Taming the ‘Frugal Four’: the challenge facing the German Presidency

Angela Merkel will have to convince Mark Rutte and Sebastian Kurz [EPA-EFE | Olivier Hoslet]

The European Commission has presented its proposal for a recovery fund as part of the draft EU budget. Now the member states must be convinced, a task that will fall on Berlin when Germany takes over the EU Council Presidency in July, EURACTIV Germany reports.

Last week four states signalled their opposition to an overly generous recovery fund: Austria, Sweden, Denmark and the Netherlands, known as the ‘Frugal Four.’

Their draft for a recovery fund, which appeared last week in response to a proposal agreed by Chancellor Angela Merkel and French President Emmanuel Macron, illustrated their concerns in detail.

Their most important point is that aid money should not be issued as grants, but as repayable loans. The fund should not lead to any debt mutualisation and be closed after two years, the states added.

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European Commission president, Ursula von der Leyen, proposed on Wednesday (27 May) an unprecedented stimulus of €750 billion, mostly through non-refundable grants, with governments having a crucial role in deciding how the money will be spent.

Austria: Proposal is ‘basis for negotiation’

The Commission proposal now provides for a mix of grants and loans. Of the €750 billion total, €250 billion is to be repaid. The question remains, however, whether they can live with €500 billion in grants.

The initial reactions of the four differ. This alone is striking. After the presentation of the Merkel-Macron Plan, Austria’s Chancellor Sebastian Kurz (ÖVP) spoke for all four states when he announced their joint position against subsidies on Twitter.

This time, Kurz immediately signalled his willingness to compromise, and described the Commission proposal as a “starting point for negotiations.” In a press release, he welcomed the time limit, which prevents the mutalisation of debts. But “what still needs to be negotiated is the amount as well as the relationship between grants and loans,” said Kurz.

Green pressure

Nevertheless, Austria will be persuaded, says Paul Schmidt, Secretary General of the Austrian Society for European Policy, in an interview with EURACTIV Germany.

Finance Minister Gernot Blümel (ÖVP) struck a softer note than the Chancellor on the eve of the Commission proposal when he said in a TV interview that the final reconstruction fund would be a mix of grants and loans.

Another factor suggests Austrian approval: the ÖVP’s coalition partner, the Green party. Their Europe spokesman, Michel Reimon, quickly described the Commission proposal as a “good starting point.”

“Austria’s coalition must and will participate in a solution based on solidarity,” he wrote.

Green Vice-Chancellor Werner Kogler expressed similar sentiments in a letter to the Green group in the European Parliament, in which he welcomed the ideas in the Macron-Markel plan (which only provided for grants) and stressed that aid money must not be allowed to worsen states’ debt levels.

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The European Commission is considering bringing back Europe-wide plans for a digital services tax in order to finance the bloc’s €750 billion recovery fund, the executive said on Wednesday (27 May).

Positions ‘are far apart’

Combative tones are coming from the Netherlands. “It is difficult to imagine this proposal will be the end state of those negotiations,” a Dutch diplomat told EURACTIV.

The positions “are far apart,” and the Dutch position continues to be based on the non-paper of the Frugal Four (including the principle of “loans for loans” and a rejection of the communitarisation of debts).

However, it was striking that Prime Minister Mark Rutte on Wednesday praised Italy for presenting a reconstruction plan – to be financed with EU money.

‘Simply too high’

Sweden and Denmark will give in simply because, as non-euro countries, they do not want to be further isolated in financial matters, says Schmidt.

Indeed, Danish Foreign Minister Jeppe Kofod welcomed the proposal as a “substantial addition” by the Commission, saying that the mixture of grants and loans was “an important step towards the Danish position.”

In the upcoming negotiations, Kofod vowed to “fight for Danish interests” but acknowledged that a compromise will have to be found.

On the Swedish side, Stefan Löfven issued a statement criticising the idea that two thirds of the money would not have to be paid back. This would create false incentives and lead to an inefficient distribution of the money, Löfven said, and therefore possibly to “a sharp increase in what Sweden pays to the EU.”

[Edited by Benjamin Fox]

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