France and Germany Propose € 500 Billion Recovery Fund
Germany and France unveiled an initiative Monday aimed at rescuing the European Union from the severest crisis in its history and bridging the deep national divisions that have stalled progress on a pandemic recovery fund.
After meeting via videoconference, German Chancellor Angela Merkel and French President Emmanuel Macron introduced a recovery fund worth €500 billion ($543 billion) that would assist the EU countries and industries hit hardest by the coronavirus pandemic.
Merkel said the crisis endangered the union of the European Union. The initiative by Europe’s top two economies was strived at helping reach an agreement among all 27 EU member states.
“To raise a sustainable recovery that revives and enhances increase in the EU, Germany, and France support an ambitious, temporary, and targeted Recovery Fund,” Merkel stated, talking at a video news conference.
The reopening of old political wounds has jeopardized Europe’s ability to recover from the worst economic shock it has seen since the Great Depression.
Divisions between member nations have decreased progress on a recovery fund that the European Commission had expected could grow at least €1 trillion ($1.1 trillion) to reconstruct regional economies.
Charles Michel, president of the European Council of EU national leaders, had asked for the package to be operational by June 1. But the Commission failed on May 6 to conclude its program.
Disputes over whether the fund should give loans or grants to the hardest-hit countries such as Italy and Spain delayed progress. Grants, or direct money assignments, would suggest a degree of debt sharing that countries such as the Netherlands, Austria, and Germany have long maintained.
But Merkel and Macron validated that under their program, the European Commission would obtain money to promote the EU economy and channel the funds via the EU budget to the hardest-hit countries and sectors.
“Given the unusual nature of the Covid-19 pandemic challenge for economies across the EU, France and Germany propose enabling the European Commission to finance such restoration support by borrowing on markets on account of the EU”.
Macron stated the EU recovery fund would experience the backing of the European Central Bank. While the fund would have to be returned over time, that burden would not fall only on those who need the aid most.
“These 500 billion euros will have to be repaid,” Macron stated, but “not by the recipients,” he added.
Analysts said the agreement represented progress after weeks of division that risked stoking anti-EU sentiment in countries such as Italy that have been slammed by the pandemic. By offering grants rather than long term low-interest loans, some of that political damage could be repaired.
“Of course, as beneficiaries of funds will have to shoulder their part of additional offerings to the EU budget to repair the EU debt, the net benefit will be flatter than the gross amount of the grants they get,” wrote Berenberg chief economist Holger Schmieding in an analysis note.
But the Franco-German initiative still needs to be turned into a formal proposal by the European Commission, and agreed by all 27 EU member states, potentially at a summit on June 18.”While it will not be simple to persuade the Dutch, Danish and Swedish governments to uphold the idea, we foresee the French-German proposal as the foundation for a deal in the end,” Schmieding added.
The European Union economy will contract by a record 7.5% this year, the European Commission notified earlier this month, and the decline could be even sharper across the 19 nations that use the euro.
It’s a much sheerer drop than the region that suffered following the 2008 global financial crisis and a more depressed scope than the International Monetary Fund projection in April.
Ursula von der Leyen, president of the European Commission, greeted the “constructive proposal offered by France and Germany.”
EU Council President Michel described it as a “step in the right direction” for the EU. “I welcome Germany and France’s attempts to find mutual ground on the recovery fund,” Michel tweeted. “I call all 27 member states to act in a spirit of understanding as soon as the European Commission has tabled a proposal.”
EU leaders have urged that the pain could be even worse than prediction if the pandemic is more critical and long-lasting than currently conceived.
EU heads have already signed off on urgent rescue measures worth at least €500 billion ($538 billion), a package that involves wage subsidies pointed at preventing mass layoffs and loans to businesses.