Europe is in the depths of its deepest recession since World War II and the leaders are seeking common ground on the terms of $857 billion stimulus package that would help lift those hardest hit by the pandemic.
EU leaders will meet again on Saturday to try to save a huge post-coronavirus economic rescue plan after running into a brick wall of defiance from "frugal" countries led by the Netherlands and Austria.
Europe is in the depths of its deepest recession since World War II and the 27 national leaders are seeking common ground on the terms of $857 billion (750-billion-euro) stimulus package that would help lift those hardest hit by the pandemic.
But 12 hours of difficult haggling on Friday failed to yield a result as Dutch Prime Minister Mark Rutte refused to give ground on his demand for strict controls on payments to his struggling southern partners.
The 27 leaders are scheduled to reconvene at 11:00am (0900 GMT) on Saturday but diplomats are increasingly gloomy about the prospect of a deal being struck this weekend.
The Dutch in particular — but backed by Austria, Sweden and Denmark — are reluctant to hand out cash to countries such as Spain or Italy they see as too lax with public spending.
READ MORE: EU virus economic rescue summit begins
Today and tomorrow the #EUCO will be discussing the EU budget, and the recovery fund for overcoming the impact of covid-19. These are two big and complicated issues with significant interests at stake for everyone. The negotiations will be tough. pic.twitter.com/CkjM0eBPxm— Mark Rutte (@MinPres) July 17, 2020
Differences among leaders are 'very very large'
Germany's Chancellor Angela Merkel and French President Emmanuel Macron are backing a package of loans and subsidies to member states to revive economies shattered by the virus and preventive lockdowns.
As she arrived for the summit the first to be held in person since the pandemic began — Merkel warned that the differences among the leaders were "very very large", while Macron described it as a "moment of truth".
But, despite the long talks among all the leaders and small group meetings to try to break the deadlock, a diplomat said they had run into "a blockage on the question of governance for the recovery plan".
According to diplomatic sources, European Council president and summit host Charles Michel had suggested granting the members a form of "emergency brake" on payments, to appease the Dutch.
This would enable governments to call a summit if they have concerns about a national economic plan, but other members insisted it must not amount to giving the Dutch a veto over recovery measures.
"We'll have to restart things differently," one senior diplomat said, of Saturday's talks.
'Difficult to swallow'
Another diplomat from a non-frugal state warned: "What the Netherlands wants is legally impossible and politically difficult to swallow."
Before the talks Rutte insisted he wanted to show solidarity with countries that don't have the budget to stoke a meaningful recovery.
"But at the same time, you can also ask those countries to do everything possible to solve this yourselves the next time. And you do this through reforms, in the labour market, in pensions etc," he added.
The draft plan put forward by Michel, foresees a recovery package, made up of 250 billion euros in loans and 500 billion in grants and subsidies that would not have to be repaid by the recipient member states.
This package is in addition to the planned 1,074-billion-euro seven-year EU budget from 2021 to 2027 that the leaders must also agree in the coming weeks or months.
Rutte's position has been backed to varying degrees by fellow members of the so-called "Frugal Four" — Sweden, Denmark and Austria. Finland has also been calling for cuts to the Michel plan.
Austrian Chancellor Sebastian Kurz wants the recovery fund to be smaller, tweeting to say he "clearly rejects" the sum of 500 billion euros in grants.
He also insisted he would not accept anything leading to a "permanent 'Transfer Union'," — where Europe's richer countries would subsidise their under-performing neighbours.
The frugals want any loans or grants to come with strict conditions attached to ensure that heavily-indebted countries carry out labour market reform. This is furiously opposed by the south.
"If the money is not used to invest in the future, if it does not go hand in hand with necessary reforms in states that are simply broken in their systems... then all this will fizzle out," Kurz warned.
The summit could even stretch into Sunday, but few in Brussels were confident of a breakthrough, despite the tight timetable, so another summit may well follow later this month.