(Bloomberg) — Germany warned that disputes over the governance of the European Union’s virus recovery fund make it almost inevitable that it won’t be operational by the Jan. 1 target date, raising the risk of setbacks in the flow of much-needed funds to the continent’s battered economies.



a group of people sitting at a table: Partition screens set up for social distancing measures divide customers eating and drinking on an outdoor restaurant terrace in Munich, on Sept. 24.


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Partition screens set up for social distancing measures divide customers eating and drinking on an outdoor restaurant terrace in Munich, on Sept. 24.

“Delays with consequences for Europe’s economic recovery will most likely be unavoidable,” German ambassador to the EU, Michael Clauss, said in a WhatsApp message sent from his spokesman. Germany, which holds the rotating presidency of the EU until the end of the year, is coordinating talks related to the bloc’s 1.8 trillion-euro ($2.1 trillion) recovery fund and long-term budget.

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EU governments are split over tying disbursements from the jointly financed economic recovery package with the adherence to democratic standards. Allowing the European Commission to raise 750 billion-euros ($878 billion) in debt — a key part of the deal — requires the unanimous approval of all member states and a simple majority of EU lawmakers.

Countries such as Hungary and Poland oppose the rule-of-law conditions, with Budapest having raised the prospect of refusing to ratify the deal in its national parliament. A group of richer member states, including the Netherlands and Finland, also oppose a compromise proposal put forth this week by Germany, saying it’s too lenient.

“We need to intensify our work in defending the rule of law,” European Commission Vice President Vera Jourova said on Bloomberg Television on Wednesday. “We need to increase the pressure, also by means of money.”

July Agreement

While the bloc’s leaders agreed in July that a mechanism to protect EU funds from fraud should be created, they left unresolved how it would work. Under Germany’s compromise proposal, a weighted majority of member states would need to approve any decision to stop fund disbursements to countries over rule-of-law breaches.

At a meeting of government envoys in Brussels on Wednesday, Hungary, Poland, Sweden, Finland, Denmark, the Netherlands and Belgium opposed the proposal. The European Parliament will also need to approve the measures.

Richer nations said they won’t bankroll joint aid without iron-clad guarantees that funds won’t be misappropriated. A report published by the EU’s executive arm on Wednesday may exacerbate their reservations.

Prosecution of corruption in Hungary is “very limited and there appears to be a consistent lack of determined action to start criminal investigations and prosecute corruption cases involving high-level officials,” the commission said in its first-ever annual rule-of-law report, which assesses the bloc’s 27 member states.

Despite the objections, Germany’s rule-of-law proposal got the required majority backing by member states to start negotiations with the EU assembly. Still, having a majority may not matter much if a member state then blocks the commission’s ability to raise funds in debt markets.

Negotiations over the EU’s long-term budget are typically fraught, and all parties involved will face pressure not to block a fiscal package deemed essential to stem the steepest recession on record. Still, officials say that ratification is a lengthy process and the longer negotiations drag on, the more difficult it becomes to have the fund up and running by Jan. 1.

“We are increasingly running into a blockade in the overall budget negotiations,” Clauss said. “The timetable is shifting further and further back.”

(Updates with Vera Jourova comments in the fifth paragraph.)

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