June 18, 2020 / 2:33 PM / 25 days ago

Fearing "autumn of discontent", EU to seek unity on recovery plan

* Sense of urgency among leaders as deep downturn looms

* Friday summit to be only first step to a recovery fund deal

* Markets have factored in an agreement thanks to easing tensions

* Pandemic added to challenges EU faces over China and U.S.

By Gabriela Baczynska and Paul Carrel

WARSAW/BERLIN, June 18 (Reuters) - European Union leaders will try to narrow their differences over a coronavirus economic recovery plan at a summit on Friday, worried that further bickering and delay will only dent public confidence in the bloc as a deep downturn takes hold.

German Chancellor Angela Merkel said the EU, reeling from more than 100,000 deaths linked to COVID-19 and facing its worst recession since World War Two, urgently needed an agreement on its multi-year budget and a multi-billion-euro recovery fund.

“The pandemic has revealed how fragile the European project still is,” Merkel told parliament in Berlin, lamenting the “rather national and not European” initial response to the pandemic by EU governments, including her own.

Leaders of the EU’s 27 member states will meet by video-conference on Friday in what is expected to be only a first step towards a consensus on a joint economic rescue that has so far been a tug-of-war between fiscally conservative northern countries and a high-debt “Club Med” group of southerners.

Financial markets have factored in a deal coming together thanks to conciliatory language on both sides, but diplomats said on Thursday that another summit - or even two - may be needed next month to get it across the line.

The leaders will discuss a proposal made by the European Commission, the EU’s executive, to borrow 750 billion euros ($843 billion) from the market to help revive economies hardest hit by the pandemic, notably Italy and Spain.

They will also debate a proposal to set the bloc’s EU budget for 2021-27 at 1.1 trillion euros, returning to an issue that kept them arguing through the night at a summit in February.

SENSE OF URGENCY

Diplomats said the coronavirus crisis that erupted after that meeting has brought a sense of urgency across Europe.

The pandemic struck as the bloc struggled with other big challenges, from finding a common strategy to counter China’s economic rise to dealing with a hostile U.S. administration.

“The EU needs to send a strong signal that it is ready to act decisively before the expected wave of discontent with the economic malaise hits this autumn,” said a senior EU diplomat.

“We would like to reach consensus in July. Come this autumn, the effects of the economic stagnation will be increasingly visible, including in the streets of EU cities. We must send a signal that the EU is acting to fix this.”

The Commission has suggested that two-thirds of the recovery funds be disbursed in grants and one-third as loans.

The Netherlands, Denmark, Sweden and Austria, dubbed “the Frugal Four”, say the fund is too large and want it used only as loans, since grants would have to be repaid by all EU taxpayers.

“It’s such a complex debate, that it will be difficult to find a way out in coming weeks, if at all,” Dutch Prime Minister Mark Rutter told parliament in The Hague on Wednesday.

“But eventually you will need to aim for a compromise, because there are the bigger interests ... to avoid that Europe, the European Union, as an important guardian of security and stability in the world, come out of this weaker.”

He said that European solidarity needs to cut both ways and the countries benefiting from the recovery funds must push ahead with economic reforms in areas from the labour market to taxation and their legal systems. (Additional reporting by Anthony Deutsch in Amsterdam Writing by John Chalmers; Editing by Toby Chopra)

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