Merkel and Macron launch European recovery fund of EUR 500 billion

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The joint initiative presented by French President Macron and German Chancellor Merkel on Monday afternoon is midway between the Southern wishes (1.500 billion) and those of Northern Member States (modest fund, no bargains).

Macron spoke of “a big step forward” because the EU borrows jointly and passes that money on as a gift to the affected countries. Until now, Berlin (like The Hague) was not interested in this. Merkel pointed out that exceptional circumstances – she called the corona crisis the “worst in European history” – call for special measures.

The German-French proposal gives the European Commission the opportunity to borrow EUR 500 billion on the international capital market in the coming months. The member states guarantee these loans, which will not cost the countries anything in the short term (amid a severe recession).

Repayment in 15 years

Merkel and Macron propose that the debt be repaid in the next 15 years. The usual distribution key would be used for this: approximately 5 percent for the Netherlands and 27 percent for Germany. EU countries may also decide to introduce new European taxes (a tax on tech giants) to pay off the debt.

Merkel and Macron emphasized that the billions are intended to ease the impending recession. At the same time, the money must be used to green and digitize industries. Both leaders called for their colleagues to be urgent: bracing only exacerbates the recession.

Commission President Von der Leyen “welcomed” the Franco-German plan. The Commission will present its proposal for a recovery fund and a new European multiannual budget (2021-2027) at the end of May. Commission officials say Von der Leyen has had “close contact” with Macron and Merkel in recent days.

The government leaders decide in June, everyone has a veto. EU President Michel called the Berlin and Paris plan “a step in the right direction,” as did Rome and Madrid. In a first reaction, The Hague rejected borrowing 500 billion euros as proposed by Paris and Berlin. According to the cabinet, the necessary money for recovery can be found by sliding in the EU budget.

In recent weeks, Berlin and Paris have been bickering about tackling the corona pandemic. A French plan for a special corona fund for affected companies and countries was thrown off the table by Germany. That fund was too similar to jointly issued debt, the euro bonds loathed in Germany and the Netherlands.

By letting the Commission borrow the money for the recovery fund, expenditure continues to flow through the EU budget, reducing the resemblance to eurobonds. Macron and Merkel said that agreement between them is not enough for a European agreement, but a condition.

Earlier this month, EU leaders agreed to € 540 billion in loans to countries and sectors where the corona crisis has hit hard. These are 240 billion in available loans through the European Emergency Fund, 200 billion through the European Investment Bank and 100 billion from the Commission for unemployment benefits. Together with the proposed recovery fund, more than 1,000 billion euros is available, almost equally divided between loans and gifts. That is less than what Italy, Spain and the European Parliament are asking for.

In addition to the new recovery fund, Macron and Merkel want to give the EU more powers to initiate healthcare policy. The EU should have more money available for vaccine development, build up stocks of medicines and devices (masks, test kits) and prepare plans to fight a pandemic. The new ‘European sovereignty of care’ could reduce the existing dependence of China and India on the supply of medicines.

Berlin and Paris also think it is high time to adjust EU state aid rules to create new European industrial giants: clusters of companies developing electric car batteries or hydrogen cells. Until now, the Commission has applied the brakes for fear of distortion of competition.

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