France, Germany propose €500bn recovery fund to break EU deadlock

Under joint proposal European Commission would borrow money on financial markets

German Chancellor Angela Merkel listens during a joint press conference with French President Emmanuel Macron, who attends via video link, at the Chancellery in Berlin, Germany. Photograph: Kay Nietfeld/AFP via Getty Images

German Chancellor Angela Merkel listens during a joint press conference with French President Emmanuel Macron, who attends via video link, at the Chancellery in Berlin, Germany. Photograph: Kay Nietfeld/AFP via Getty Images

 

France and Germany have proposed creating a €500 billion recovery fund in a bid to break deadlock over how to dig the European Union out of the economic slump caused by the coronavirus pandemic.

Under the joint proposal by the major EU powers, the European Commission would borrow money on financial markets and use it to top-up spending in the joint seven-year EU budget that will begin in 2021.

“I believe this is a very deep transformation and that’s what the European Union and the single market needed to remain coherent. It’s what the euro zone needs to remain united,” said Frence President Emmanuel Macron.

Potentially a major breakthrough, the announcement comes a week before the European Commission is due to lay out its proposals on how to pay for the recovery fund, which it has been drawing up in coordination with member states to respond to a downturn forecast to be the worst in a century.

The plan was welcomed by countries including Spain and Italy, which had pushed for greater fiscal integration in the bloc to smooth out economic imbalances between its weaker and stronger economies that have at times imperilled the euro zone.

Rather than given out as loans to already-indebted countries, the money borrowed by the Commission would be spent under the EU budget according to need, and be repaid through member states’ contributions over a very long time.

Italian Prime Minister Giuseppe Conte welcomed it as “an important first step in the right direction along the lines intended by Italy”, while Spain’s Pedro Sánchez said it was “a positive step in the right direction, in line with our demands.”

Division

Proposals on the recovery fund had been deadlocked by disagreement between a group led by Italy that sought a generous response and greater sharing of risk, and a so-called “frugal” block including the Netherlands and Austria, who are wary of burden-sharing and a more costly EU.

Ireland had joined the Italian bloc in calling for the issuance of joint debt and a response characterised by “solidarity”.

The Franco-German plan was greeted as a significant move in Dublin by German Chancellor Angela Merkel, who has in the past leant towards the frugal camp.

It was welcomed as an indication the Irish government had been right to back calls for a more generous response, which had been a break with prior allies on economic policy such as the Netherlands. With the backing of Germany, it would be “hard for frugals to block”, one official said.

Taoiseach Leo Varadkar stressed that whatever form the plan takes, agricultural CAP payments in the EU budget should be unaffected, in a phone call with European Commission President Ursula von der Leyen on Sunday in which she briefed him on the progress made in developing the recovery fund.

Starting point

It remains to be seen whether the Franco-German proposal can win around the frugal states, but the backing of both the EU’s major powers raised expectations a deal could be found, causing the euro to strengthen and pushing down Italian bond yields to a one-month low.

A Dutch government spokesman said the Netherlands would “consider” the Franco-German idea but that it awaited the Commission’s proposal as the “starting point” for discussions. Austrian Chancellor Sebastian Kurz said his position was “unchanged” and that the EU budget should be redirected rather than increased in size.

Commission President Ursula von der Leyen welcomed the idea, saying it “goes in the direction” of the plan she is working on. But she added that the Commission would “also take into account the views of all member states and the European Parliament. ”

Members of the European Parliament have called on the Commission to consult them more closely on the plan, and have proposed a range of ideas including allowing the EU to levy its own resources to raise funds such as through taxes on plastics or financial transactions.