the novelty of its mechanisms — the acrimony and dramatics of the four-day meeting betrayed the new divisions within the bloc. They also signalled where the fractures may lie in future crises.

The talks were defined by shifting roles among members now jostling to make their voices heard and for leadership in the absence of Britain, which had often played the part of the thrifty contrarian, fastidious about rules, in past summits.

This time, Merkel, unusually for a German leader, and holding the EU’s rotating presidency, put her finger on the scale on behalf of hard-hit southern countries and did battle with the nations she once championed, the northern members that have been less affected by the virus and are wary of the vast sums being thrown around.

Where Friday’s meeting was marked by joyful greetings and even celebrations of the birthdays of two leaders — Merkel, now 66, and Prime Minister Antonio Costa of Portugal, who turned 59 — Sunday night’s dinner (a “cold dish” after several sumptuous meals, socially spaced but unmasked) was marked by shouting matches and a nasty atmosphere.

Macron, for example, yelled at Chancellor Sebastian Kurz of Austria for not only being a tightfisted impediment to the rescue deal but also for leaving the room to take a call. To some leaders’ shock, the French president slapped the table. Kurz tried to keep his cool, and in a zinger put Macron’s temper tantrum down to sleep deprivation, diplomats said.

As talks broke up without a deal around 6 a.m. Monday, Mark Rutte, the Dutch prime minister, told his country’s media that he didn’t care if other leaders mockingly called him “Mr No” for blocking the agreement. (They did.)

It was Rutte who stepped into the vacuum left by Germany’s shift and Britain’s departure to lead the so-called Frugal Four, which include his nation as well as Austria, Sweden and Denmark. Occasionally, the “frugals” became five with the support of Finland.

In the end, with a unanimous decision by the 27 nations needed for a plan to go forward, a bitter compromise prevailed. The ambitious plan pushed by Merkel and Macron was watered down, but remained significant. The overall figure of 750 billion euros remained, but an original proposal to offer 500 billion euros of that in the form of grants was trimmed back to 390 billion euros, with 360 billion euros earmarked for loans.

In addition to raising cash and extending grants, the package will increase lending and deploy other, more traditional stimulus methods to arrest and reverse the economic free-fall that threatens the stability of the world’s richest bloc of nations.

Economists predict a recession far worse than anything since World War II. France, Italy and Spain, the bloc’s second-, third- and fourth-largest economies, are expected to suffer the most, clocking in contractions of around 10% this year.

Greece and other smaller economies that are still recovering from the last recession will also be badly affected by the downturn. But heavy debt loads in many of these nations make them reluctant to amass yet more debt, and their budgets aren’t sufficient to self-fund their recoveries. That led them to turn to the EU for help.

Together with the vast bond-buying program by the European Central Bank, national stimulus plans worth trillions of euros, and other, smaller EU support schemes for banks, businesses and workers, European leaders hope to reverse the recession in 2021 and spend their way into a rapid and powerful recovery.

They also agreed on Tuesday on the bloc’s regular budget for the next seven years: 1.1 trillion euros to finance the normal EU policies on agriculture, migration and hundreds of other programs.

But the deal came at a heavy price in progressive goals attached to EU values and norms. To bring Hungary and Poland on board, EU leaders decided to water down the caveat making funding conditional on the rule-of-law benchmarks that the two nations’ illiberal governments are violating.

In another concession to Poland, the bloc’s most coal-dependent nation, a requirement was dropped that would have committed the country to being carbon neutral by 2050 to draw on parts of the funds.

Since its inception, the EU has struggled between maintaining nation-state sovereignty and developing joint federal-style structures.

The deal reached on Tuesday is significant in that more creditworthy EU nations will be underwriting loans to fund the recoveries of countries that would otherwise face onerous borrowing costs.

The Netherlands and Austria were hostile to the very idea of borrowing money and simply giving much of it to benefit mostly southern, weaker economies.

Under significant pressure at home as elections approach next March, the Dutch prime minister, Rutte, advocated loudly for fewer handouts to those nations, among them Italy and Spain, that have been hardest hit by the pandemic but that also have structurally weak, unreformed economies.

The Netherlands and other wealthier nations with healthier public finances are concerned that the commonly funded aid would simply go into a bottomless pit of spending that doesn’t truly help these economies recover without changes to make it easier to reduce bureaucracy, create jobs and stimulate growth.

A key argument in favour of offering grants rather than loans has been that Italy and other countries likely to take the aid are already overindebted, and piling on yet more loans would just worsen their positions.

Rutte fought successfully for bigger-than-usual rebates, or reimbursements, for his own and other nations that are net contributors to the EU budget.

He and the others succeeded in wringing out another concession: Any country that wishes to use the new funds will need to submit a plan for how it intends to spend the money. The other EU nations will have a chance to review and object to the plan within three days of its submission and demand that it be tweaked.

Still, that mechanism fell short of the outright veto that Rutte had demanded, which the Italian and Spanish leaders denounced as an unacceptable encroachment into their authority.

The package will go to the European Parliament for ratification, and is expected to face a serious challenge on the grounds that it does not tackle concerns about how Poland and Hungary’s governments violate the bloc’s standards for democracy and the rule of law.

c.2020 The New York Times Company