Angela Merkel and Emmanuel Macron have proposed that the EU borrows on the financial markets in order to disperse some €500bn (£448bn) through grants to European economies hit hardest by the coronavirus pandemic.
Under the Franco-German proposal the member states receiving the funds would not need to repay the cash. Liability for the debt would instead be added to the EU budget, to which member states contributions vary according to the size and prosperity of their economies.
Should the proposal receive the endorsement of the 25 other member states, it would amount to a significant move towards a level of burden-sharing and fiscal transfers firmly opposed during past crises. The European commission, the EU’s executive arm, would borrow the money under the EU’s name.
Speaking during a virtual press conference with France’s president, Merkel said: “We are convinced that it is not only fair but also necessary to now make available the funds ... that we will then gradually repay through several future European budgets.
“When Germany and France take the initiative, then this encourages the opinion-making process in the EU. We will have to act European in order to get well out of this crisis.”
Macron, who has described the current crisis as a “moment of truth” for the EU, said the bloc had failed to show sufficient solidarity at the start of the pandemic, emphasising that the new cash would be given out in grants rather than loans.
He said: “What is sure is that these €500bn will not be repaid by the beneficiaries … We are proposing to do real transfers [of money] ... that’s a major step.”
Austria’s chancellor Sebastian Kurz nevertheless made clear that the Franco-German initiative would face resistance from some northern EU member states.
He tweeted: “Just had a good exchange with the Prime Ministers of Denmark, Netherlands & Sweden on the expected proposal by the EU Commission on the recovery fund and the updated [EU long term budget].
“Our position remains unchanged. We are ready to help most affected countries with loans. We expect the updated [budget] to reflect the new priorities rather than raising the ceiling.”
While the proposal is a significant move towards sharing debt, a move that has been firmly resisted in the past by the Netherlands, Germany, Austria and Finland, among others, the recovery fund would have a strict shelf-life and “volume”, according to a paper published by Berlin.
The Dutch government in particular has been concerned at any move that could institutionalise debt-sharing and unconditional grants, claiming that there is a moral hazard in bailing out member states that have failed to prepare for economic difficulties.
Merkel stressed during the press conference that the recovery fund should be seen as a “one-off effort” and that “because of the unusual nature of the crisis, we are choosing an unusual path”.
There is growing anxiety that the different speeds at which EU countries recover from the pandemic, and the lockdowns it has enforced, could prove to be an existential threat to the bloc. Earlier this month the European commission president, Ursula von der Leyen, conceded that companies in rich countries including Germany had been given an unfair advantage by the relaxation of the EU’s state aid rules.
The commission’s recent economic forecasts suggest that Germany will also have a far less dramatic contraction of its economy than most other member states. In contrast, Greece’s gross domestic product is forecast to shrink the most, by 9.7%, owing to the closure of its tourist industry. GDP in Italy and Spain is expected to contract by 9.5% and 9.4% respectively.
Von der Leyen, who is expected to unveil the commission’s own plan next week, welcomed the Franco-German announcement, in a coordinated statement.
She said: “It acknowledges the scope and the size of the economic challenge that Europe faces, and rightly puts the emphasis on the need to work on a solution with the European budget at its core.
“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.”
The comments were echoed by Charles Michel, the president of the European council, which comprises the heads of government and state of EU member countries.
“This is a step in the right direction,” the former prime minister of Belgium said. “In order to reach an agreement, all 27 EU member states will be involved. I call all 27 member states to work in a spirit of compromise as soon as the [European commission] has tabled a proposal. Relaunching and transforming our economies impacted by the Covid-19 pandemic is key.”
Macron conceded that a French-German deal alone “doesn’t mean an agreement from the 27”. A European council of the 27 heads of state and government is expected to debate the proposal next month.