Via Financial Times

Germany and France have joined forces to push for a €500bn EU recovery fund, boosting the effort to create a co-ordinated European fiscal response to the coronavirus pandemic.

German Chancellor Angela Merkel and France’s President Emmanuel Macron announced the initiative in a joint videoconference on Monday afternoon. The funds would be raised by the European Commission borrowing on capital markets — which to date has only been done on a relatively modest scale — and would be used to support EU spending rather than loans to national governments. 

The Franco-German plan marks a potentially significant breakthrough, given that Paris and Berlin were previously at loggerheads over the issue of common debt issuance to pay for recovery efforts. The move comes after several days of talks among leaders over a joint response to the EU’s worst-ever economic slump

Ms Merkel said the EU was facing the “gravest crisis in its history, and such a crisis demands appropriate answers”. Mr Macron described the proposals as “a major step”, adding: “This is the transfer of real budget money to the worst-affected regions and the worst-hit sectors”.

However, the Franco-German plan ran into immediate resistance. Austrian chancellor Sebastian Kurz said he along with his Dutch, Danish and Swedish counterparts were only prepared to accept a rescue fund that gave out loans.

In a summit last month EU leaders charged the European Commission with formulating a comprehensive recovery package centred on the bloc’s upcoming seven-year budget and an associated recovery fund.

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Talks over the plan have intensified in recent days, with Ursula von der Leyen, the commission president, spending the weekend on a series of calls with EU leaders to flesh out the proposals. By Sunday Ms von der Leyen was close to identifying a “landing zone” for what the commission is calling a “recovery instrument”, according to one commission official briefed on the talks.

The Franco-Germany tie-up has led to optimism in Brussels that a deal among the 27 EU member states has become more likely. However, it will fall to European Council president Charles Michel to broker the final accord among the member states at a summit. 

Such a meeting has yet to be scheduled, and clinching an agreement remains a highly complex and uncertain process, given the differing views of member states. Talks on the EU’s regular seven-year multiannual financial framework, through which the recovery funding will be funnelled have been stuck for more than two years. 

President of the European Council Charles Michel (right) and head of the European Commission Ursula von der Leyen (left) © Kenzo Tribouillard/AFP/Getty

Ms Merkel acknowledged that agreement was by no means certain. “We are making [our partners] a proposal — I think it will help to reach consensus in the EU27,” she said. “But we can’t force anyone [to accept it].” 

The €500bn figure is higher than earlier estimates that had circulated within the commission, which were for borrowings of €320bn.

Under the Franco-German proposal, all the money from the recovery fund would be distributed in the form of grants. This has triggered scepticism among so-called frugal northern European member states, which prefer all or most of the money to be given out as loans that would have to be repaid by member state recipients.

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The Franco-German declaration said the recovery fund “will be based on a clear commitment of member states to follow sound economic policies and an ambitious reform agenda”. 

Ms Merkel said the recovery fund was needed because the coronavirus pandemic had affected different member states to differing degrees, and “there is a risk that the EU’s cohesion will be endangered by the economic effects of this virus”. The fund would allow all EU member states to “react appropriately” to the crisis.

She said the European Commission would raise funds on the market “which we would then spend in the short term, but pay back over the long term”. She emphasised that the funds would not be distributed as loans.

“In terms of how this money is used, it is obvious that the countries that were worst affected by the crisis are those that will profit the most from these funds,” she said.

Mr Macron emphasised the importance of the agreement he had struck with Ms Merkel. “An agreement between Germany and France is not an agreement of the 27, but there can be no agreement among the 27 if there is not already a Franco-German agreement.”

A senior French official earlier said the idea of the Franco-German initiative was to “bridge the gap” between the “frugal” states and the rest. “Hence the importance of today’s talks.” 

Ms von der Leyen welcomed the proposal, saying it “acknowledges the scope and the size of the economic challenge that Europe faces”.

“This goes in the direction of the proposal the commission is working on which will also take into account the views of all member states and the European Parliament,” she said.

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Pedro Sánchez, Spain’s prime minister and one of the leading proponents of the recovery fund, welcomed the Franco-German accord, taking to Twitter to hail it as “a first step in the right direction [and] an initiative in line with our demands”.

As well as outlining the proposed economic recovery fund, Ms Merkel and Mr Macron agreed to strengthen health co-operation in the EU to develop “strategic health sovereignty”, including by establishing common stocks of medicines and medical equipment and by coordinating the development of vaccines and treatments. 

They also reaffirmed the EU’s “Green Deal”, called for an acceleration of digitalisation, and pledged to reinforce European “economic and industrial resilience and sovereignty” by diversifying supply chains, currently heavily dependent on Chinese production, and modernising competition policy.