By Gabriela Baczynska and Francesco Guarascio
WARSAW/BRUSSELS (Reuters) - Opposition from the Netherlands and the threat of a Hungarian veto weighed on chances of a deal on the eve of EU talks on a mass stimulus scheme to kickstart economies hammered by the coronavirus.
The 27 national EU heads will meet face-to-face in Brussels on Friday and Saturday for the first time since COVID-19 pushed the bloc into a sweeping lockdown, as well as its deepest-ever recession, forecast at 8.7% this year for euro zone members.
They will haggle over their 2021-27 budget proposed at just above 1 trillion euros and a linked recovery fund of 750 billion euros in grants and loans designed to help rebuild southern states like Italy where the virus took the biggest toll.
"Does 1,750 billion euros seem like a lot of money to you? Believe me, it does to the European heads... But it is worth it," the chairman of the meeting, Charles Michel, said on Thursday in stressing the EU's economic answer to the pandemic would top that of the United States or China.
The pandemic has provided an existential challenge for the EU, with some calling for decisive action to prove the bloc remains a relevant international power and bulwark against nationalism and protectionism, inside and out.
But a senior EU official involved in preparations of the talks stressed that "serious differences" persisted and a deal was not a given.
"We are not there yet," said the official, naming the overall size of the package, the proportion between grants and loans, governance of the recovery scheme, rule of law conditions on money and climate goals as still dividing opinion.
While the southern, high-debt countries call for solidarity, the Netherlands leads the camp of wealthy but thrifty net contributors to the bloc's joint coffers weary of bankrolling peers they see as fiscally reckless.
Together with Austria, Denmark, Sweden and Finland, Dutch Prime Minister Mark Rutte wants to curb the funding, favours loans over grants, demands economic reforms as conditions to access the money and wants to keep his EU budget rebate.
Rutte also wants more powers for the Dutch parliament in deciding to allow the bloc's executive European Commission to borrow on the market to finance the 750 billion euro fund, and unanimous voting by EU states to accept applications for aid.
"Let's try to solve it, and not talk about 26 to 1," said a senior EU diplomat.
HOUSE OF CARDS
Hungary, where Prime Minister Viktor Orban has tightened the noose around academics, media and civil society, threatened to veto the package over a mechanism to freeze funds for states undercutting the rule of law, a key point for the wealthy net payers like The Hague.
Eyes are also on German Chancellor Angela Merkel, who stands at the helm of the biggest EU economy. As she turns 66 on Friday, she has thrown her weight behind getting a deal.
If anything, Michel is likely to propose trimming the package to try to ensure it is approved and Denmark has floated a budget of 1.05 trillion euros, down from 1.074 trillion discussed so far.
The southerners are seen as ready to accept some modest cuts for the sake of an overall agreement, though a possible reduction in humanitarian aid has already raised some heckles.
COVID-19 struck in Europe just as it was still struggling to overcome the echoes of some of its past crises from the financial meltdown a decade ago, a spike in uncontrolled immigration in the mid-2010s and a protracted Brexit.
Bickering between member states over money, medical supplies and border closures exposed rifts in the world's largest trading bloc. Following bruising disputes, it has, however, managed to agree on half a trillion euros of immediate economic relief.
As EU leaders dive into arcane horse-trading over their longer-term economic recovery, a second senior diplomat in Brussels said the complex package was like "a house of cards that will collapse if you pull one out".
"Many crucial elements of the package are not agreed yet," said the diplomat. "We cannot allow ourselves months and months of negotiations... It's crunch time."
(Reporting by Gabriela Baczynska, Francesco Guarascio, Robin Emmott, Elizabeth Pinneau, John Chalmers, Andreas Rinke, Writing by Gabriela Baczynska, Editing by Nick Macfie)