BRUSSELS — European Union leaders gathered on Friday to start hammering out a giant aid package to help their economies recover from the coronavirus calamity. But even before they began, the haggling had exposed fundamental differences between member states that must be finessed in coming days if they are to succeed in saving Europe’s economy.
The major sticking point is how much latitude to give those receiving the aid to spend it as they please. Since much of the money is guaranteed by wealthier northern states, some of them are demanding that strings be attached to push economic, political, environmental and social reforms.
Chancellor Angela Merkel of Germany, whose nation recently took over the European Union’s rotating presidency and who has led efforts to push ahead with the package, previously sounded optimistic. But she was cautious as she arrived about the prospects of reaching a deal.
“It would be desirable but we must also face reality,” she said. “I expect very difficult negotiations,.”
The talks will continue at least into Saturday night, and no announcement is expected until then.
It was the first time E.U. leaders held an in-person meeting since the outbreak of the pandemic that has upended so many of their plans, and officials hoped that being together would help them advance compromise faster.
Video showed them wearing masks and greeting each other with gentle bows and elbow-bumps. The leaders of Poland, Hungary, the Czech Republic and Slovakia — who have most challenged the bloc’s liberal, democratic principles — broke ranks and posed together maskless.
The logistics around organizing the meeting in the time of Covid-19 were cumbersome. Special floor markings indicated distancing and the preferred flow of officials in the building.
The leaders met in the biggest room in the new Europa building. It fits 300 people. Only the heads of 27 governments and the leaders of E.U. institutions were admitted. Earlier guidance had indicated that the leaders would be allowed on occasion to be visited by close advisers. But the usual dozen-plus entourage per leader is a thing of the past: they were limited to five advisers each.
The show of bonhomie disguised political pressures and longstanding cultural differences that have slowed the quest for a swift agreement spearheaded by Ms. Merkel along with France’s president, Emmanuel Macron.
Familiar trenches are being dug. Some northern European countries led by the Netherlands want sweeping liberalization of southern countries’ economies and a reform of their public finances in exchange for stimulus.
Most members from Europe’s west want Hungary, Poland and other eastern members to adhere to environmental targets, to stop eroding the rule of law and to end attacks on immigrants and minority groups such as their Jewish and L.G.B.T. citizens if they are to tap E.U. funds.
The leaders will try to agree on 1.8 trillion euros in funding — about $2 trillion — of which just over €1.1 trillion will be allocated to the bloc’s budget for the next seven years, the normal way of setting out E.U. spending, and €750 billion will be separated out for a pandemic recovery fund.
The recovery component under discussion includes a bold proposal that will enable the E.U. administrative branch, the European Commission, to borrow in the financial markets on a large scale and offer part of the funds it raises for free in the form of grants to needy members.
In practice, that will mean more creditworthy E.U. nations will be underwriting loans to fund the recoveries of countries that would otherwise face onerous borrowing costs.
In combination with a European Central Bank program to buy member states’ debt at low interest rates to enable them to continue funding stimulus programs, the proposed €750 billion plan would be a major help to those most in need, especially in the European south where structurally weak economies were hammered by the coronavirus.
Economists predict a recession unseen outside wartime in the region. Italy, Spain and France, the bloc’s third, fourth and second-largest economies, will suffer the most, clocking in contractions of around 10 percent each this year.
Greece and other smaller economies that were recovering from the bloc’s 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, which leads them to turn to the European Union for help.
Richer countries like Germany, which has played a catalytic role in forging compromise, stand to benefit from a fast and steady recovery in their weaker southern neighbors. They share a currency, the euro, and a common market for their goods and services.
Germany’s shifting role, from leader of the conservative rich north to champion of compromise, could be the deciding factor in this new battle for the European Union.
“Germany has made a visible differentiation of its position,” said Maria Demertzis, an economist and the deputy director of the Brussels-based research institute Bruegel. “It hasn’t forgotten issues of conditionality and reforms, but, for this moment, it’s reordering its priorities.”
This leaves the northern nations to be led by the Dutch, who are demanding a role in scrutinizing how the money is spent by their peers, which Italy and others view as unacceptable encroachment on their business.
They instead propose that the European Commission act as a fair arbiter of whether countries’ stimulus plans are wise and well designed.
Mark Rutte, the Dutch prime minister, who faces a close election in less than a year, wants his Parliament to have a say in the disbursement of funding, a view that no other nation shares.
“I estimate the chance of us reaching an agreement this weekend is less than 50 percent,” Mr. Rutte said as he arrived at the meeting in Brussels on Friday morning, dimming hopes for a quick agreement.
His insistence on strict conditions to the aid has irritated southern members, leading to tensions that are bound to play out in the negotiations.
“To be fair, what the Dutch are saying isn’t wrong, when they raise issues of big debts, or flag that countries need to reform,” Ms. Demertzis said. “But the question is timing: Is this the conversation you want to be having right now? The diplomacy is not right, the substance is.”
It is far from certain that they’ll reach an agreement. It is possible, rather, that they continue their talks on Sunday and even reconvene later this month, but there is consensus that they should have an agreement before an August summer break.
And while the proposed package includes mechanisms that would force countries to adhere to ambitious environmental goals and push them to improve the way they deal with their rule of law and minorities at home, certain eastern members object.
“Linking those two areas, those two completely different legal areas, creates an enormous threat of legal certainty,” said Prime Minister Mateusz Morawiecki of Poland as he arrived at the meeting. “We can’t agree to that.”
In the run-up to the meeting, his ally Prime Minister Viktor Orban of Hungary prepared for a similar battle, getting his Parliament to vote on a resolution stating that E.U. procedures against Hungary for rule-of-law violations must be closed before the new budget is adopted, and that funding shouldn’t be dependent on rule-of-law requirements.
The aid package under discussion will allow the European Commission to develop new muscles that will make it resemble a federal government more than ever before. But many members view the institution with suspicion because it is a vast bureaucracy with little democratic accountability.
The commission has in the past used the E.U. budget to issue bonds, but never at the scale proposed, and never to then distribute those loans for free. The proposals stress that this will be a one-time exercise to combat a disastrous recession.
The proposals will also allow the commission to find ways to raise its own funds, for example through a tax on carbon emissions, digital services and other cross-border activities. If it goes ahead, the commission will be managing both spending and revenue sides of the E.U. balance sheet, and will be given the authority to levy taxes, a privilege usually reserved for elected governments.
“We need to see what comes out of the meetings, but if this passes, it is in the direction of the countries backstopping a grant: This is an incredible step forward,” said Ms. Demertzis. “Everyone is talking about this being a one-off, but as we all know, there’s nothing more permanent than temporary measures.”
Monika Pronczuk contributed reporting from Brussels and Ben Novak contributed from Budapest.