MNI SOURCES: EU Recovery Fund Facing Allocation Battle

-Broadening Fund Beyond Covid Pushes Allocation Away From Most Virus-Hit

-Some See 'Landing Zone' Between E500bn-E650bn Mainly Grants Plus Convertible

Loans Element 

By David Thomas

     BRUSSELS (MNI) - EU negotiations on a post-Covid Recovery and Resilience

Fund (RRF) say the discussions have shifted focus to design flaws in the

allocation key proposed by the European Commission, which mean countries most

affected by the crisis may lose out, well-placed sources tell MNI.

     "More issues are coming on top of a package that was already difficult to

resolve," one EU source confided, while many caution that the talks have become

more complex and have shifted away from a simple fight between the so-called

'Frugal Four' fiscally-conservative members states and the rest.

     "A second front has opened in the talks," another source said, referring to

the allocation debate, who calculated that the RRF division as proposed by the

Commission would leave Italy with only a net EUR20 billion income from the fund

once its own contributions had been deducted.

     By contrast, Poland is emerging as an unlikely winner from the allocation,

mainly due to the EUR190 billion 'top-up' of the RRF to address overlaps with

longer-term EU programmes such as climate transition, Cohesion funding and

notably the Common Agricultural Policy.

     This is despite the fact Poland has been much less impacted by the virus

than Italy and Spain.

     As a big farm producer, France, too, has a stake in the top-up element of

the RRF, without which it does not stand to benefit significantly from the fund

despite being one of the EU member states worst affected by the pandemic.

     --POLITICAL TENSION

     Uncomfortable factors such as these are likely to heighten political

tension at the July 17-18 EU summit, with the Polish government's record on rule

of law issues and gay rights likely to be raised by other EU leaders. Scepticism

over the prospects for the Commission's proposed rise in Own Resources through

various UE levies provides another area of contention.

     With German Chancellor Angela Merkel pushing for a deal to be brokered on

the RRF during the summer, EU President Charles Michel is in the midst of a busy

round of diplomatic calls and meetings to try and forge a compromise. Given the

mounting difficulties, one source said Michel would have to "pull off a trick."

     "He will have to navigate some murky waters," the source added. "It's not

necessary that everyone is happy, but the compromise can't be unacceptable to

anyone," pointing to the unanimity technically required to secure agreement.

     One EU official noted that Michel had arranged the summit for a Friday and

Saturday, opening up the possibility of the talks continuing into Sunday if

needed. "He might lock everyone up until he gets agreement," this official said.

     --SIZE MATTERS

     While many officials insist it is still premature to put numbers on the

eventual size of a compromise RRF agreement, some are talking of 'landing zone'

numbers which range between EUR500 billion, the size of the original

Franco-German proposal, and EUR650 bln, which would be less than the

Commission's EUR750 bln total.

     One source close to the Frugal Four -- who cautioned that his views were

personal and not official -- said he could imagine a compromise lying between

EUR590 billion to EUR650 billion with a one-third loans to two-thirds grants

mix. The overarching seven-year EU budget settlement starting in 2021 could end

up between EUR1.6-EUR1.7 trillion, compared with a pre-pandemic EUR1.3 tln on

the table in February and the EUR1.85 tln proposed by the Commission in May,

according to this source.

     Officially, the Frugal Four -- Austria, the Netherlands, Denmark and Sweden

-- continue to insist on loans not grants, but the view that loans will not help

solve the problem of Italy's increasing economic divergence from the rest of the

euro bloc is becoming compelling, sources say.

     Another EU source said he thought these compromise guesstimates could be

reasonable but ventured EUR500 bln as the more likely compromise area, with the

bulk in grants and a convertibility scheme for the remaining loans to become

grants based on conditions being met. German officials continue to push for a

return to the EUR500 bln grants scheme and against the Commission's EUR750-bln

plan, MNI understands.

--MNI London Bureau; tel: +44 207-862-7492; email: david.thomas.ext@marketnews.com

--MNI London Bureau; +44 203 865 3823; email: kevin.woodfield@marketnews.com

[TOPICS: M$E$$$,M$X$$$,MC$$$$,MI$$$$,MT$$$$,MX$$$$,MFX$$$,MGX$$$]