Covid 19 coronavirus: EU 'frugal four' present rival Covid recovery fund plan

The European Commission, headed by Ursula von der Leyen, is preparing to table its own detailed plans for the recovery fund. Photo / Getty Images

The debate over the EU's recovery fund intensified on Saturday as four northern European states proposed a plan that would offer only loans, rather than grants, to hard-pressed member states.

Austria, Denmark, the Netherlands and Sweden said they would support the creation of a one-off emergency fund but that they opposed any measures that would lead to debt mutualisation or "significant increases" in the EU's upcoming seven-year budget.

The paper from the so-called "frugal four" of the EU clashes with proposals from Germany and France, which on Monday submitted a plan for a €500bn recovery fund that would offer grants rather than loans.

That move won a positive reaction from southern European states, and was seen as an important breakthrough given longstanding Franco-German differences over the need for more risk-sharing in the eurozone.

The rival proposals come as the European Commission this week prepares to table its own detailed plans for the recovery fund and upcoming multiannual financial framework (MFF), which runs from 2021-27. All 27 member states will need to be on board before any recovery fund plan sees the light of day.

The frugal nations are opposed to the idea that the EU could borrow money and hand it out as non-refundable transfers to hard-hit states.

Their paper said they would be willing to support lending on "favourable terms" to member states in need, while limiting the risk and providing "sound incentives".

They would support a "temporary, one-off emergency fund" to support the recovery and health sectors with a sunset clause of two years.

"On top of a modernised MFF, we propose to create an Emergency Recovery Fund based on a 'loans for loans' approach, which is in line with fundamental principles for the EU budget," the frugal four's paper said, without putting forward any figures.

They said support for coronavirus-related spending could be found by seeking savings elsewhere. It would involve "front-loading" or temporarily topping up coronavirus-related expenditure to kick-start the recovery.

The frugal four also insisted recipients of recovery funding would have to display a "strong commitment to reforms and the fiscal framework" in the hope this would help promote potential growth.

The countries warned that given the depth of the economic contraction, all member states would have to devote a larger share of their national resources to the EU budget. "Additional funds for the EU, regardless of how they are financed, will strain national budgets even further," they said.

Once commission president Ursula von der Leyen presents her own plans Charles Michel, the council president, is expected to oversee the negotiations, as he looks for an opportunity to hold an EU leaders' summit aimed at settling the budget discussions.

Among the key questions that will need to be resolved are the level of the MFF, the fate of budget rebates received by frugal states, and the balance between grants and loans in the recovery fund as well as its size. In addition northern states are likely to make tougher demands for economic reforms as a condition for the funding.

The talks will also have to tackle the vexed question of the rules for determining how the funding is allocated between member states.

Written by: Sam Fleming

© Financial Times 2020