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EU Leaders Seek Agreement on COVID-19 Recovery Fund

FILE - European Union flags flutter outside the European Commission headquarters in Brussels, Belgium, June 25, 2020.

European heads of state will seek agreement over a proposed $856 billion pandemic recovery fund — and to discuss the bloc's next multiyear budget — when they meet Friday in Brussels. Neither issue promises to be easily resolved.

Backing the recovery package are hard-hit southern countries like Italy and Spain, which would benefit most from their proposed mix of loans, aid and grants. On the other side are the so-called "frugal four" — the Netherlands, Austria, Denmark and Sweden — which warn spending must be responsible.

German Chancellor Angela Merkel arrives for the weekly cabinet meeting in Berlin, Germany, July 15, 2020.
German Chancellor Angela Merkel arrives for the weekly cabinet meeting in Berlin, Germany, July 15, 2020.

Europe's traditional powerhouses, France and Germany, have joined forces to support the package. Even so, Chancellor Angela Merkel of Germany — which currently holds the EU's rotating presidency — expressed uncertainty earlier this week that a deal will be struck at the Brussels summit.

"I think Angela Merkel is pretty determined to reach an agreement," said Rosa Balfour, director of the Carnegie Europe research organization in Brussels. "What she has said to be cautious is that if it's not this weekend, it will be in the coming weeks."

At stake are many things — European unity, the direction of financial markets, but also lightening up a heavy EU agenda that includes other key issues, such as finishing up Brexit, Britain's departure from the European Union.

Tara Varma, head of the Paris office for the European Council on Foreign Relations, said the final funding agreement may look quite different from the original proposal.

"But if ultimately they make it, that is quite a breakthrough," she said. "And honestly, it's a big move forward for the Germans, to implement the rest of their agenda, which is quite massive."

There are other stumbling blocks. Some researchers warn the rescue fund will siphon green investments needed to meet the EU's ambitious climate goals. And Hungarian Prime Minister Victor Orban said he may veto any deal linked to rule-of-law criteria.

Analyst Balfour said EU leaders might bow to Hungary's demands — at least this time.

"But in the long term, I do think it's an existential threat to the EU, because the EU is so tied to the fact it is formed by democracies," she said.

The two-day summit takes place amid EU estimates the bloc's economy will shrink 8.3 percent this year, before growing in 2021.