EU leaders consider new proposal in bid to break deadlock on coronavirus recovery fund

President of the European Council Charles Michel presented a new proposal Monday, in the hope of reaching an agreement on a landmark initiative to fund Europe's recovery from the coronavirus crisis.

The European Union is battling a savage recession triggered by the pandemic, and the hardest-hit countries like Italy and Spain urgently need fresh economic relief worth hundreds of billions of dollars.

But agreement has so far been thwarted by deep divisions over the overall size of the recovery fund, how much assistance should be given as grants or loans, and the conditions that should be attached.

At the center of discussions is a proposal for the European Commission to raise €750 billion ($859 billion) on financial markets on behalf of all EU states. Under the original plan, €500 billion ($573 billion) was to be distributed to countries via grants, while €250 billion ($286 billion) would be offered as loans.

Michel's proposal revises the split in the recovery fund to €390 billion ($446 billion) in grants and €360 billion ($412 billion) of loans, a document seen by CNN shows.

The volume of grants had been vehemently contested during the summit. The so-called "Frugal Four" countries -- Netherlands, Denmark, Austria and Sweden -- had opposed the issuing of €500 billion grants over concerns it would burden their countries with debt to fund the spending of other countries.

There had been bitter rows over how the grants would be governed. The Netherlands had led the push for member states to have the power to block or withdraw payment if they felt a country was breaking the conditions attached to the grants.

In Monday's proposal, a softening of the language would see the Commission and European Finance ministers assess whether a country had been negligent in following the rules. If at any point an individual member state felt that the rules were being broken, the Commission would then "propose appropriate and proportionate measures," which would "have to be approved by the Council by qualified majority."

Some barriers to funds were removed all together. Michel erased the condition that only countries that committed to achieving climate neutrality by 2050 would be able to access certain parts of the fund -- a demand from Poland and the Czech Republic.

The size of the core EU budget -- called the Multi-Annual Financial Framework (MFF) -- remains unchanged at €1.074 trillion ($1.23 trillion), but allocations with the MFF have been altered, which has generated windfalls for some countries.

To boost competitiveness, growth and job creation in some of the less developed regions of the EU, the plans includes an extra €1 billion for the Czech Republic, €300 million for Slovenia, €200 million for Belgium and €100 million for Cyprus. The sparsely populated, northern areas of Finland will be allocated an additional €100 million.

Negotiations on the huge, seven-year MFF have been stalled for months and the process, according to EU diplomats, is eight or nine months behind schedule.

Leaders will now continue debating the proposal in hope of reaching agreement on both the recovery fund and MFF. The European Parliament will need to scrutinize and adopt the plan before it can be ratified in each of the EU's 27 member states.

'The European future'

French President Emmanuel Macron momentarily lost his temper during overnight talks, French officials told CNN. There was a "tough moment last night," they said.

Speaking Sunday, Luxembourg Prime Minister Xavier Bettel said he had "rarely seen — in seven years — such diametrically opposed positions on many points" within the European Council of EU leaders.

If the leaders can't agree, there's a risk of a two-speed economic recovery, with wealthier northern European states bouncing back faster than struggling Italy and Spain. That could inflame political tensions within the bloc that some experts warn could pose an existential threat to the European Union.

Council President Michel set out what was at stake at the start of the summit on Friday. Securing a deal was "not only about money, it's about people, about the European future, about our unity," he said.

The European Commission said earlier this month that it expects the EU economy to shrink 8.3% in 2020, considerably worse than the 7.4% slump predicted two months ago.

European Central Bank President Christine Lagarde said last week that "an ambitious and coordinated fiscal stance remains critical," and the ECB assumes a major agreement will pass. This, she said, must happen "quickly."

Before the EU summit was adjourned after all-night talks, a compromise was proposed that would reduce the proportion of grants to about 50% of the fund, or €375 billion ($429 billion).

Speaking to reporters early on Monday, Dutch Prime Minister Mark Rutte said that Michel was working on a new compromise proposal. "We are not there yet, things could still fall apart. But it looks a bit more hopeful than at times last night when I thought this is over," Rutte said.

German Chancellor Angela Merkel said on Monday that EU leaders had come up with a "framework" for a possible agreement.

"That is progress — and it gives us hope that there may be an agreement today or at least that an agreement is possible," Merkel told reporters.

That sentiment boosted markets early Monday with the euro climbing to its highest level against the dollar since early 2019, rising 0.3% to $1.15. It's since pulled back to $1.14.

The meeting of the EU top brass is the first major in-person gathering of world leaders since the pandemic started.

— Julia Horowitz, Emma Reynolds, Chris Liakos, Rosanne Roobeek, Pierre Bairin, Fred Pleitgen and Nadine Schmidt contributed reporting.